Barron's 2007 Analyst Roundtable, Part II

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Mixing It Up -- Part II by Lauren R. Rublin

Summary: Part II of Barron's annual analyst roundtable highlights the picks of Pimco's Bill Gross, Archie MacAllaster of MacAllaster Pitfield MacKay, Goldman Sachs' Abby Cohen, Felix Zulauf of Swiss Zulauf Asset Management, and value investor John Neff.

• Bill Gross: The Fed will lower interest rates by midyear, and the dollar will weaken. (1) iShares MSCI EAFE Index Fund ETF (EFA) -- an index of 1,000 global stocks, it's a play against the dollar, and fees are cheap. (2) RCM Strategic Global Government Fund Inc. (RCS) -- it yields 7.5% with triple-A government bonds using leverage and lots of mortgage-based investments. (3) Floating Rate Income Strategies Fund Inc. (FRA) -- it makes Ba-rated bank loans to big corporations, and has an 8.10% yield that will hold or maybe go a little higher over time.
• Archie MacAllaster: (1) Lyondell Chemical Company (LYO) -- #3 U.S. chemical company, it trades for $25 with '06 earnings of $3.25 and '07 estimates of $4+. Compare that to #2 DuPont (DD), which sells for $48 and has 06/07 earnings of $2.80/$3.25. (2) Hartford Financial Services Group Inc. (HIG) -- competitors Prudential Financial Inc. (PRU) and MetLife Inc. (MET) sell for 15-16x earnings, it sells for 10. (3) Arch Capital Group Ltd. (ACGL) -- a cheap insurance stock with a long way to go. (4) Capital One Financial Corp. (COF) -- it sells for less than 10x estimated earnings, and deserves 12+. (5) Corning Inc. (GLW) -- it trades in a range, and is presently at lows, and is cheap in the tech sector. (6) Pioneer Natural Resources Company (PXD) -- it costs them $8/barrel for oil, vs. competitors' $10-12, and they've got lots of it.
• Abby Cohen: (1) General Electric Co. (GE) -- global diversified business with a great mix. (2) Royal Caribbean Cruises Ltd. (RCL) -- Consumer stocks are in disfavor, giving them value. RCL has new ships coming on, and falling oil prices. (3) Federated Department Stores Inc. (FD) -- should have a good /07 because of restructuring and its focus on the high-income group. (4) MedImmune Inc. (MEDI) -- it is a significant player in the HPV [human papilloma virus] vaccine, which helps eliminate a form of cancer; earnings are about to grow dramatically. (5) Barr Pharmaceuticals Inc. (BRL) -- with the midterms over, the generic pharma market should rebound. (6) Baker Hughes Inc. (BHI) -- it's selling at a discount to peers due to problems, soon to be rectified. (7) Symantec Corp. (SYMC) -- longer term growth should be 16-17%.
• Felix Zulauf: He sees the VIX going up to 20+ in 2007. (1) iShares MSCI Singapore (EWS) -- wait for a correction. He likes its healthy GDP, free-market corruption-free economy, and strong dollar. (2) Petroleo Brasileiro S.A. (PBR) -- oil field depletion is 4% and the case for higher prices remains. PBR plans to grow production 7-8% in the next five years.
• John Neff: (1) Lyondell -- he sees $4.75 2007 earnings, giving it a 5.2 ratio; his target is $40, 60% higher that the current $25. (2) Nabors Industries Ltd. (NBR) -- world's largest land driller, it trades at 6.2x earnings. (3) YRC Worldwide (YRCW) -- he forecasts $5.75 earnings in 2007 for a 6.8 multiple; other truckers command 11-13. (4) Citigroup Inc. (C) -- it recently bought the credit-card businesses of Sears, Home Depot and Federated Department, which should boost bottom line earnings.

Related Links: Barron's 2007 Analyst Rountable, Part 1

Comments

[joel menkes]

Gross is off base for now. The fed can't lower until the europeans start lowering. Otherwise you get a double hit from the inflation perspective, the lowering itself and the lowering vs foreign currencies. So, unless the europeans start lowering by mid-year, you won't see it here, either.

[DavidJackson]

Even if Bill Gross is right on the dollar, his ETF pick doesn't make sense, as EFA is a large cap ETF dominated by multinationals, many of which have a significant proportion of their revenues from the US and would therefore be hit by a weaker dollar (or at least not gain one-for-one with a falling dollar).

Surely a much better choice for him would have been the WisdomTree International SmallCap Dividend ETF (DLS) or the WisdomTree Europe SmallCap Dividend ETF (DFE). More info in the Q&A with the WisdomTree product manager.