What to Buy and Why: Barron's 2009 Roundtable, Part II

Barron's chronicles round two of its three-part 2009 Roundtable. Last week's installment was largely an overview, followed by the 2009 stock picks of Meryl Witmer and Fred Hickey. This week, Bill Gross, Archie MacAllaster, Felix Zulauf and Abby Cohen weigh in.

Bill Gross

• Not Treasurys - because of their low yields, and the eventual threat of inflation, government bonds are a trap. Chances of a 1930s-esque deflation? 10%. If you must buy government bonds, Gross likes Germany's. (Most other Roundtablers agree that Treasurys are not the place to be.)
• AIG (AIG) - follow the government, which stands behind AIG with the close to $200B it has sunken into it. AIG's preferreds, which yield 12.5%, are "the most incredible example of value I have ever seen in the bond market." He also likes bank preferreds.
• iShares Lehman TIPS Bond Fund (TIP) - cash-strapped funds have been spitting these out billions of dollars at a time. They now yield 2.5% in an economy that's growing nowhere close to that, and the potential for inflation 5-10 years out is high. They could gain 10-20% in price over the next six months if markets become convinced deflation has been averted.
• Pimco High Income Fund (PHK) - it's about as good a deal as any in the bond market today.

Archie MacAllaster

• Franklin Resources (BEN) - moving away from share buybacks, BEN is starting to use its money to snap up mutual fund assets on the cheap. "In two years it will be making more money than ever before."
• SuperValu (SVU) - third-largest grocery chain in U.S.
• Williams Companies (WMB): - has hedged a lot of its gas production, so its average selling price will be more than $7 per thousand cubic feet. Gas sells now for $5.50.
• Hartford Financial (HIG) - it's high-to-low range is an incredible $85.11 to $4.16. HIG should make $5-6/share in 2009. It's very flexible.
• Delta Air Lines (DAL) - fresh out of bankruptcy court with a relatively clean balance sheet and about $35B of revenue.
• MetLife (MET) - any time you can buy MetLife under book value, you should.
• Prudential Financial (PRU) - 2008 earnings are estimated to be $3.50/share; in '09 it could earn as much as $7.

Felix Zulauf

• Medium-term government paper blended with five-year investment-grade corporate bonds issued by companies in defensive industries, such as telecom, food and oil - it will take markets a long time to adjust to the new reality; deleveraging will continue. The "Obama hope" will peter out some time in Q1. S&P could easily fall into the 400-600 range over 2010-'11. Like Gross, he also likes German government bonds.
• Gold - we are seeing government stimulation of historic proportions, which will ultimately be inflationary. Gold is the only currency that won't get devalued. It will be revalued. Should double in two years. (If the Fed's liabilities had to be covered in gold, it would sell for more than $6,000/ounce.) He also likes Market Vectors Gold Miners ETF (GDX).
• Short the Hungarian forint against the euro - Hungary has the largest percentage of public and private credit - 57%.
• Crude oil or Energy Select Sector SPDR ETF (XLE) - trade beaten-down commodities.
• Asia equities - stocks are cheap, offer good good dividend yields and are a good way to have a foot in these markets. He likes iShares MSCI Hong Kong (EWH) and iShares MSCI Singapore (EWS).

Abby Cohen

• Corporate bonds - senior debt of Bank of America (BAC), JPMorgan (JPM) and Travellers (TRV). Not just the coupon (5-6%) but the potential of price appreciation.
• Bank of America (BAC) - she picked this before the events of last week.
• Duke Energy (DUK) - a 6% yield and long-term earnings growth of about 5%. The new administration could be a boost for DUK, which has been proactive about energy efficiency.
• Wyeth (WYE) - less exposure to patent expirations, and it has a significant biotech initiative. Could be a buyout target.
• ITT Industries (ITT) - she likes its defense business, and says its water business looks like a long-term winner in the Obama era.
• Applied Materials (AMAT) - chip orders should trough in the first half of 2009. AMAT has a $4.85B backlog and $4.2B in cash. (Other Roundtablers have a hard time with this pick.)
• Hess (HES) - if you see some light at the end of the tunnel in terms of economic activity and energy prices move up, Hess could do well.

Comments

[R. Richard ...:]

Ah! But Gross, or at least Pimco has started buying U.S. Bonds!!!

Jan 19 04:44 PM

[Stone Fox C...:]

MacAllaster has the most interesting picks. Both HIG and PRU are compelling at these levels.

Jan 19 04:57 PM

[driftwood2:]

Abby's picks are laughable as usually. It's especially funny that she pick BAC which of course veritably imploded last week. AMAT's PE is 14.5 which is not cheap at all in this environment. Everyone knows that semis are cyclical and AMAT even more so.

