“If you are buying companies on the cheap, make sure the earnings are correct,” SocGen’s global quant strategist, Andrew Lapthorne, says.
In a speech given to hedge fund managers in Hong Kong recently, Lapthorne said the only reason US companies are beating analyst estimates is that they have been restating losses as ‘exceptional’ events on the balance sheet.
They have also been pushing certain items forward on their balance sheets and simply cost-cutting, not profiting; a mistake that will soon lead to trouble, he says.
“Companies have not been using price to chase volumes… they have cut costs instead,” Lapthorne said.
Both Nestle and Unilever, for example, will regret their decision not to use their pricing power this year, according to Lapthorne. The misstep might lead to their having to lower prices next year. The price dips could contribute to deflation and damage the economy, but they might be inevitable.
According to the Asian Investor, Lapthorne predicts that as a result of surplus inventories, many companies will in 2010 reveal that they have no pricing power.
He warns investors that these “value” stocks are good for trading, but not buy-and-hold. Only “high quality stocks” will fare well as volatility resumes, he says.
He does think there are a few deep-value stocks out there. Most are in the energy sector, he says.
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