Biggs Market Redux Places Procter & Gamble in Basket

By Rita Nazareth and Elizabeth Stanton

Jan. 4 (Bloomberg) -- Barton Biggs, who piled into stocks at the bottom of the global bear market in March, is loading up on the biggest U.S. companies and speculating commodities will drop in 2010.

The 77-year-old manager of Traxis Partners LP is buying household-product manufacturers, drugmakers and computer companies on speculation they will prove bargains as earnings surge. The hedge fund, which gained three times the industry average in 2009, is shorting raw materials and says banks will trail the Standard & Poor’s 500 Index for five years.

“Big capitalization, high-quality U.S. stocks are very, very cheap compared to everything else,” said Biggs, who cited Procter & Gamble Co. and Johnson & Johnson in a Dec. 29 interview. He called commodities “an investment vehicle for maniacs” that will probably fall in 2010. “I don’t know what’s going to happen in the second half of next year. I’m just saying that in the next three to six months, the economy is going to keep recovering and stocks are going to go up again.”

Buying shares before the benchmark gauge for U.S. equities plunged to a 12-year low in March gave Traxis Fund a 38 percent gain in 2009, helping recoup a 40 percent drop that began when Biggs failed to foresee the credit crisis in 2007. He’s staying bullish even after the largest rally since the 1930s pushed the S&P 500 to its highest price relative to profits in seven years, data compiled by Bloomberg show.

Cheap Valuations

The index rose 1.5 percent to 1,131.35 as of 11:06 a.m. New York time. While the S&P 500’s gain since March pushed its price last week to 24.6 times the combined earnings of its companies, the highest since 2002, the index remains cheap compared with forecast profits, Biggs said. The price-earnings ratio falls to 14.2 when measured against the average forecast for S&P 500 income in 2010, according to equity analysts surveyed by Bloomberg.

For the 100 biggest companies, the ratio drops to 13.7 compared with 2010 estimates, lower than any time between 1997 and the 2008 credit crisis, based on earnings during the previous year.

“I can find a lot of things that I want to buy in the U.S.,” he said. “I’m still playing the same tune. I’m pretty well loaded up as far as stocks are concerned.”

Biggs, who oversees about $1.4 billion, declined to comment on specific holdings. P&G, the world’s biggest maker of consumer products, is trading for 16.8 times earnings in the last year and 15 times profit forecast for the year ending in June 2011, according to data compiled by Bloomberg.

Beating Projections

That compares with an average of about 21.6 times income last decade, the data show. Cincinnati-based P&G lost 1.9 percent in 2009 even after beating analysts’ profit projections for three straight quarters.

J&J, the world’s largest health-products company, is priced at 14.2 times annual earnings, 42 percent below the average valuation in the S&P 500. The New Brunswick, New Jersey-based company climbed 7.7 percent in 2009 after dropping 10 percent a year earlier. J&J has beaten analysts’ average profit estimate for 14 straight quarters.

Biggs is buying the largest U.S. computer and software makers on speculation that executives who put off investments will start spending this year. About 22 percent of corporations plan to increase technology purchases in the first quarter, the most in two years, according to a survey of 1,753 companies from Nov. 9 to 20 by ChangeWave, a Rockville, Maryland, research firm.

Spending Boom

“It’s a bet on a capital spending boom and it’s also a bet that big corporations around the world have under-spent on technology since 2000,” Biggs said. “Big-cap tech stocks are still very attractive.”

Computer makers led the S&P 500’s advance in 2009, climbing 60 percent for the biggest increase since 1999. The S&P 500 Information Technology Index trades for 23 times profits in the past 12 months, a 5 percent discount to the overall market and 26 percent below its average valuation in the last decade, according to data compiled by Bloomberg.

Stock market bulls are counting on the fastest U.S. earnings growth in at least a decade to reduce valuations in 2010. Companies in the S&P 500 are forecast to report their first quarter of profit growth in two years this month after more than $1.7 trillion of bank losses and writedowns spurred the first global recession since World War II.

Fastest Growth

Analysts surveyed by Bloomberg estimate income will rise 27 percent in 2010 and 21 percent in 2011, the fastest two-year gain since 1994. A year ago, Wall Street firms predicted 2009 profits would rise 4.5 percent. They are poised to fall 12 percent, according to data compiled by Bloomberg.

Equities may prove expensive should the profit increase fail to materialize. The S&P 500’s price-earnings ratio based on earnings in the past year has jumped to the highest since May 2002, when the index began a 28 percent tumble, data compiled by Bloomberg show.

Biggs, the former global equity strategist for Morgan Stanley, said Traxis is “generally short” raw materials after the Reuters/Jefferies CRB Index of 19 commodities gained 23 percent in 2009, the steepest advance since 1979, data compiled by Bloomberg show. Investors profit from short sales by borrowing an asset and selling it in the hopes of buying it back later after the price falls.

Oil climbed 78 percent in 2009 and copper rallied 137 percent after the U.S. government lent, spent or guaranteed $11 trillion to end the credit crisis. So-called macro hedge funds such as Traxis that speculate on stocks, bonds, currencies and commodities gained an average 12 percent in 2009 data compiled by Bloomberg show.

Trail the Market

Financial companies are likely to trail the market for another five years, mimicking computer and software stocks following the collapse of the Internet bubble in 2002, Biggs said. Technology makers lost 57 percent from their all-time high in March 2000 through October 2007. The S&P 500 climbed 2.5 percent to a record over that period, according to data compiled by Bloomberg.

Hedge funds, mostly private pools of capital whose managers participate substantially in the profits from speculating on whether the price of assets will rise or fall, boosted bullish investments in stocks to the highest level since October 2007 in the third quarter, according to data compiled by Goldman Sachs Group Inc.

Morgan Stanley

Traxis Fund is the flagship of the firm Biggs founded with Madhav Dhar and Cyril Moulle-Berteaux from Morgan Stanley, which owns 20 percent of the company and recently invested $150 million. It has climbed about 7 percent a year since being formed, twice the S&P 500’s return but less than the average for so-called global macro funds.

Biggs stayed bullish during the first half of 2008 after underestimating losses spurred by defaults on subprime mortgages, he said.

“I certainly wish I had understood more in late 2007, early 2008 how serious the credit problem was,” Biggs said. “The bubble wasn’t in spaces that we knew.”

Traxis still fared better than the S&P 500 in 2008, losing 29 percent after fees as the S&P 500 tumbled 38 percent. While Biggs was early in predicting a rebound, his fund profited by adding stocks in emerging markets between October and March.

“Over the longer run, emerging markets are going to be the place to be, particularly the Asian emerging markets,” he said. “In the short-run, I’m bullish about the U.S. as well.”