Here's a one page summary of leading stories from this weekend's (July 29) Barron's (paid sub. req.), noting stocks to watch for Monday morning when the market opens and brief comments on the Barron's articles. Note: clicking on a stock ticker pulls up opinion, analysis and a quote for that stock; clicking on a headline takes you to the full Barron's article (paid sub. req'd.). You can get this summary emailed to you every week by signing up here.
What Could go Wrong with China? By Jonathan R. Laing
Summary: While everyone's impressed by China's growth and many are convinced it will become the dominant economic power this century, Laing takes the contrarian postion that 'the Sino-euphoria is overdone.' Some reasons for concern: (1) a rapidly aging population, due to the one-child policy enacted in the '70s, means a dwindling labor force, (2) relatively poor health care exacerbated by environmental problems, including poor water quality and shortages, (3) growing corruption at all levels of government, (4) a 'combustible' combination of exploited labor, a huge divide between new rich and poor, disenfranchised workers following the downsizing of state-owned firms, and seizure of land and housing, (5) the 'runaway' investment boom that's outstripping GDP growth 2 to 1 and built upon a shaky banking system, (6) fragmented markets defined by provinces, (7) intellectual property problems, and (8) geopolitics -- specifically, protectionism and growing reliance on oil and other commodities.
Quick comment: One of the best ways to gain exposure to China is via ETFs: the iShares FTSE/Xinhua China (FXI) and Powershares Golden Dragon (PGJ) are both up strongly on the year, after a big May drop. Andrew Schmitt joins Laing in being nervous about China, while Roger Nusbaum holds a small China position for clients, since 'all of the catalysts moving China are still in place are likely to be there for awhile to come.'
Braveheart's Return By Neil Martin
Highlighted companies: Epoch Holding Corp. (EPHC), Bunge (BG), DaVita (DVA), OMI (OMM), Comcast (CMCSA) Advanced Micro Devices (AMD)
Summary: An interview with William Wallace Priest, co-founder of the publicly traded Epoch Investment Partners, whose flagship Global Absolute Return fund has managed a 17.2% annualized return after feeds for the past three years. Minimum investment is $5 million. Priest believes the days of enormous P/E expansion are over, and that investment strategies built on business metrics will be more important than traditional valuation methods. Alpha (absolute return) will trump Beta (systematic risk). He looks at free cash flow as the dominant metric. Priest is bearish on emerging markets right now, except for companies selling heavily into them -- like Bunge. In healthcare, he likes DaVita for emphasizing profitablity over growth, in transportation: OMI for its outstanding management and buybacks, in communicaitons: Comcast for its upgraded broadband network and buybacks. He's bearish on AMD, which will have a hard time withstanding the price war with Intel.
Quick comment: More on AMD's effort to stay competitive with Intel. Seeking Alpha contributor Michael Markowski is another investor heavily focused on free cash flow as the single most important indicator of future outperformance.
It's Practically in the Bag By Michael Santoli
Highlighted companies: Coach (COH)
Summary: Luxury retailer Coach's stock has dropped 17% this year amid concern that its rapid growth is slowing, but as business remains strong the stock could rise up to 25% a year without its (historically low) multiple of 17-18 times earnings adjusting at all. Coach has led the movement of handbags becoming fashion statements; its U.S. market share of $100+ bags is up to 26%, while that market has nearly doubled in the past three years. Look for Coach to ratchet up its yearly guidance on its earnings call this Tuesday.
Quick comment: Look for Coach to get a lift Monday in response to this article, and ahead of earnings. Chad Brand also thinks consumer discretionary companies like Coach are solid contrarian bets in an otherwise soft retail market; Rob Black notes that weaker consumer spending is less of a problem for luxury merchants such as Coach.
