4 Specific Opportunities Well Positioned to Weather a Challenging Market

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 |  Includes: GE, MMM, SLB, T
by: Ben Marks

Index Mar 2011 YTD 2011

DJIA + 0.76% + 6.41%
S&P500 - 0.10% + 5.42%
NASDAQ - 0.04% + 4.83%

During the month, the S&P 500 Index declined by 0.10%, showing remarkable resilience to extraordinary incidents, holding on to a 5.42% gain for the quarter. It’s surprising to us that Qaddafi is still in power, although his influence over oil production facilities has been diminished, and the rest of North Africa is no longer headline news.

Europe is still nervous over their exposure to North Africa. Additionally, in Europe there are continuing domestic debt issues and the German ruling party lost support in a key province. Despite these uncertainties, low interest rates continue to force cash into equities. In any case, US large cap stocks continue to be safe havens in a turbulent world.

Scenes from Japan were far worse than anything Hollywood could devise. The devastating physical impact of Japan’s earthquake and tsunami won’t be tallied for years to come, but the current estimate is $300 billion or 30 times that of the 2004 Indonesian tragedy (Wall St. Journal,3/30/11).

The earthquake shifted the world on its axis, also shifting estimates of world production from their axes. The evacuation zone is widened almost daily on radiation fears. Rolling blackouts continue. The extent of supply chain disruptions is still being determined. This leaves production and expenses in a quandary; we will have a better understanding when companies begin to report results in mid-April. In the meantime, we are evaluating each of our companies’ exposure to Japan and also opportunities created by rebuilding the country’s infrastructure.

The doubling of energy prices and the 40% increase in food costs since late 2008 are driving up inflation and driving down consumer spending on other goods & services. According to Barclays, rising fuel prices have already offset 60% of January’s cut in Social Security Taxes. The higher fuel prices also contributed to a fall in the Thompson Reuters/University of Michigan consumer sentiment index --- to its lowest level since November, 2009. What we do know is that estimates for 2011 US Gross Domestic Product have been moving down since early January, from 3.5% to the 2.0-2.5% range.

At the beginning of March, the index of purchasing managers (ISM) rose from 60.8 to 61.4. This is a key leading stock market indicator as it is the starting point for changes in manufacturing capacity utilization rates. The index reflects inventory on hand and distributors’ optimism.

Whether it’s because retail sales were below expectations due to weather, unemployment remains high, or companies are simply holding onto cash rather than investing in capital, a slight drop in the ISM to 61.2 did not surprise us when it was reported Friday morning. We are doing our homework, and believe there are specific opportunities well positioned to weather what may prove to be a challenging market as the year unfolds.

After a lengthy process, several banks received Government approval to raise dividends to shareholders in mid-March, but not to previous levels. Of these banks, most saw declining stock prices as the announced dividend rates disappointed investors.

In these turbulent times, we continue to recommend multiple asset classes rather than pure equity investing. The combination of Equities, Fixed Income, Currencies, Commodities and other Alternative Strategy investments are designed to help offset volatility in one asset class and add to overall investment returns. And yes, my bracket was busted in the NCAA tourney last week.

Stock News

3M (NYSE: MMM) Our Sr. Investment Analyst, Mariann Montagne, attended 3M’s St. Patrick’s Day analyst event where management focused on innovation as the driving force for accelerating growth. It is truly a research & development focused organization, where scientists are exposed to multiple categories’ programs in 3M’s labs around the world. That’s how a highway sign product was revealed to be the perfect ingredient for a denture product, and the number of LED lights within an auto taillight was reduced from 13 to 2.

Such innovation drives market share, revenue growth and increased profit margins. Emerging/developing markets are currently over 32% of sales, but products have been directed at only the top tier of users. Going forward, 3M is leveraging operations in emerging markets with locally-sourced, locally-made, low-priced products for the masses, unleashing the broader spectrum of 3M technology.

Thus, we expect their earnings growth rate to accelerate from 11% over the past ten years to the 13-17% range on 8-10% sales growth over the intermediate term. We continue to own 3M, expecting above average total return over the intermediate & longer terms.

General Electric (NYSE: GE) in an attempt to reduce its dependence on financial markets, agreed to purchase 90% of Europe’s largest manufacturer of power conversion equipment for $3.2 billion. It is the latest in a stream of energy acquisitions by GE over the past six months, totaling $11 billion. Converteam has been a private company, but estimates indicate the price is 14 times trailing earnings, even less once potential cost savings are taken into account. There is an agreement in place to purchase the remaining 10% from management over the next three years, once operations have been streamlined.

Schlumberger (NYSE: SLB) The outgoing CEO spoke at two recent conferences about the complexity of supply and the growing demand for oil & gas. 75% of the world’s oil reserves have been nationalized and are closed to international investment. Half the oil & gas supply for 2020 is yet to be developed or discovered. One-third of the world’s needs could be sourced from offshore wells. All of this makes a great long term investment case for this leader in oilfield products & services operating in 80 countries (many over 70 years). In the two months following the Gulf of Mexico oil spill and the resulting drilling moratorium, the company moved 580 of its deepwater experts to new locations around the world, proving remarkable flexibility for a $27 billion revenue company. We continue to believe that Schlumberger is best in class and a good long term holding.

AT&T (NYSE: T) announced a preliminary agreement to purchase #3 wireless carrier T-Mobile USA for $39 billion in cash and stock. This would increase AT&T’s wireless subscriber base by one-third, placing it well ahead of Verizon (currently equal to AT&T). The deal would also enable AT&T to expand broadband coverage by 46.5 million people, in line with goals set by the Federal Communications Commission (FCC). Regulatory approvals from the FCC and the Federal Trade Commission are expected to take about a year, and will likely mandate some divestitures. The stock price is up 10% since the deal was announced on March 21 on expectations of increased revenues per user and lower overhead expenses.
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