Following Big Money Pays Off

The market is in a correction as the economy slides into recession. Jobs are being lost, homes are being lost, and liquidity is disappearing as loans default, budgets tighten, and high prices stifle spending. Strength overseas coupled with a weak dollar, however, should keep corporate profits from sinking too much, and wealthy savvy investors seem to be propping up undervalued companies. Cash-rich companies are also buying the undervalued. There is big money moving in the market, and individual investors should pay attention to it.

Whether the recession will be mild or not, uncertainty reduces the willingness to invest in risk causing the market to fall to lower valuations. The current rally suggests valuations have fallen enough, for the time being.

In this scenario, it makes sense to look to where the billionaires and mega-cap companies are investing and follow the most experienced and successful investors. Billionaire Wilbur Ross has invested heavily in Assured Guaranty Ltd. (AGO). Assured insures municipal bonds and steered clear of the junk bonds blowing up other insurers balance sheets. Their AAA credit rating is considered stable by all the ratings agencies. Munis rarely default, which makes AGO a very low-risk investment. Also, they are reporting increased business as some competitors such as Security Capital (SCA), Ambak (ABK) and MBIA (MBI) stumble and fall. Warren Buffet’s Berkshire Hathaway (BRK.A) has also entered into this space by starting its own municipal bond insurance business.

Municipal bonds can be a profitable place to park some pork (I really like alliteration). These tax-free investments are yielding higher than some taxable bonds and much higher than Treasuries. I would recommend buying munis in the State where you live to qualify for complete tax exemption on the interest. For those us in the Empire State, there are two ETFs, SPDR Lehman New York Municipal Bond (INY) and iShares S&P New York Municipal Bond (NYF). There are also a number of national municipal bond ETFs such as iShares S&P National Municipal Bond (MUB), SPDR Lehman Municipal Bond (TFI), and PowerShares Insured National Muni Bond (PZA). A good closed-end muni bond fund is the Nuveen Insured Municipal Opportunity Fund, Inc. (NIO).

Buffet also recommends buying strong brand name companies such as a couple of his holdings Coca-Cola (KO) and American Express (AXP). I like the strong technology and electronics name brands such as Microsoft (MSFT), Apple (AAPL), and Sony (SNE). These companies have large cash flows, invest in their own companies through R&D, and strengthen their brand by improving products and rolling out updated versions. A related sector is experiencing consolidation as video game companies are investing their cash buying smaller competitors. Infogrames, a French game maker, offered to buy Atari (ATAR). Electronic Arts (ERTS) is trying to buy Take-Two Interactice (TTWO) for $1.9 billion. Take-Two is taking steps to thwart the take over. ERTS may end up looking else where to expand, and another small rival is trading at low price-to-book and price-to-sales ratios. THQ (THQI) has been beaten down and could be a take-over target for ERTS if they don’t get TTWO. Activision (ATVI), who has nearly $2 billion of cash with no debt, could also seek to buy a smaller rival. The big money in this industry can protect their stock prices from general market weakness.

Microsoft and Google (GOOG) are investing their cash hoards in the internet sector. Here, I wouldn’t necessarily follow exactly where the big money is flowing. Instead, I would invest in the big money. Microsoft and Google are looking to dominate the internet market which continues to grow as other sectors deteriorate. Recent price drops take much of the risk out of these tech giants. The fate of Yahoo (YHOO) is yet to be determined, but this is not a market for speculation.

This article by no means exhausts the possibilities here. General Electric (GE) is investing heavily in wind energy. Dupont (DD) is investing R&D dollars in agricultural products. IBM is investing in its own stock. Overseas transportation companies, such as airlines and shippers, continue to buy more planes and ships.

Look to where the big money is investing and screen those sectors for solid companies to preserve and grow your wealth in uncertain times.

Disclosure: Author has positions in NIO and PZA. Author is a contributor at www.newstockreports.com, which covers and recommends some of the companies mentioned in this article.

Comments

[Serge]

Following "big money" is foolish. Preceding it is what you should actually be trying to do. You never want to be late to the party.

[Asif]

Infogrames already owns a majority stake in Atari and uses the Atari brand for its games. Hence the 2 cent premium offered to buy out the rest of Atari. I still remember the day Infogrames bought the Atari name and the stock doubled from $3 to $6 overnight. Lackluster sales of the Matrix games and loss of the Unreal Tournament franchise has left this stock in the dumps despite a raging gaming market.

I agree with Serge that you may be too late to the party or in the case of Atari, its obituary.