Jan 19 05:20 PM

[SW Richmond:]

"Short the Hungarian forint against the euro"

This trade's pretty much discounted, isn't it?

Jan 19 07:15 PM

[User 265729:]

Not another, buy, buy, buy and boy some more story.

Now is the time to wait, look and listen before crossing the street.

Jan 19 08:06 PM

[User 265729:]

Ya, But Korea is going to start dumping them an all of Asia may follow.

www.bloomberg.com/apps...

www.bloomberg.com/apps...

Not a great thought at this point...


On Jan 19 04:44 PM R. Richard Schweitzer wrote:

> Ah! But Gross, or at least Pimco has started buying U.S. Bonds!!!

Jan 19 08:09 PM

[HAL9000:]

Gross recommends PHK - a closed end fund selling at 22% over NAV according to etfconnect.

Jan 19 09:32 PM

[weiwentg:]

As for AMAT, semis are cyclical, but AMAT is probably the best among all the semi stocks. It has larger scale than its competitors as well as an emerging solar business. I think we're around the bottom of the cycle - this is the time to buy AMAT.

As to Abby's pick of BAC common, I have to say that BAC (which I bought around $48) is starting to look like a deep value play. Ken made a blunder with the Merrill acquisition. However, BAC is not as scattered as Citi. Merrill's brokers are a solid asset. The bank has a dominant and stable retail presence in the US. The terms of the last aid package were not onerous. BAC is also too big to nationalize. I would prefer that Ken Lewis step down in atonement for the Merrill fiasco, but I think the bank will survive. $7 a share is not reasonable, either.

Jan 19 10:55 PM

[ChickenLips:]

AMAT might be a silly pick if as far as traditional microprocessor manufacturing is concerned (Intel's earnings dropped like a rock). But let's consider the future. The new administration might pass some serious legislation benefitting solar cell manufacturing here in the US. AMAT would be the obvious pick since a majority of manufacturers would be purchasing AMAT equipment/service contracts. Buying AMAT in the Q1 trough might not be a bad idea for a LONG term investment.

Jan 20 01:01 AM

[mkreisel:]

Since they all bashed US Treasuries, I would think that Treasuries is the place to be.

As for equities and corporate bonds, please wait at least until the current earning season is over. Then we shall have a better idea about who's holding up well and who's not.

I personally want to know what Buffett had done during the last quarter of 2008. The answer comes out on the first Friday of March.

Jan 20 01:14 AM

[fjpenney:]

Stock picks from so called experts are a great means of selling a magazine, newspaper, etc. yet the record of these experts' forecasts often lags the market. Barrons recently announced that the stocks which had bullish articles written on them in their magazine for the past two years underperformed the relative market benchmark. Dr. Phillip Tetlock's research, which is regarded as the most thorough on the subject, found that fianncial and political forecasts by people (read experts) who are paid to forecast are, on average, no better than forecasts by non-experts.

These forecast articles will always be around because most people believe that "experts" like Abby Cohen actually possess the skill required to be great stock pickers.

Jan 20 05:14 AM

[ArtfulDodger:]

Surely gents there is at least one decent piece of advice in this hodgepodge. Eh?

Jan 20 08:49 AM

[dawase@gmai...:]

I generally think the round-table is pretty savvy, but

1. including Cohen is laughable, and

2. they decided not to revisit last years picks and assess performance.

Not the standard I've come to expect from Barron's.

Jan 20 09:00 AM

[Old Rick:]

Last years picks were in Barron's online last week. Pretty dismal showing except for Fred Hickey with a couple good shorts.


On Jan 20 09:00 AM dawase wrote:


> 2. they decided not to revisit last years picks and assess performance.
>
>
> Not the standard I've come to expect from Barron's.

Jan 20 09:18 AM

[raytayzmd:]

...PHK?"it's about as good a deal as any in the bond market today"?...did Gross really say that?...PHK is a CEF currently trading at about a 23% PREMIUM to net asset value and burdened with about 50% leverage...that's probably the WORST value in current closed end high yield funds!

Jan 20 09:37 AM

[Conan the B...:]

Eli: you apparently missed the asterisks associated with Zulauf's picks: Gold only if it drops to the $700-$600 area.

For Trading Picks:
Oil and the Asian equities: only after they go to new lows.

Personally, I'd wait for both corrections to occur before wading in with both feet.

I have started tracking HIG. Awaiting Earnings and guidance.

Jan 20 11:17 AM

[User 265729:]

Barron's sits unsold on the stands, right next to piles of unsold issues of Money and the New York Times.

