Here's a one page summary of this weekend's (April 22) Barron's (paid sub. req.), noting stocks to watch for Monday morning when the market opens and brief comments on the Barron's articles. Note: clicking on a stock ticker pulls up opinion, analysis and a quote for that stock.
Top 100 Financial Advisers by Suzanne McGee
Thesis: Ms McGee interviews several financial planners from Barron's Top 100 list. Jeff Erdmann from Merrill Lynch, expects overseas markets to outperform the U.S. He is especially interested in real estate investment trusts with international exposure and active managers for Japan and India. According to Mr. Erdmann he has been allocating more capital to overseas markets that he can recall in his 22 years of managing money for Merrill Lynch, up to 30% allocation.
Lori Van Dusen from Citigroup Smith Barney feels that its very important have a portfolio that is resistant to economic shocks, that means that it is important to avoid over concentration in any one area or asset class. Dale Reed from JPMorgan Private Bank, thinks that it has difficult to find undervalued markets or sectors at current time, and so broad diversification is the best strategy. Like Jeff Erdmann, Mr Reed has been putting more assets into foreign stocks, now targeting a
15% allocation with additional exposure via structured notes.
Gregory Vaughan of Morgan Stanley mostly works with clients from Silicon Valley. Because his clients often have concentrated exposure to the technology sector, Mr Vaughn seeks out investments that not correlated with technology industries. Such investments have ranged from Chinese private equity to timberland partnerships.
Charles Zhang from Ameriprise Financial Services favors using ETFs and other low cost fund to get exposure to specific geographic markets and sectors. Zhang avoids ever investing a mutual fund that charges over 1% in fees. Zhang is currently positioning his clients for a rebound in U.S. large-cap growth stocks, which he feels are undervalued. Mr Zhang has also written a book on investing Make Yourself a Millionaire : How to Sleep Well and Stay Sane on the Road to Wealth
Quick comment: Since the 1990s everyone has access to quality financial products like ETFs, this has lead to rise in fee-only financial planners whose sole loyalty is to their clients. Unlike traditional "full service" brokers, these planners are do not have incentives to push the stocks on the brokerage firms "focus list" or place clients into investments with high fees.
Money Gushers by Leslie P. Norton
- Highlighted companies: Daimler Chrysler (DCX), Time Warner (TWX)
- Thesis: Gulf Arabs flush with oil wealth are buying everything that moves, and many things to don't.The Abu Dhabi Investment Authority oversees $300 billion in investments compared to the largest US pension fund, the California Public Employees Retirement System (CalPERS) which administers a mere $200 billion.
- Quick comment:Much of this foreign investment is driven by a lack of internal investment opportunities and stunted capital markets in the Islamic middle east. For example, Israel has a Gross Domestic Product of $140.1 billion, most of which is driven by investment in technology/biotechnology sectors. In contrast, Saudi Arabia has a GDP with $340.6 billion, with most of Saudi Arabia's GDP coming from oil extraction that is already fully built up, thus forcing capital inflows to be reinvested outside the region.
Lessons Learned by Lawrence C. Strauss
Highlighted companies: EOG Resources (EOG), Devon Energy (DVN), Golden West Financial (GDW), JPMorgan Chase (JPM), Altria (MO), AIG (AIG), Tyco (TYC). Thesis: Mr. Strauss interviews Chris Davis and Kenneth Charles Feinberg:
Co-portfolio managers of the Davis New York Venture Fund [NYVTX]. NYVTX is a large cap value fund. In the past year portfolio turnover was 3% which is consistent with the managers buy and hold philosophy. Both Davis and Feinburg feel market is not overvalued. They take inspiration from Warren Buffet by looking at "owner-earnings" and asking if a company has a sustainable competitive advantage. The managers consider "owner earnings" to be free cash flow (with some adjustments) available to common equity.
Quick comment: Both Davis and Feinburg note that many investors fail to differentiate in the financial sector. Not all financial stocks are interest rate sensitive, and many (especially those with exposure to adjustable rates) benefit from higher interest rates. When State Street introduced the KBW Index ETFs: Capital Markets (KCE), Major Banks (KBE) and Insurance (KIE), one of the key points was that each of the sectors was not that correlated with the others.
Looks Good on Paper by Harlan S. Byrne
Highlighted companies: Wassau Paper (WPP), International Paper (IP), Weyerhaeuser (WY), Domtar (DTC) Thesis: Wassau Paper shares are undervalued as a result of 38 cents a share loss in 2005, with expected $0.84 EPS this year. The company is using its cash to buy back $400 million worth of its stock. Mr Byrne feels that this means that management believes the stock is undervalued. The company has been focusing on higher margin printing and writing papers, paper towels and tissues and specialty products. Wassau has produced several lines of premium 100% recycled paper, which may fuel growth in the future. Quick comment: Investing in Timberland and Forestry related industries has been come quite popular, since they tend to have low correlation to the broader economy. Harvard University is well known for having a fair chunk of their endowment invested in timberland. Other institutional investors tend avoid the paper industry, considering it to have the same problems as the airline industry: lack of consistent profitability, thin margins, energy sensitive, and very capital intensive.
