Market Insights from Epoch Co-Founder David Pearl

An article in Barron’s offers comments from David Pearl regarding his market outlook and “why free cash flow remains his yardstick of choice.”

Here are some highlights:

  • We are in “one of the best economic periods since World War II,” said Pearl, and while the mid-term election split in Congress will result in mild gridlock there will be “no big change that would affect the course of business, economic growth, jobs.”
  • The probability of a trade war with China sits at lower than 50%, according to Pearl. “If you can do a deal with Canada, you’ll eventually figure out a deal with China,” he asserted.
  • Epoch’s market return forecasts (5% to 7% annually), Pearl explained, are “almost all driven by earnings growth,” adding, “We would never assume that a company’s going to have PE expansion while rates are going up.”
  • Pearl defines free cash flow as “the cash generated from the business that has no mandatory use to keep the business running or for an obligation like debt or a dividend.” He believes its an important gauge because “Cash is real. You run a company on cash,” adding that evaluating free cash flow is a “much better and more precise way to see if a business is healthy.”
  • Pearl would still buy Apple stock, he said, because the company has continued to innovate and has become one of the most profitable companies.”
  • Financials, Pearl said, are “ridiculously discounted,” and favors Morgan Stanley.