By Dr. Stephen Leeb
Leeb’s Market Forecast

It’s no secret that the past decade or so has not been terribly kind to the average stock investor. Few people made much money unless they were following an alternative strategy focusing more on commodities and other key sectors (which is why so many TCI readers have done well)

Putting aside commodities, it’s difficult to find many large cap companies today that have recently hit at all-time highs. Not surprisingly, the market averages are still below their 2007 peak – and in some cases their 2000 peak.

This week, we decided to look at some of the few stocks that have made recent all-time highs and are not commodity producers. While we think the commodity bull has a long way to go, these other winners give us some important insights into emerging trends that will influence the near to mid-term future of the market as a whole.

To recap the big picture: We think the large amounts of money currently being poured into the economy by governments around the world will continue to support the prices of most assets. Periodic corrections are of course inevitable. However, we doubt the stock market will fall more than 10% on any correction. Commodity prices, which are more volatile, could dip 15-20%. But the uptrend in both these areas should remain quite solid for a time.

What will really crater the stock market will be the inevitable day when rising commodity prices create too much of a headwind. The central banks will find it impossible to stimulate economic growth any further through monetary policy, simply because every new flood of money drives up commodity prices faster than stock prices.

As we said last week, the central banks have made a Faustian bargain. (Doctor Faust, as you may know, was a man who made a pact with the devil. The devil granted him 24 years of tremendous wealth and power, in exchange for his soul at the end.) Since we didn’t make the pact, the best we can do is make money as the first part of this drama unfolds and stock prices rise. When the devil comes to collect his due, in the form of outrageous commodity prices, we’ll need to change tactics.

Obviously, commodities and gold remain our top two sectors throughout the entire drama. While monetary policy works, commodity prices will continue to rise and the dollar will weaken (which is good for gold). After monetary policy fails, commodities and especially gold will remain valuable stores of wealth. In fact, we expect a new world reserve currency will emerge down the road composed of gold plus a basket of the world’s strongest resource currencies, including the Chinese yuan.

However, let’s consider some additional stocks and sectors that are emerging strong performers today, as the first act of this drama unfolds.

Online Retailing

One non-commodity stock that stands out today is Amazon (AMZN). The company is the leading online shopping site and has done an outstanding job establishing its brand. Though the stock is richly valued at present, we feel its growth potential exceeds that of other retailers such as Wal-Mart (WMT). Wal-Mart currently has a market cap of $200 billion, whereas Amazon’s cap is only about 40% the size. Yet, with its strong growth, Amazon seems likely to surpass Wal-Mart down the road to become the world’s largest retailer.

Wal-Mart’s problem is the rising cost of building physical stores. Moreover, when gasoline prices skyrocket, as they likely will, consumers could cut back on driving to big box stores on the outskirts of cities to do their shopping.

We believe that Amazon’s approach of using an online retail site that saves the customer time and gasoline will be increasingly appealing. In addition, we believe Amazon will find more ways to organize its delivery systems to create cost-saving advantages over the box stores.

Certainly, we would prefer Amazon’s P/E was a little lower for safety, but the company is still very likely to outperform the market, and that makes it a promising buy.

Technology

Another stock we like is Apple (AAPL). Steve Jobs has to be one of the top CEOs of the past decade, if not the past century. He has taken the company from a position 14 years ago of having to take a cash infusion from Microsoft (MSFT) just to stay afloat (at the time Microsoft wanted to avoid being the only PC maker around) to being now larger than Microsoft by the market cap. Apple has managed to redefine the music industry and may be on the verge of redefining television as well.

Even more impressive is Apple’s effort to create a seamlessly integrated media universe based on products such as iPads, iPods, and iPhones. Apple has started to steal corporate market share from Blackberry. Standard Chartered Bank in the UK has already switched to the iPhone. JP Morgan Chase and UBS are considering following suit.

True, Apple currently has only a 10% market share in computers, but we suspect that will change. Apple’s products are designed to work together for greater efficiency. So once a company is using iPhones it will see the advantage of switching to Apple computers as well. This makes Apple’s product line far more impressive than that of its major hardware competitors – Hewlett Packard and Dell.

Healthcare

Another sector that enjoys considerable tailwind is healthcare, which benefits from demographics. The biggest problem in healthcare is rising costs. So the way to choose great companies is to look for those that can both benefit from an aging population and save money.

One of our favorite companies in this area is Express Scripts (ESRX). An aging population consumes more prescription drugs, and this pharmacy benefit manager provides a range of services that lowers costs for pharmacies. Though not the largest PBM – yet – the company appears to be the best managed of the group and may take the lead over the next few years. Its upside is huge.

For example, one source of cost-savings in healthcare is generic drugs. The profits on generics are much higher than on patented drugs (for pharmacies that is, not drug makers). As the healthcare system struggles to keep costs down, it will turn more to generic drugs resulting in stronger profits for Express Scripts.

Another beneficiary of the aging population will be hospitals, especially those that serve a cost-saving function. One of the most costly areas in healthcare is mental health, which tends to be more labor intense. Few psychopharmaceutical drugs exist that have real lasting effects on mental disorders. The most common ones in use today are virtually the same ones prescribed 30-40 years ago. Breakthrough drugs have been few and far between, and many pharmaceutical companies have put research into this area on hold for lack of promising areas.

With a lack of drug-based treatments, hospitals that specialize in delivering forms of therapy such as cognitive behavioral or talk therapy in a cost-effective way stand to make increased profits.

The leader in this field (which also runs other types of hospitals) is Universal Health Services (UHS). The company’s only drawback is that it is located in Las Vegas, an area which has been hit severely by the economic slowdown. When people feel a sudden financial pinch, they tend to cut back on unnecessary expenses such as entertainment and gambling. However, we doubt they will stay away for long. The urge to gamble is part of the human spirit and has nothing to do with one’s financial security. Those in the lowest income brackets are often the biggest buyers of lottery tickets, so we expect casino trips will rebound.

Of course, UHS has interests outside Nevada. Moreover, Las Vegas’s problems should not stop the company from benefiting from the nation’s growing need for cost-effective psychiatric and psycho-therapeutic services.

Outsourcing

The other growth sector we see today is outsourcing. Again, this is because companies have a rising need to cut costs. Surprisingly, one of the leading companies in this area of industrial services is the former computer giant, IBM. Another outsourcing firm that is less widely known is Cognizant Technology Solutions (CTSH). Both these stocks should prosper as rising material prices force companies’ to save money in other areas.

Combined with the foreign stocks we gave you last week, you now have a number of choices outside the resource sector that should deliver good profits over the next 12 months or so. Unfortunately, the happy days of this Faustian bargain may not last much longer than that. Rest assured however, we will continue to update you on strategies to protect and grow wealth even after the devil comes for his payment.

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