TECHNOLOGY TRADER: Bets Beyond Intel, AMD By Bill Alpert
Highlighted companies: Intel (INTC), AMD (AMD), Microchip Technology (MCHP), Linear Technology (LLTC) Analog Devices (ADI), Texas Instruments (TXN)
Summary: With Intel and AMD battling it out in a brutal price war while PC end sales drop, semiconductor investors should find more compelling options in broadly diversified chipmakers such as Microchip Tech, which makes inexpensive microcontrollers; Analog Devices and Linear Technology, which have tens of thousands of customers; and Texas Instruments, which supplies the dynamic cellphone market.
Quick comment: The semiconductor ETF finally began leading the market this week, a sign reticent bulls were waiting for. Options trader Phil Davis made a great call on TI before its strong earnings last week - he's still holding $30 August calls; William Trent, however, is wary about oversupply in the wireless handset market.
A Brand-New Drill By Jacqueline Doherty
Highlighted companies:El Paso Corp. (EP)
Summary: Natural gas provider El Paso has spent three years selling off assets to avoid deep liquidity problems, and the process seems to be working. CEO Douglas Foshee was hired in 2003 to unravel the company's Enron-emulating energy trading business, and focus on E&P in natural gas. He's done just that, and the stock's moved from $3.45 at the low point three years ago to the current $15.60. Reported earnings have been negative for four years, due to one-time charges and 'asset impairments', so this is the decisive year for El Paso to reassert itself on the balance sheet. With stable, price-insulated natural gas revenue, and promising drilling successes, the company 'is likely to trade up to $20' in the near future.
Making a Splash By Christopher C. Williams
Highlighted companies: Tetra Tech (TTEC), Watts Water Technologies (WTS) , American States Water (AWR)
Summary: Engineering and consulting firm Tetra Tech collapsed with the telecom bubble in the late 90s and has continued to report losses -- reaching $100 million in the red last year. It has been selling off telecom and other properties, however, focusing on its core water-related construction and technical-services expertise. The company helps municipalities and governments improve water quality and control sewage, and has been winning contracts at a rapid clip. Earnings should grow at an impressive rate over the next two years. The stock rose amidst the climb in the water-services sector, but has since pulled back and now provides an attractive entry point: 'The shares could climb by about one-third over the next year, to 20, as demand stays strong and profit margins improve.'
Quick comment: This writeup should put the stock on more radar screens and provide some lift on Monday. A Stanford Group analyst explains why water's so hot. Prefer the nuts and bolts to consulting? John Bethel just went long a water components company that recently made an IPO: Mueller Water Products
All Pumped Up By Rhonda Brammer
Highlighted companies: Range Resources (RRC), Denbury Resources (DNR)
Summary: Natural gas prices rose the past week amid high energy demand and lower-than-expected storage. Peter Vig of RoundRock Capital likes a smaller player in this sector: Range Resources is 'like a gas-manufacturing company' -- 99% of its wells drilled in the first half were successful; its specialty is extracting gas from unconventional sources like tight sands, coal beds and shale. Range has huge undeveloped reserve potential as well. Among small oil stocks, Vig likes E&P Denbury Resources for its unique liquid CO2 reserves, used to extract oil from otherwise dry wells via 'tertiary recovery.' Denbury buys up mature fields cheaply (nobody else has the CO2 to use them), builds a pipeline to it, then leverages that field to buy the next. Vig sees Denbury at $45 within 12 months.
Highlighted companies: Motorola (MOT)
Summary: At Motorola's financial analyst meeting and new product showcase last week ('RAZRFEST'), CEO Ed Zander announced he aspires to overtake Nokia in handset sales. Veverka notes that 'over the past seven quarters, Motorola's global market share has jumped from 13.5% to 22.1%. Meanwhile, Nokia's has remained relatively flat at 33%.' More RAZRs are on the way, and they're faster, thinner and smarter.
Quick comment: Read Motorola's conference call transcript for more on the company's strong quarter; global mobile phone sales are strong indeed, and the big suppliers are getting bigger.
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