What Asset Allocation Now? (Bob Doll and David Darst)

DAVID DARST: Technology. Health care. These companies sell for 12, 13, 14 times earnings. They give dividend yields of three, four, five percent. Five percent in the U.K., three to four in the United States.

CONSUELO MACK: And compare that to the three percent yield in the ten-year treasury. Right.

DAVID DARST: And you know, it has a chance to grow. They were under a lot of pressure because of the health care legislation. You’ve got patent expiration. You’ve got certain companies, but they’re buying biotech companies. They’re buying other companies, the big ones, and they’re squeezing out cost savings. So we think the earnings can surprise to the upside, and the third one that we like is a defensive sector which is utilities, and again, this plays to this yield. This plays to this yield. The baby boomers, as they retire, the 77 million of us...

CONSUELO MACK: Right, need income.

DAVID DARST: ...born between 1946 and 1964. Management of Morgan Stanley is always asking me why are people buying so many bonds. Well, the two traumas of the stock market. They want yield, and they’re getting closer to retirement.

CONSUELO MACK: Sure, they need the income.

DAVID DARST: And those three motivations we think will drive people to companies that...

CONSUELO MACK: To utilities.

DAVID DARST: ...can pay you nice generous dividends, and that would be the health care and the utility sector. So we’re positive on those two.


BOB DOLL: I’m going to agree with two of the three sectors David just put on the table. So in cyclical land, we want to own technology. The U.S. is the world’s leader, and we’re gaining market share. These companies have the best ability to generate free cash flow and doing a phenomenal job of it. They learned their lessons in the year 2000 when we had the tech bust, and so they fared so much better in the problems we’ve had in this last recession. Energy we are adding to on the weakness in cyclicals in this environment, thinking that’s a good global cyclical to own as well. Our favorite defensive sector, health care.

CONSUELO MACK: Which has done extremely well this year.

BOB DOLL: It has done well. We think it will continue for the same reasons David had. I would add to it, to health care, some of the health care service names, some of the HMOs and the like. We think their business model is still strong and the public companies will continue to consolidate the industry.

CONSUELO MACK: And David Darst, you favor something that you call the global gorillas.

DAVID DARST: Global gorillas are these great giant corporations, Consuelo. They are U.S. They are U.K. They are Swiss. They are European. They are Canadian, and they have the penetration into these emerging markets. Many of the great consumer products companies that we all know, they’re 30%. Some of the big beverage companies are 80% emerging markets.

CONSUELO MACK: Right, so you’re talking about like Coca-Cola and Pepsi.

DAVID DARST: That’s correct. These companies...

CONSUELO MACK: Proctor & Gamble, Nestle.

DAVID DARST: These kinds of companies have 30% emerging markets exposure.

CONSUELO MACK: Right, and growing.

DAVID DARST: And they are penetrating in and growing, and so these global gorillas are companies that have great balance sheets, very strong fortress-like positions within their domestic home market, and now they’re basically going out into the world and participating in this global growth. That’s what we mean by global gorillas, and we like that as a theme.

CONSUELO MACK: Bob, has the large cap ship finally come in after, you know, years of being denigrated and undervalued?

BOB DOLL: Increasingly so, Consuelo. Look, even now we are down cap relative to our benchmark. We still find a lot of mid cap names that are very interesting that have good rates of growth. As the economy matures in its growth rate, that’s the time when these big cap names really come on. So with each passing day, we’re trimming a mid cap name and adding a mega cap name. So we’re heading in that direction. I don’t think you have to have all your money there, but that’s where we’re going, because along with the list that David just put on there for their attributes, I would add, and they are cheap.

CONSUELO MACK: And so give us some of the specifics that you think, or holdings in the large cap space that we should all consider.

BOB DOLL: David mentioned Apple. I would add Microsoft. Risk reward we think is interesting. If you like high free cash flow companies, Dell Computer fits that bill. In energy space, a Chevron, a Conoco I think fits the bill. I’ve mentioned health care. Pfizer- done more restructuring than most of the others, United Healthcare in the healthcare service name. So there would be a half dozen large cap names that should win.

CONSUELO MACK: So what’s the one investment for a long-term diversified portfolio that all of us should own something of right now that looks like it’s a bargain or undervalued? Bob Doll?

BOB DOLL: I’d finish where I started. U.S. companies. The U.S. stock market for all the...

CONSUELO MACK: U.S. large cap companies? We’re going to have to drill down in that a little bit.

BOB DOLL: Well, the drill down for me would be positive free cash flow. We are in an environment of slow growth. We’re in an environment of herky-jerky growth as we talked about earlier in the show, and so I want companies that have financial flexibility, extra degrees of freedom, and one way to measure that, I think, is free cash flow. So if you can find companies with double-digit free cash flow yields of which there are many- Dell Computer I mentioned, United Healthcare I mentioned. Sprint is another one, that we think these companies have good risk reward profiles.

CONSUELO MACK: Is there any- and I’ve asked you this over the years so many times- is there any such thing as a core holding anymore as far as a stock is concerned? Is there anything that you can buy and just hold onto and let that free cash flow pay you dividends and you reinvest or whatever?

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