Alan Brochstein

Quality Individual U.S. Companies: The Short List

Caution on TDW - they have a huge capex commitment ahead and have never really generated a lot of FCF. Fortunately, they have limited debt, but they are committed to spending another $540mm to bring on additional vessels between now and 2012. These commitments were made at a time when the economics were very different and will now serve as a drag. HRL, on the other hand, is very timely despite the rally over the past year. I can see it reaching 48 over the next year. JNJ should be fine too.

Own Gold? Time to Fold

It clearly wasn't a good call. I am no gold expert and said so from the get-go in the first article in October: I was approaching this as an outsider with no real vested interest (though I did for a short while bet against gold with an ETF).

All assets have rallied since I wrote this article. This has happened in the context of no signs of inflation. I believed that gold would pull back as people came to understand better that the massive monetary stimulus wouldn't trigger inflation in the near-term or as the economy continued to crater. What I missed was that the improved liquidity would rally all hard assets as well as financial assets. I was spot on in stocks, but this same lack of understanding about the impact of liquidity caused me to become cautious way too early (since May).

When I wrote this article, the CRB index was about 209, so it has rallied about 30%. Gold has rallied a bit more. In the October article, I made the point that other metals seemed to offer better value (having pulled back while gold had held in). Rather than be so negative on gold, I probably should have presented the idea as a relative value trade. Since that first article (10/11/08), gold has rallied by about 25%, but copper has rallied by 40%, palladium by 50% and copper by 60%. So, it's not just gold. I would add that other assets have increased since the December article substantially as well (S&P 500 up 22%). Another problem has been the dollar, which has eroded substantially relative to the Euro.

So, while I feel like I got the inflation part right, I sure blew the call on gold. The economy proved not to be as weak as I had envisioned as well - we didn't really get the deflation that I feared. I know that some people will say that I didn't get the inflation part right, because it will show up later, but I still believe we are years away from that. To me, the biggest risk now is that the house of cards comes tumbling down. I didn't think long-term interest rates would soar this year (they are up, but only reflective of the safety bid diminishing), but that is a big risk now (and not from inflation - just supply and lack of demand).

I don't know if this is what you were looking for in terms of what went wrong with this call. It is not something that I stuck with - I recognized many months ago that I was wrong. I don't really have a strong opinion about gold, but I do believe that global economic growth will be weak and inflation isn't likely to be an issue. Gun to my head, I would avoid gold, but I am not standing on the soap box these days.

Allegiant Travel: Not Your Typical Airline Stock

Good luck... This one has been an enigma. I know that Trader Mark, who frequents S.A. got frustrated with this one due to the way it was acting over the summer. You might read the Barron's cover story from the late summer too, as it laid out the bear case (not too convincingly in my opinion).

Some Chain Restaurants Gaining Traction

Hey, John. I listened to the BJRI call, as that is the restaurant chain about which I am most optimistic. While I continue to view that story very favorably, the stock seems to more than anticipate the future. The near-term remains very challenging for all restaurants in terms of demand. I don't see a lot of opportunity for investment currently in the sector.

Large Caps Could Lead the Market Much Higher

No, perhaps you are getting confused with the Index of Leading Indicators. GDP is the sum of production and has nothing to do with asset values.


On Oct 19 06:06 PM Bjarne Jensen wrote:

> Do I recall correctly that increases/decreases in the stock market
> is a component of GDP? Does the market run up explain positive GDP?
> Does anyone know the answer?

PetMed Express: The Type of Business We Like to Own

JW, what do you think about the competitive environment? This one caught my attention a couple of months ago, and I liked what I saw initially. Then, coincidentally, Amazon sent me an email regarding their pet offerings. Certainly not as extensive a selection, but the prices were so much lower and on things that I would buy.

My Take on China Versus the US

You raise a lot of excellent points. You might turn to Thomas Friedman's "The World is Flat" for some additional insight. It's also interesting to consider that the Chinese people are relatively homogenous compared to our melting pot. Before one embraces a socialist society that is adopting capitalist tendencies, though, I would consider that the country beheads its citizens as a matter of policy. We may do it clandestinely here (no clue), but it is certainly not done at the federal level. Then there's the whole pollution thing.

