Two prominent investors, one a bull, the other a bear, actually agreeing on one thing while disagreeing about just everything else. To wit, Legg Mason's Bill Miller and GMO's Jeremy Grantham part company on most questions regarding the economy and the stock market.
But they both think high-quality U.S. stocks provide the best prospective long-term returns of any major asset class over the next decade. That said, Miller thinks the U.S. equity market, as defined by the Standard & Poor's 500 index, currently is roughly 10% undervalued while Grantham reckons it's 30% overvalued.
Stocks, by contrast, have spent "10 years in the wilderness," leaving high-quality, large-capitalization stocks cheap relative to bonds, Miller contends. Merck (MRK) trades at 12 times this year's earnings and yields more than 10-year Treasuries. International Business Machines (IBM) has record earnings; trades at 12 times next year's forecast earnings; buys back shares every and has increased its dividend 25% over the past five years.
As for Grantham, he sees "high-quality" U.S. stocks providing a 6.8% annual return over inflation during the next 10 years, slightly more than the overall market's historical real return of 6.5%. But overall large-cap U.S. equities should provide a real return of just 1.3% annually and 0.5% in real terms for small-cap stocks.
The seeming anomaly that the best-quality stocks also have been the cheapest has been a recurring theme of Barrons.com and Barron's magazine. Last week, Barrons.com featured a positive profile of Procter & Gamble (PG) while the print publication has published bullish stories on blue chips such as IBM, ExxonMobil (XOM), PepsiCo (PEP), Altria (MO) and AT&T (T) in recent weeks.
In addition, last week, the magazine also ran a feature on the so-called Dogs of the Dow, the highest yielding stocks of the Dow 30 Industrials ("Groomed for a Comeback," Jan. 18), which included such blue chips as DuPont (DD), Boeing (BA), Home Depot (HD), Merck, Chevron (CVX), Kraft (KFT), McDonald's (MCD), AT&T and Verizon (VZ.)
So, whether you agree with Miller and think stocks have further to rise, or Grantham, who believes the market is vulnerable to a pullback, you ought to stick to the top-shelf stuff, not the bland lite beer.
Disclosure: The Div Guy owns shares of PG, XOM, PEP, T and VZ at the time of this post.