Savita Subramanian, head of Bank Of America Merrill Lynch’s (BAC) U.S. equity research, says she’s “unapologetically bullish” on U.S. stocks for 2013. Her forecast is for the S&P 500 to reach 1600 a year from now. That’s a non-too-shabby 18% pick up in price alone from current levels. Add in a 2% dividend yield and you get to 20%.
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Much of that forecasted gain might be back loaded into the second half of the year. Ethan Harris, co-head of Global Economics Research says the firm sees two distinct halves to the year: a weak start given lingering concerns about the shape and form of fiscal cliff outcomes is expected to give way to more clarity as the year progresses, spurring a pickup in capital spending.
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Subramanian noted that part of her team’s bullishness stems from everyone else’s bearishness. Merrill Lynch tracks Street strategists’ current allocations to equities in balanced portfolios. The long-term average is between 60% and 65% stock exposure. Right now it’s at 46.5%. It’s not just Street pros that have a habit of being contra-indicators. The American Association of Individual Investors has long asked members to share their bullish/bearish sentiment. We, um, have a tendency to be most bearish when the markets are revving for a rally.
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Subramanian sees the best potential among U.S. firms with significant global exposure. Whereas Merrill’s call for 2012 was to focus on firms with domestic sales strength, going forward she expects stronger economic growth outside the U.S. to give an edge to firms with significant operations abroad. Merrill’s research signals that global players are selling at a steep discount to the domestically-minded when measured by price-to-sales. Subramanian says this is presenting the best “entry point in over a decade.”
Firms aren’t required to divulge how much of total sales comes from outside the U.S.; according to S&P Capital IQ, less than half of firms break out there foreign sales. But among those that do, S&P Capital IQ reported IBM (IBM), Apple (AAPL), Pfizer (PFE) and Google (GOOG) to have more than half their sales coming from outside the U.S.
All four have price-to-sales ratios trading at or near their historic lows. (At YCharts each firm’s price-to-sales ratio -- along with a comparison to similar firms -- can be found under the Valuation tab after you input the ticker in the quote box.)
Carla Fried, a contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine.