Stocks are cheap. They are down more than 40% from their peak in October of 2007, and that is in line with their profit decline. But stocks are now selling for less than their replacement cost -- that is, what it costs to build the businesses or build the buildings. That's very important because until profits go up and prices go up for the services of existing businesses, you aren't going to get more competition.
The stocks he likes best are those that are capitalizing on their competitors' problems. To wit:
- People's Bank (PBCT) used to be a small regional bank, but through its risk aversion and access to low-cost deposits, it's now the country's 11th-largest bank, with a market cap of $5.6B and $2.5B in cash which could open up acquisition opportunities.
Other stocks he holds:
- ITC Holdings (ITC) - sometime soon the government will mandate that utilities take a certain percentage of their power from nuclear and wind, which will benefit this electricity-transmission company.
- Wynn Resorts (WYNN) - after a recent share offering, its debt load seems manageable. Trades for a low multiple on trough earnings. Well managed.
- Blue Nile (NILE) - their competitors, mall jewelry retailers, are going out of business.
- DeVry (DV) and Strayer Education (STRA) - state colleges are cutting back on their programs due to budget restraints. Enrollments in private educators are up strongly.
Baron makes an interesting point about active management vs. buying index funds:
With index funds, you are going to be investing in the most successful businesses at that point in time, and at the top of the market you will be massively overweighted in those companies. That was oil and gas in the 1970s and 1980s. In the 1990s, it was technology. Earlier this decade, it would have been financial companies, which you would have invested in at exactly the wrong time. When you invest in our funds or other mutual funds that are actively managed, the idea is that you are going to be investing in businesses that a team of analysts and portfolio managers has carefully chosen.
Keep you eyes on the balance sheet, Baron says, and you'll be okay in the long-run. He 'hopes' stocks will strike new all-time highs within 4-5 years, "and maybe even sooner if we get lucky."
A number of bloggers seem to be encouraged by the ISM's latest manufacturing survey, which surged to its best reading in seven months last week. Both Mark Perry and The Good News Economist believe growth will return to the GDP by Q2 or just after. And Edward Harrison thinks we've hit a manufacturing bottom.
But David Templeton thinks the excitement over the recent upturn is misplaced, and notes that a disproportionate level of cash remains sidelined.