Former Big Bear Turns Baby Bull

Former Big Bear Turns Baby Bull
Posted By:Lee Brodie
Topics:Consumers | Economy (U.S.) | Recession | Stock Market | Stock Picks

It seems even the most bearish market mavens can’t fight the bullish momentum in this stock market. Wait until you find out who’s now a buyer of stocks.

Richard Bernstein, the former Merrill Lynch chief investment strategist, and one of the biggest bears we know is changing his tune.

People like me have underestimated the rebound, Bernstein says. What’s made him a believer?

You might remember the last time Bernstein was on Fast Money he told the traders – at the foundation of the stock market and the recovery is jobs. The market can’t sustain itself unless people are bringing home the bacon.

And although the unemployment rate continues to rise Bernstein is more focused on initial jobless claims which he and many others consider a leading indicator. And that number has started to decline.

In fact, when they were reported last week new jobless claims dropped to the lowest level since January. And that trend combined with low inflation likely means Americans will regain their appetite for spending.

Another way of saying that is – the economy is slowly getting better. “if you believe in the recovery this is the prime time to be a value investor.”

What’s the trade?

Bernstein says the best value are in junky names. “The companies that you’d hate to own tend to perform the best. In almost every industry go for lower quality companies."

Huh?

"In 1991 - a time period that was similar to now - 'C' and 'D' rated stocks by S&P went up 90% that year and continued to outperform for 4 years after that," he says.

Why?

"As the economy continues to improve investors shift from focussing on the balance sheet to focussing on the income statement and cash flow. And the junkiest companies have the greatest operating leverage so their cash flow just explodes," he says.

Although Bernstein doesn't reveal names he does says "consumer cyclical stocks probably have strong upside potential.

"History shows that as long as initial jobless claims trend downward the performance of consumer discretionary stocks [XLY 28.35 -0.30 (-1.05%) ] trend up," he concludes.

http://www.cnbc.com/id/33397834