The Little Exchange That Could by Kopin Tan
- Highlighted companies: International Securities Exchange (ISE)
- Thesis: ISE which was the worlds first fully electronic options exchange in 2000, plans to begin listing and trading stocks. ISE currently accounts for 30% of the total US traded option volume.
- Quick comment:ISE is home to several self calculated indexes including the ISE SINdex of owners and operators of casinos and gaming facilities, producers of beer and malt liquors, distillers, vintners and producers of other alcoholic beverages, and manufacturers of cigarettes and other tobacco products.
Lowe's Builds Value by Christopher C. Williams
- Highlighted companies: Lowe's (NYSE: LOW), Home Depot (HD)
- Thesis: Lowe's is like Home Depot (HD) and with a lower PEG ratio. Lowe's is expanding rapidly and aims to open three stores a week, as the company aims to grow from about 1280 units to 1800 units. Lowe's plans to open six to 10 stores in the Toronto area next year and foresees 100 stores in Canada over time. The company's new driver of profitability is offering value added services such as installation. Many consumers prefer to purchase home equipment such as sinks and bathtubs at a known price, and then avoid dealing with shifty contractors by having the trusted people at Lowe's install it for them.
- Quick comment: Perhaps home equipment/supply stores are less affecting by the housing market than many investors think, because people who shop at Lowe's/Home Depot are looking to improve their existing house, not buy a new one.
Toothsome Prospects by Bill Alpert
- Highlighted companies: CSR [LSE: CSR], Broadcom (BRCM), Texas Instruments (TXN), Freescale Semiconductor (FSL), Marvell Technology Group (MRVL), Atheros Communications (ATHR).
- Thesis: Bill thinks that the bluetooth personal wireless networking standard is at the beginning of its growth curve. This augers well for stocks of bluetooth chip makers like UK based CSR, which Bill thinks is undervalued relative to american players. CSR at 25x P/E is cheaper than Atheros Communications (ATHR) at 120x, Broadcom (BRCM) at 55x and Marvell Technology Group (MRVL) at 45x
- Quick comment: Such high P/E ratio explain contribute of the volatility of the semiconductor electronics sector.
Copper Could Get Clobbered by Prudential Equity Group.
- Highlighted companies: Phelps Dodge (PD), Freeport-McMoRan Copper and Gold (FCX),
- Thesis: Prudential Equity Group is lowering their Copper Industry rating to Unfavorable from Neutral, and downgrading PD and FCX to Underweight from Neutral Weight. Prudential believes that high copper prices are causing demand to falter as end users switch away from or use less copper. Prudential is lowering their 2007 price estimate to $1.25 per pound from $1.75, and lowering 2008 price estimate to $1.25 from $1.50.
- Quick comment: Any switch away from copper benefits aluminum manufacturers such as Alcoa (AA), however many traders feel that it is unclear if copper demand (driven by increasing demand for electrical goods throughout the world) will actually slacken. PD's capital structure has been weakened as a result of activist hedge funds forcing the company to payout special dividends and buy back enormous amounts of stock.
Finding Value in Energy, Metals by John Kimelman
- Highlighted companies: Paramount Resources [TSX: POU], Peabody Energy (BTU), Arch Coal (ACI), Foundation Coal Holdings (FCL) Archer-Daniels- Midland (ADM), Century Aluminum (CENX)
- Thesis: Mr. Kimelman interviews MacKenzie Davis, Co-manager of the RS Global Natural Resources Fund, RSNRX. Mr Davis's largest holding is Paramount Resources [TSX: POU], a junior canadian oil company with untapped oil sands reserves. The fund has substantial holdings in Powder River Basin based coal companies (BTU), (ACI), (FCL). PRB coal has very low sulfur and mined in gigantic strip mines which very cheap to operate. Mr Davis feels that the inherent advantages of cheaper mining and desirable coal give PRB based coal miners an advantage over eastern coal miners. Although the market as whole has been bullish on uranium stocks, Mr Davis feels that there wont be progress in the nuclear energy industry until the federal regulatory environment becomes clearer. Overall Mr Davis feels that alternative/clear energy is remarkably overvalued when measured by traditional metrics such as price to cash flow. He prefers investments in conventional energy companies that are aware of the possibilities of alternative energy technologies. Overall, Mr Davis feels that ethanol stocks, like (ADM) are overvalued. The RS Global Natural Resources fund allocates 23% of its portfolio to metals, with Century Aluminum (CENX) as a core holding. CENX is building capacity in Iceland, to take advantage of cheap geothermal energy.
- Quick comment: PRB coal tends to be crumbly, very dusty, makes slag, and is prone to spontaneous auto-ignition. Utilities prefer to burn eastern coal whenever they can. See also the argument for high sulfur coal stocks -- exactly contrary to Mr. Mimelman's thesis. An indirect play on Aluminum is Koppers (KOP) which supplies the coal tar used to make carbon electrodes for the Hall-Héroult process.
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