So, while I recognize the several factors that suggest the ascension of China, I do understand that it too has its flaws.

Large Caps Could Lead the Market Much Higher

I don't totally agree with your point. Yes, PE's have run up from extremely low levels, but it this surprising? Usually PE's do rise when earnings are depressed. Plus, they are linked to interest rates, and corporate bonds have come down in yield this year. I believe, though, that an honest assessment of earnings is that they have been much better than we would have expected. Kudos to companies for taking so much cost out so quickly. Surely, some of this is just slashing headcount, an action that may be expedient in the short-run but likely to poise longer term challenges to economic recover. But part is related to operating smarter. I spend most of my professional time studying smaller companies, and improvements in business processes are certainly helping the cost structure.

To argue your point more specifically, though, Captain JJack, let's look at just the top 10 companies:

XOM = score a big one for you -- 6.41 at year-end to 3.87
MSFT = ditto -- 2.23 to 1.67
WMT = nada - 3.71 to 3.58, but UP from 3.53 at the end of March
JPM = 2.55 to 2.14, but up from 1.63 at the end of March (and from 1.41 bottom)
GOOG = UP 21.74 to 21.93
GE = 1.45 to 0.98
AAPL = UP BIG 5.16 to 5.89
PG = 4.20 to 3.72
JNJ = 4.66 to 4.57, but up since March's 4.49
IBM = UP 9.07 to 9.79

So, while some estimates for this year are clearly a lot worse, several are up and some are unchanged. Perhaps more importantly, the direction of the estimates is now up. So, I believe that there was too much pessimism in March regarding future earnings and that PE ratios were absurdly low.

This tells nothing of the future, but it does help explain the rally. It's not just PE expansion, and PE ratios haven't moved to "absurdly high" levels as many claim.


On Oct 18 09:11 AM CaptainJJack wrote:

> We have had a HUGE run-up of P/E multiples since March. In fact,
> I could argue that the ONLY thing that has really changed since March
> are the P/E multiples.
>
> Anybody who has been in this market over the last year knows how
> notoriously bad the forward earnings numbers are -- just take a look
> at forward estimates at the start of this year for THIS year.
>
> While there is a lot of manufacturing leverage now that companies
> have cut so much payroll, the current fixed infrastructure is currently
> being supported by large government (both US and Abroad) stimulus.
>
>
> The key question is: What happens when the stimulus is withdrawn?
>
>
> The key metric is the top line, not the bottom line: Those forward
> earnings are only as good as the sales projections.
>
> As an aside, there has been a significant tax cut which, if I remember
> the numbers right, amounted to 2/3 of the tax stimulus proposed by
> some Republicans ( there never was a unified Republican stimulus
> alternative, but the number $400 billion was often used as the tax
> cut required --- and the only stimulus needed).
>
> We should have seen the top line numbers rising by now if the tax
> cuts were as powerful as they were being promoted, and I for one,
> do not see it.
>
> As far as I can see, the $250 Billion tax cuts have had almost zero
> effect, and this is similar to the tax rebates of last year--coming
> into effect in at the end of the 2nd quarter, after the recession
> was 2 quarters old, and just before the economy tanked.

Large Caps Could Lead the Market Much Higher

Hey, it's blatant manipulation, but here's a fact. If the economy goes south again, many of the companies that we thought might disappear due to poor liquidity (too much debt due too soon) won't struggle as much. Many have reset their capital structure. Now this doesn't mean that their prices won't drift slowly towards zero as the economy remains Japan-like for years to come, if that is the case, but there won't likely be the panic such as we experienced in the earlier part of this year.


On Oct 18 09:39 AM j-dub wrote:

> Appreciate the timely reply.
> See, this is the effect that the gunning of the stock market is trying
> to produce. Money managers wondering if they are mising an economic
> expansion (perpetually, always a quarter or two away)about to occur
> (even if the math says it can not). Thus producing the snowball effect
> of moving the markets even higher .
>
> I wish you luck and, yes, large caps with world-wide exposure certtainly
> might producce the highest returns in the next five years.

