It seems a day's concern is all stock investors can muster regarding the deteriorating Greek economic situation, with stock averages showing small gains on Tuesday morning: At 11:50 a.m. EDT, the Dow Jones Industrial Average (DJINDICES:^DJI) and the broader S&P 500 (SNPINDEX:^GSPC) were up 0.44% and 0.31%, respectively, and the technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC) was up 0.27%.
Greece: Concern is rising
Some asset managers are taking the situation seriously enough to enact contingency measures. Yesterday, Aberdeen Asset Management CEO Martin Gilbert told Bloomberg Television that his firm has established a $500 million line of credit to meet a possible surge in investor redemptions in the face of falling bond market liquidity, saying "it will get ugly" if either Greece exits the eurozone or the U.S. starts raising interest rates. While he doesn't expect the former to occur, he said it is "reasonably likely" Greece will default on its debt.
He's not alone: 57% of respondents to the June Bank of America Merrill Lynch fund manager survey said they expected either a Greek exit from the eurozone (15%) or a Greek default without an exit (42%). Those figures likely understate the present level of concern, as responses were collected between June 5 and Jun. 11 -- i.e., before Sunday's collapse in talks between Greece and its bailout monitors.
Rising bets against U.S. stocks
Whether it is due to Greece or other factors, short-term sentiment regarding U.S. stocks appears to be turning pessimistic. Bloomberg reported today that the latest CFTC Commitments of Traders Short Report, which tracked futures positions through June 9, shows the short (i.e., bearish) positions of large speculative traders in S&P 500 futures outweighing bullish positions by the widest margin since the five-day period ended Oct. 24. Similarly, as of last Friday, investors had sold short shares of the SPDR S&P 500 ETF (NYSEMKT:SPY) to the tune of 8.5% of shares outstanding -- the largest proportion since Oct. 27, according to data from Markit.
Precision Castparts: Best-in-class at an average price
Nevertheless, for all this Sturm und Drang, stock pickers still have opportunities in this market. Barron's highlighted an interesting one this weekend in Precision Castparts (UNKNOWN:PCP.DL), a supplier of advanced metal components to the aerospace, energy, and industrial sectors. I realize this is less sexy than an app that sends self-deleting photos or text messages, but Precision Castparts does "what it says on the tin," producing precision-engineered, high value-added parts that keep the world turning, as it were. That positioning pays off, as the company has achieved an average net income margin of 15.3% over the past 10 years.
Value-oriented fund managers Bill Nygren and Kevin Grant added Precision Castparts to their Oakmark Funds during the quarter. Here's how they made the investment case to their investors in their quarter-end letter:
Precision Castparts enjoys what we believe is an outstanding corporate culture and is led by a long-tenured CEO who is known for aggressively pursuing operating efficiencies. For many years, the company's stock traded at a significant premium to other aerospace and industrial peers, but recent weakness has brought the share price to attractive levels relative to these industry groups and the S&P 500. We believe the current valuation of less than 15x earnings is overly punitive, considering PCP's organic growth prospects and the company's ability to add value through acquisitions.
PCP is providing more components on key new airplanes, which should allow the company to outgrow its end markets. In addition, management projects $4 billion-$6 billion of acquisition opportunities over the next couple of years with return characteristics similar to its existing business. Finally, the company's unique technical and process capabilities, coupled with its efficiently run operations, should allow it to continue to generate above-average margins. We are pleased to have the opportunity to add shares of what we consider a best-in-class company at a price that implies it is only average.
Shares of Precision Castparts closed at $211.39 yesterday, nearly exactly in line with their average closing price in the first quarter. I think this stock will ultimately illustrate that investors who focus on great businesses and invest "through the cycle" will be rewarded, even if the current macroenvironment appears discouraging.