'Bull Market Has Legs,' Says Oppenheimer

NEW YORK (TheStreet) -- "The bull market that emerged from the March 9, 2009, bottom has been the most denied bull market that we can remember."

That's how Oppenheimer Chief Investment Strategist John Stoltzfus addressed the continued skepticism of some investors about the recovery of the U.S. stock market, which has been driven by the extraordinary efforts of the Federal Reserve to spur economic recovery, as well as the government's historic bailouts of banks and other companies, and "industry-based cooperative efforts."

The Troubled Assets Relief Program, or TARP, encompassed the bailout of hundreds of banks, as well as auto manufacturers, and in part the bailout of American International Group (AIG). Both TARP and the AIG bailout resulted in profits for the U.S. government, while arguably saving the United States from a depression.

One can never prove a negative, but there's no question the efforts of the government and the Federal Reserve were unprecedented and in part a reaction to the years of misery during the Great Depression of the 1930s.

Stoltzfus in a client note on Monday wrote that he found it curious that "the stock market's and the economy's recovery process, fed by extraordinarily transparent monetary policy by the U.S. Federal Reserve since the height of the crisis in September of 2008, was and continues to be challenged by skeptics."

Many of these skeptics continue to say that having short-term interest rates near zero for over five years is unnatural and unhealthy for economy, and decry the Fed's tremendous balance-sheet expansion brought about by the "QE3" purchases of long-term bonds that began in September 2012. The bond buying succeeded in holding long-term rates down, and the Fed expects to complete its wind-down of the purchases by the end of 2014.

"Many of the bears were so convinced that monetary policy would fail to rekindle frozen markets and fail to restart the stalled economy that they missed some or all of the gains that have occurred," Stoltzfus wrote.

OK, so what happens next?

Stoltzfus believes "this bull market has legs." This echoes the view of FM Global SVP of Investments Paul LaFleche, who said during a recent interview that he expected "an upper single-digit rate" for corporate earnings growth, along with "upper single-digits returns for stocks" over the next year.

The view of Oppenheimer's research team is mostly positive, with capital expenditures by U.S. companies accelerating, and continued employment growth, although increasing automation and efficiency will place a long-term drag on employment growth.

Looking at U.S. equities, Stoltzfus favors cyclical industries: "Consumer Discretionary, Materials, Industrials and Technology remain our most favored, along with Financials, which we expect to benefit from secular growth trends in both developed and emerging markets as well as a supportive yield curve as economies improve.

Among equity sectors, Oppenheimer suggests a 19% allocation to Information Technology, with favored names including Facebook (FB) and Angie's List (ANGI). Shares of Facebook were up 2.7% in morning trading Monday to $71.68, while Angie's List was up 0.6% to $13.31.

The sector with the next highest suggested weighting is Financials, with Oppenheimer analyst Chris Kotowski favoring KKR  (KKR) and JPMorgan Chase (JPM).

Kotowski rates KKR "outperform," with a price target of $27, implying 11% upside over the next 12 to 18 months from Friday's closing price of $24.28. KKR trades for 9.2 times the consensus 2015 EPS estimate of $2.65, among analysts polled by Thomson Reuters. The private equity firm pays a variable quarterly dividend, with payouts totaling $1.40 a share over the past year.

JPMorgan Chase is also rated "outperform" by Kotowski, with a price target of $72, implying 21% upside from the stock's closing price of $59.40 on Friday. JPMorgan trades for 9.4 times the consensus 2015 EPS estimate of $6.35. Based on a quarterly payout of 38 cents, the shares have a dividend yield of 2.56%.

The bank is likely to announce a dividend increase on March 26, after the Fed announces the results of its annual Comprehensive Capital Analysis and Review (CCAR) of major U.S. bank holding companies. For more on CCAR and what investors can expect from the big banks in the way of dividend increases and stock buyback plans, please see Why You Should Celebrate Bank Stress Tests.

Shares of KKR were up 0.5% to $24.39, while JPMorgan's shares were down slightly to $59.33.

This chart shows the stock performance of KKR and JPM against the S&P 500 since the end of 2011:

KKR Chart data by YCharts

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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