Solid company growth produces positive equity prices over the long term, says Gary Lisenbee, CEO and CIO of Metropolitan West Capital. His firm manages the Renaissance U.S. Equity Value Fund.
In the short term, markets and stocks are driven by macro events. Stocks often fluctuate based on what’s happening in volatile regions such as Greece, Europe and China, and due to current headlines.
But, over periods of three-to-five years, Lisenbee says advisors can get a handle on where stocks or equities will go by using a bottom-up approach.
“They should analyze earnings growth over a three-year period to come up with approximate estimates of possible returns,” says Lisenbee.
Read: Taste companies before buying, for more from Lisenbee
Since equity returns have diminished over the past few years, Lisenbee suggests looking for companies with high dividend yields, an important component of earnings.
He says over the next four-to-five years, investors can most likely expect 5% annual earnings growth on average, on top of dividend payouts.
“We’re in a low-inflation environment. Some might even argue we’re operating in a borderline deflationary environment. So, [investors] are looking at a projected mid-to-high single-digit return on equities.”
Down the road, Lisenbee predicts investment prospects will improve across the board. Returns may rise to 7% and above.
In the meantime, though, stocks are a good investment since they’re currently more lucrative than other asset classes.