Forbes Investor Advisory Institute hosted a Financial Roundtable on March 22, 2007 with a number of leading investment professionals. From the Roundtable, hosted by Wally Forbes, here's an excerpt from Barbara Marcin (pictured), a portfolio manager at Gamco Investors, Inc. where she manages the Gabelli Blue Chip Value Fund and the Gabelli Dividend and Income Fund:
I think there's a lot of value in general in the market.
Just before coming here I looked at the largest 20 stocks in the S&P 500 just as another check. They're selling at a multiple of 13.5 on this year's earnings. And they're wonderful companies with good balance sheets and the cash flow and earnings to seed growth faster in growing areas overseas. So, I guess I could name a lot of stocks but I'll pick just a few.
One area where I think there's good value over the next few years for an individual is in the energy area. Our view is that the price of a barrel of oil will most likely be between $50 and $80 per barrel. Who knows. It could be $40 to $100 over the next few years. But those prices will support drilling and servicing and continued exploration and production.
I think there's particular value in the servicing companies. The one I like best there is Halliburton (NYSE:HAL).
Halliburton, as you know, has had a lot of problems in the last couple of years and so the multiple has been held down. It's selling at about 12 times this year's earnings with the prospect of good growth in earnings over the next couple of years. It recently spun off 10% of its ownership of a subsidiary, Kellogg, Brown and Root, now renamed KBR, which you might remember from the news for getting into a lot of trouble with contracts in building and construction services in Iraq. That has helped hold the multiple down. And Halliburton recently announced that it would exchange 1.08 shares, I think, of KBR for each share of Halliburton to the Halliburton owners and then whatever is not taken up will be spun off. So in this way they'll retire some of the Halliburton stock and help support earnings.
But there's good growth in earnings over the next few years for Halliburton and I think that, as its reputation recovers, not only will the earnings increase but the multiple will go up. The stock is selling at about $30 today and I think it can be at $45 stock in two years time -- maybe even in a year-and-a-half.
Another company that I like is Global Santa Fe (NYSE:GSF) which is a deep-water driller and is selling about eight times this year's earnings. This is because people are concerned that if oil were to fall below $50 a barrel, the exploration and production companies would cut their spending. So, it is a volatile stock and the companies in the energy area remain volatile You have to expect to experience that. But I think we'll have higher lows and higher highs over the next few years.
I like a lot of the high quality large-cap companies. The top 20 in the S&P 500 could really make a good group for anyone looking to put money in. That’s where I think you could make a lot of money.
One of the topics we've been talking about today is the housing industry. Companies in this industry follow very, very typical patterns. I looked at each of the last four housing cycles to see the extent that they're anything like this one. And they generally are, although they're usually caused by rising unemployment and rising interest rates.
We've talked about a severe downturn in housing. The housing companies were talking two months ago about possibly seeing a bottoming out. But, within the last few weeks, all reissued outlooks saying that things still look bad and that the upturn is not in sight. And, as Joe said, maybe that won’t be until 2008 or 2009.
Nevertheless, these stocks typically bottom out in price a year before the worst outlook for the housing industry. A year before their own operations begin to pick up. So, if you think we're within 12 months of the bottom of housing, which I feel very confident we are, even though I think things will continue to get worse, these are very good buys here. We could have a 50% return over the next year or two. The ones I like best there are D.R. Horton (NYSE:DHI), Ryland (NYSE:RYL) and Centex (CTX). I think that they are good buys here and suggest buying a little group of them.
I also think a number of the financial services companies have good long-term outlooks and you can buy them now at 10 or 11 times earnings. I like Merrill Lynch (MER), Morgan Stanley (NYSE:MS), which are large investment banking and brokerage firms, Capital One (NYSE:COF), the credit card company, and even some of the large banks like a Wells Fargo (NYSE:WFC) or Citigroup (NYSE:C), which have good growth potentials and pay decent dividends. Those are good companies for the long term in a portfolio.