Sunday, March 8, 2009

JP Morgan's chief strategist tries again

On June 6, 2008 when unemployment was increasing, Thomas Lee of JP Morgan said:

The biggest rise in the unemployment rate since 1986 is an "aberration" and investors who sold equities today are "completely misreading" the outlook for economic growth, according to JPMorgan Chase & Co.

The S&P 500 then was at 1370. Today it is at 680, and Thomas Lee said in a WSJ article tonite that--A level of 500 on the S&P is "possible, but I wouldn't put it in the realm of probable," says Thomas Lee, chief U.S. equity strategist at J.P. Morgan. Mr. Lee on March 2 removed a tentative "buy" recommendation he had placed on the S&P in February.

Four months later in October 17, JP Morgan's Thomas Lee picked 16 "franchise stocks." They were the following, with their prices then, and now

3M Co. 56.49 41.83 -26%
Baxter International Inc. 59.62 51.92 -13%
Colgate-Palmolive Co. 62.19 56.05 -10%
CA Inc. 15.90 16.01 unch
Devon Energy Corp. 70.80 39.92 -44%
General Mills Inc. 64.73 50.96 -23%
Gilead Sciences Inc. 43.03 44.01 +2%
Google Inc. 372.54 308.57 -17%
Hewlett-Packard Co. 39.71 26.98 -32%
McDonald's Corp. 53.8 52.12 -2%
Merck & Co. 28.50 22.74 -20%
Monsanto Co. 80 71.65 -10%
Nucor Corp. 33.56 32.34 -4%
Philip Morris International Inc. 19.32 15.72 -18%
Union Pacific Corp. 55.49 34.98 -37%
Visa Inc 52.22 50.19 -4%

If you followed his strategy, you lost about 16% of your money, while the S&P dropped 26%, showing that Thomas Lee might be better at picking stocks that will lose less than his macro calls on the market.

Lee's macro calls on the market are worthless. He acknowledges that the S&P could hit 500, but he thinks it could end 2009 at 1100. Would that information help JP Morgan price any of their derivative transactions?

But it does highlight his point, that stocks do have a franchise value, and that much of these names are now at prices unforseen by many.

And some of these names, like Nucor are now worth a really hard look.

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