INTERVIEW: Bridging the Trends by Sandra Ward
Highlighted companies: Textron Inc. (TXT), CSX Corp. (CSX), Norfolk Southern Corp. (NSC), Hess Corp. (HES), Temple-Inland Inc. (TIN), Dominion Resources Inc. (D), Credit Suisse Group (CS), Allianz Aktiengesellschaft (AZ)
Summary: Barron's interviews Rob Lyon and Jerry Senser, Co-chief investment officers, Institutional Capital:
Related: Top holdings in Institutional Capital's three funds: ExxonMobil Corp. (XOM), American International Group Inc. (AIG), Novartis AG (NVS), Altria Group Inc. (MO), General Electric Co. (GE), Bank of America Corp. (BAC), Citigroup Inc. (C), Total S.A. (TOT), Koninklijke Philips Electronics NV (PHG). Seeking Alpha hedge fund coverage, shorts, longs.
- Economy: They don't foresee a recession: credit conditions are stable, and once businesses get rid of their currently inflated inventories and housing starts to pick up, the economy should regain momentum. It's unlikely that economic weakness will force the Fed to raise rates.
- Stock market: 2007 stock market gains should be in the mid-single digits. P/E is just under 16x trailing earnings, not far from its historical average.
- Mergers & acquisitions: "It seems every week there are more and bigger deals than the week before, and I don't think that is going to change for a while."
- Inverted yield curve: This time it's not a recession signal, because, unlike in previous cycles, it's not a signal of tightening credit. To blowup the 'leveraged-buyout economy,' you need weak economic growth and tight money. That won't happen for a while, although when it does happen it may be ugly.
- Overseas growth: It will continue to outdo the U.S.
- Favorite stocks: (1) Textron Inc. (TXT) -- they'll have a big-earnings year and in 2007 and probably in 2008. At $94 today, it's going to well over $100. (2) Railroad stocks -- they are the beneficiaries of clogged highways. CSX Corp. (CSX), Norfolk Southern Corp. (NSC). (3) Hess Corp. (HES) -- they are looking at several years of large production increases. (4) Temple-Inland Inc. (TIN) -- it has many businesses whose pieces give it value well above current levels. (5) Dominion Resources Inc. (D) -- it is about to auction all its oil, NG, and production properties. The properties should fetch over $15b ($40+/share), which is a big deal for an $83 stock. (6) European stocks: Credit Suisse Group (CS) -- trades at 12x earnings, really low for a quality private-banking operation. Allianz Aktiengesellschaft (AZ) -- it has just undergone huge streamlining and cost-cutting.