Large Caps Could Lead the Market Much Higher

As I said, I am not convinced that the possibility to which I allude is a probability, but I will say that after 31 years of following the economy and stocks, I have learned that having a handle on the economy (or thinking one does) doesn't make predicting the direction of stocks as easy as one might hope. It's always a question of "what's priced in".

I became bearish on the economy in the summer of 2007, so I wasn't late to the game. I had an "aha" moment rather late last year (around Thanksgiving) that "this time is different". I still cling to that notion - that the economic recovery is doomed because "we went over a cliff".

Here we are almost a year later, and things are much better than most of us, including me, might have imagined at the time. Of course, the intervention and support of the government has had a massive role and has tainted the recovery, but, nonetheless, even crappy companies are refinancing their debt. Heck, we even have IPOs and M&A again.

Mr. Wendling, who started his bearish website in 2007 rather than 2009, could be correct generally (a big rally followed by a worse bear market move). I guess that is what I fear not expect. It is certainly not consensus, even among the bulls. As long as rates remain low, liquidity high and the animal spirits alive, there is a risk that the scenario I described plays out.

It is not clear to me that this is sustainable, or I would act accordingly. So, this article is truly an exercise in "what if". Dave Wrixon, nice try, but I don't earn "commissions", so that's clearly not my motivation either. I hope that my additional comments reinforce the point I was trying to make - this is not my expectation yet but rather a scenario that could play out and for which I will look for signs (does IBM break to an all-time high, for instance).


On Oct 18 03:13 AM j-dub wrote:

> "I continue to think that the economy will be challenged for quite
> some time and that the earnings estimates out there are too optimistic.
> But what if I am wrong?"
>
> In actuality, you are not really doubting yourself, are you Mr. Brochstein?
>
> You don't think, you know that this is the case. Reality , logic
> and reason force that economic case upon us as a country.
> So what you are really thinking in your heart of hearts is:
> "Can the market can continue to disconnect itself from reality or
> will reality catch up to it?"
> You assume that reality must take hold, as it always eventually does.
> But maybe, JUST MAYBE, you think, "this time is different."
>
> I have bet very heavilly this past week that it's not. No responsible
> money manager should seek out new models proving that it is.

M&A Watch: 8 Medical Consumables Companies That Look Like Buyout Targets

For now, since so much of their sales are tied to new equipment, I don't include them in my universe of stocks with primarily consumables. Even if I did include it, though, it is trading at 10X EV/Sales, well above my 4X cut-off that I used. We'll see if they pull off another great quarter! When I was last buying it (early this year), it was 4X Ev/Sales...

M&A Watch: 8 Medical Consumables Companies That Look Like Buyout Targets

I was disappointed that COV, which had no relationship with ASPM (except that the CEO used to be on the Board of Directors) went in that direction, when I find SMTS to be a very similar company but that had performed much better in terms of growth and profitability. My discussion with the CFO left me comfortable that ASPM was actually trying to get itself sold - not that COV went out shopping. Our discussion led me to believe that SMTS might address the issue in Japan, as EW distributes only to the cardiac market. There were a couple of other issues that came up - bottom line, though, is that I was quite comfortable after the call that I shouldn't be upset that ASPM got the bid. Hopefully, COV is happy with the results and continues to put increased focus on patient safety through monitoring.

M&A Watch: 8 Medical Consumables Companies That Look Like Buyout Targets

You are welcome, and thanks for you kind words...

St. Jude: Med-Tech Stock that Seems Unlikely to Keep Flatlining

They just pre-announced - I am starting a position near 34

This Recession Ain’t Over

Great article again, Steve. The Chicago index sure painted a different picture of the economy in 2007, didn't it? Do you know if this is what it actually looked like back then, or is it revised? Also, how do you reconcile this with the ECRI projections you shared with us a few weeks ago?