Barron's Mid-2007 Analyst Roundtable

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Room to Run by Lauren R. Rublin

Summary: Barron's 2007 mid-year roundtable survey of influential fund managers. Their picks:

• Pimco's Bill Gross: (1) iShares MSCI EAFE Index Fund ETF (EFA) -- a play on undervalued foreign valuations; it's denominated in non-U.S. currency. (2) Pimco Floating Rate Strategy Fund (PFN) -- yields 8.9%, which will rise together with interest rates. China and others seem to be shifting from bonds to equities, which means continued pressure on bond prices.
• Gamco's Mario Gabelli: (1) Cablevision (CVC) -- trades at $35.60, with a $36.26 offer on the table -- but it's worth $50-plus. (2) Cadbury Schweppes (CSG) -- its confectionery business is a great fit for Hershey Foods Corp. (HSY) and Kraft Foods Inc. (KFT). (3) Hilton Hotels (HLT) -- global growth in demand for hotel rooms. (4) Midas Inc. (MDS) -- 15-20% growth. (5) Sequa (SQA.A) -- splitting the company could release 50% more value. (6) United States Cellular (USM) -- it's worth $130/share, and trades at $89. Could be bought by Verizon Communications Inc. (VZ).
• Eagle Capital's Meryl Witmer: (1) Heineken N.V. ADR (HINKY.PK) -- aggressive CEO is driving growth and innovation. Many projects are still early-on. Imported beer sales are a growth vehicle.
• The High Tech Strategist's Fred Hickey suggests shorting (using puts): (1) Apple Computer (AAPL) -- short it once iPhone comes out. (2) Research In Motion (RIMM) -- a $31B company with a 1% handset market share. (3) NetLogic Microsystems (NETL) -- U.S. enterprise revenue is softening and competitors are beginning to undercut it. Hickey is 3% short the stock market, and recommends buying two-year notes.
• Pequot Capital's Art Samberg: (1) Apollo Group (APOL) -- shares ($48) could double. (2) Research In Motion (RIMM) -- enterprise-geared 8800 and Curve 8300 will sell like hotcakes. It should ignore iPhone and focus on enterprise solutions, its specialty. (3) Baidu.com (BIDU) -- fundamentals are great.
• Zulauf's Felix Zulauf: He likes China stocks (at 40x earnings, they could easily go to 100x), natural gas, volatility [VIX], and European companies (especially France) at only 14x trailing earnings.
• MacAllaster, Pitfield MacKay's Archie MacAllaster: (1) Wells Fargo & Company (WFC) -- consistently earns 19-22% on equity, and trades at 12x 2008e earnings vs. 16-17x for the S&P. (2) Valero Energy (VLO) -- it will beat estimates. At $76.50, it will hit $100 within the year. (3) Lyondell Chemical (LYO) -- a Russian billionaire might make a run at it for $44-45 vs. a current $37/share.
• Delphi's Scott Black: (1) American Eagle Outfitters (AEO) -- its stellar numbers deserve more respect. At current levels, it's ridiculously cheap. (2) ChipMOS Technologies (IMOS) -- could go up 34-40%.
• John Neff: Citigroup (C) -- a 10-12% grower, 4%, at 10x forward earnings makes it a steal.
• The Gloom Boom & Doom Report's Marc Faber: Suggests shorting retailers (except Wal-Mart (WMT)), perhaps using Consumer Discretionary SPDR ETF (XLY). He calls for a 10% correction by year-end, with emerging markets down 20%.
• O.S.S. Capital Management's Oscar Schafer: (1) Endo Pharmaceuticals (ENDP) -- concerns over generic challengers to its Lidoderm are unfounded, and its pipeline includes some late-stage potentials. (2) ULURU Inc. (ULUR.OB) -- with three FDA-approved products, the $4.50 company could be a 5-10 bagger.
• Goldman Sachs' Abby Joseph Cohen: (1) Valero Energy (VLO) -- earnings should exceed consensus estimates. (2) Hewlett-Packard (HPQ) -- margins will improve as earnings grow. Good international exposure. (3) Pier 1 Imports (PIR) -- while likely to remain in the red for some time, Goldman's earnings numbers are well above consensus. Management is turning the company around.

Related Links: Barron's 2007 Analyst Roundtable, Part I • Barron's 2007 Analyst Roundtable Part II • Barron's 2007 Analyst Roundtable, Part III

Comments

[Ralph F]

How can PFN yield 8.9%? I assume it's leveraged. It would be interesting to know by how much and what the risks are.

[maavericks]

PFN is leveraged about 38%. I've owned 2k shares for a long time and was thinking about shedding some shares but its sister fund PFL trades at an even higher premium, lower yield. Risks are if the Fed cut rates since their portfolios are all securities tied to LIBOR + a percentage. The securities are typically in a Senior position but are usually not very liquid compared to corporate bonds. But unlike corporate bonds, when interest rates go up, so does their income which more than offsets their borrowing costs.

[rolfnorfolk]

Interesting to see Marc Faber's prediction of a consumer slowdown. As I say in "Bearwatch":

That may reduce the monthly trade deficit for a while, but won't turn it into a surplus. China's ultra-low wage costs, combined with what seems to be very loose enforcement of intellectual property rights, are still set to hollow out Western industrial production of all kinds, as James Kynge's book makes abundantly and frighteningly clear.

It's all very well finding ways for individual investors to benefit, but if you haven't got spare money to invest, you can't back the winner in this unequal contest. Without some degree of prosperity, what real peace will our countries have? I'd like to see a credible national economic plan from our politicians.

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