INVESTMENT Q&A

Editor’s note: The Investment Q&A feature will appear regularly in the Banking & Wealth Management special reports of The Central New York Business Journal, spotlighting area investment professionals and their views on the markets and investments. In this issue, Jim Burns, president of J.W. Burns & Company in DeWitt, chatted with Adam Rombel, editor-in-chief, via phone.

Business Journal: What is your view on where the financial markets are headed in the coming months?

Burns:  I think that it’s important for investors to remember that the driving force underpinning the markets and the global economy will continue to be monetary policy. Specifically, the world’s two primary central banks — the U.S. Federal Reserve and the European Central Bank —  have continued to pursue extremely accommodative monetary policies that have supported asset prices and in turn, global economic growth. In 2013, I expect these monetary policies to continue. And while the Federal Reserve had previously stated that it would maintain ultra-low interest rates until sometime in 2015, it most recently tied that policy to achieving a 6.5 percent U.S. unemployment rate with no more than 2.5 percent inflation. Because I believe the Fed’s target is a ways off, I would favor risk assets over safety assets, and that would mean equities — both U.S. and international — over low-yielding bonds.

In short, I believe 2013 will probably be another good year for stock investors. Again, monetary policy is the key as earnings growth will likely be moderate in 2013 — probably in about the 5-6 percent range for S&P 500 company earnings.

So, my best guess would be probably a return in the 8-11 percent range for the S&P 500 index this year. [Editor’s note:  In 2012, the S&P 500’s total return was 16 percent, factoring in reinvested dividends.]

Business Journal: Provide specific recommendations for investments that clients should be making right now.

Burns:  With the Dow Jones Industrial Average literally bumping near all-time highs as we speak, you have to dig deep to find some real values. One sector that I believe is out of favor and offers investors a robust longer-term return is natural gas. Specifically, we like Apache Corp. (ticker: APA). Apache is about as close to a pure natural-gas play as you can find. Natural-gas prices have been adversely affected by the expansion of fracking as well as warmer winters in general, but that has obviously changed this year, and I believe natural gas will in fact be more widely used as a substitute for coal. Furthermore, Apache is pushing very heavily into the Permean Basin, where it expects to generate 80 percent of the company’s 5-year earnings growth, which we believe will come in at over 10 percent per annum. Currently, Apache is selling at around $84 a share, which is well off its 52-week high of $112, and it is selling at only about 12 times forward earnings.

A second company we like is DuPont (ticker: DD). The real story here is DuPont is moving away from traditional chemicals and materials and instead emphasizing agriculture, nutrition, industrial biosciences, and advanced materials. DuPont just approved a $1 billion stock buy back. It currently yields a secure 3.5 percent and has a very shareholder-friendly management team.

We also continue to purchase Ralph Lauren Corp. (ticker: RL). This is just a great company. What I really like about Ralph Lauren is its innovative business model, in which it sells high-end goods to upper-end consumers, but it also distributes its lower-end goods to stores such as J.C. Penney, T.J. Maxx, and the like. And this has allowed Ralph Lauren to have a much more consistent revenue stream than most retailers in a challenging macro environment.

Business Journal: What do you see as the greatest risks investors need to be aware of and seek to avoid in the coming months?

Burns:  I believe there are three primary risks to which investors need to be alert. First, if the U.S. economy begins to pick up steam and unemployment approaches the Federal Reserve’s 6.5 percent targeted unemployment rate, financial markets will anticipate the end of the Fed’s ultralow interest-rate policy, and that could trigger market weakness. So watch the unemployment rate. Secondly, policy makers in Washington could really bungle their efforts to achieve a credible multi-year deficit-reduction package. This worst-case scenario could shake investor’s confidence in America’s ability to lead and solve its problems, and that would cause market turbulence. I would caveat this by pointing out that many investors have already written off the prospects that the two political parties can work together and achieve a grand bargain. But I guess it depends on how acrimonious the battle becomes. The final concern that investors might consider is complacency. The American Association of Individual Investors posted a survey in January indicating that the level of bullishness among investors has just jumped to a two-year high. And with the Dow Jones Industrial Average on the verge of breaking through its all-time high, investors should be selective and seek out real value before deploying new cash.