Investment professionals at Eaton Vance say valuations have moved to
the point where they foresee outperformance by high-quality domestic
large caps over the next three to five years.
"We're at a point
in the economic cycle where we believe quality, large-cap issues are
likely to outperform going forward," Duncan W. Richardson, chief equity
officer at Eaton Vance, said during a recent panel discussion in New
York.
Richardson, who is
a growth investor, was joined by Eaton Vance portfolio managers Michael
Mach and Judith Saryan, who are value managers.
All three agreed
that valuations and the bearing of the domestic economy point to a
rebound for blue chip large caps.
"We believe 2007
will be characterized by slowing economic trends, decelerating earnings
growth, and some increase in market volatility," Richardson said. "In
this environment, the best-performing stocks are likely to be found
among higher-quality companies."
Mach added that despite the
outperformance by international stocks the past four years,
stabilization in the dollar should allow domestic companies to keep
pace. "We believe investors won't need to venture far from home to earn
solid equity returns this year," Mach said.
They noted that the valuation of
large cap growth stocks have become attractive, to the point where the
line between large cap growth and value stocks has become fuzzy.
The portfolio
managers agreed that arguing whether a stock is growth or value has
become virtually irrelevant.
"Stocks can be
compared to horses permitted to wander back and forth between the
'value barn'... and the 'growth barn,'" Mach said. Oracle, he said, is an
example of a company that has fluctuated between both camps, trading at
100 times earnings earlier in the decade-when it was clearly a growth
stock-and now trading at a value-ish 14 times earnings.
Saryan suggested that dividend growth is a new defining factor in assessing a company's growth potential.
"Paying a dividend
is a sign of quality, and not just because it's the only item on an
income statement that can't be restated," she said. "We look for
companies that not only pay high dividends, but those that are growing
their dividends, because such companies understand that cash belongs to
shareholders. It's something many companies forgot during the
1990s."