Jan 20 02:50 PM

[User 328725:]

You really want to know what to buy? Supplies. Guns, ammo, vitamins, first aid kits, all that survival stuff. get a Chinese dictionary too while you're at it.

Jan 20 05:18 PM

[PDuffy:]

I agree with the guns/ammo position as China has been plotting the downfall of the dollar and has replaced us as the leading economic power in the world.

Jan 20 06:28 PM

[raytayzmd:]

....hmmmmm, strange but it appears my comments about HIG have been deleted...censorship?.... doesn't make much sense since I didn't say anything derogatory...I simply said I was skeptical of HIG making $5-6 a share since as I understand it, no one but Jesus can walk on water...that seems pretty tame...maybe some bible thumper took offence.

Jan 20 06:35 PM

[Anthony Alfidi:]

Bill Gross is funny. He thinks bonds are a value trap even though he's started buying them again. I guess he paid more than he expected, so trying to talk the market down might work for Pimp-Co.

Jan 20 08:54 PM

[Harry Tuttle:]

Abby Cohen always has the same view: 20% upside from the current level.

Jan 20 09:44 PM

[MikeInMass:]

To be fair to Gross, the interview was conducted on January 2nd, and at the open that day PHK's premium was only 5.7% over the previous night's NAV.

Jan 20 10:30 PM

[donzelion:]

I actually like Cohen's picks - esp. BAC after its latest itty bitty drop (what's a 30% drop among friends?) ;) The difference between Citi and BAC is that Citi bought premium brands at premium prices - and kept paying premiums above and beyond anyone else simply because "we're the biggest." That works for the NY Yankees over the long run, but it sure doesn't make for the most efficient bank.

BAC bought premium brands at value prices. If you thought Merrill or Countrywide ever had any real value - then you have to believe in BAC now (esp. after yesterday's 30% off sale).

Jan 21 09:08 AM

[GloomBoom.com:]

Right on about gold. Should double in two years. Music to my ears!!

Jan 21 12:41 PM

[Delojozafado:]

I am left to wonder in these volatile markets whether or not Mr Gross has already exited some of his position in PHK, since it has had such a run up. The large premium is somewhat reflected in the share price yield of 22%. The theory being that not all the junk will collapse and that MR Gross & his "expert" minions will deftly navigate the perilous swamp of junk debt. Well a lot of investors thought Munis were relatively safe as managed by Pimco/Allianze, then the ARPS blew up at PMX and the others... I would think that PERHAPS an investment in CIK might make a better alternative in the category. It's discount and yield are commensurate with the risk. Some autos in there so I am waiting for a shoe to actually fall there. Perhaps by the end of March. A very decent alternative to junk these days is a portfolio of high grade corporate, US Gov't and Developed nation's bonds with the inflation protection. A combo of BDF,ICB,MIN,WIA (the TIP at a huge discount with double the yield) & +/-10% TBT, could still give you a +6.5% yield. That's double the one year CD. In terms of the beaten down and out there certainly seems to be value in the international REIT sector. If you are not afraid of just a little WEFIF in your portfolio then SLS is certainly compelling. I am sure that many malls in Tokyo, "Singapore", and Dubai will still cut the mustard and their tenants will continue to cough up the rent. SLS recently announced the dividend cut/policy change all knew was coming and now the shares seem fairly valued at $4.80. The shares have either reacted or perhaps over reacted?
`
I believe the EWS actually has some solvent banks in it, if that is possible. I think the foreign theme is indeed interesting but look closer to home as most of these currency prognosticators seem to think there is major support at 130/.77 for the Loonie. We are very close to that but the Loonie rallied sharply after midday on 1/21 as oil advanced $7 in the wake of the near term option expiration. If oil is to trade in $30 to $50 range then dividend paying stuff like TRP might have some merit if the pointy billed bird were to rally.

Jan 22 07:19 AM

[Staff Serge...:]

I hate to pile on but driftwood is correct. Abby's picks are a joke. I even enjoy the cover being laid by saying she made her picks before the events of this week. Like that is good cover.

If she cant predict bad things to happen over the next week then she has no business projecting what we should and should not buy over an entire year! Laughable indeed!

Ed

Jan 22 03:55 PM

[31October:]

He is smart enough to pay himself first.
Regarding preferreds, the Feds claim the right to tell AIG not to pay the dividend. Bonds sound interesting.

On Jan 20 10:43 AM valueinvestor1 wrote:
> Interesting comment by Gross on Aig bonds.I dont liek Aig or bonds
> but Gross is among the US smartest men

Jan 26 08:23 PM