Letter - May 2002





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May Day, May Day .... !

There is an old saying on Wall Street to the effect, “Sell in May and go away.” This year the jury is still out on that one. T.S. Eliot came closer to the mark when he penned, “April is the cruelest month.” It certainly was. Stocks were pounded last month while this month they are barely holding their own. As of late, economic news, which affects the stock market, has been more positive than the political side. Can rising corporate profits offset a possible nuclear war between India and Pakistan? Can Greenspan pump up the money supply enough to bring peace to the Middle East? One day last week, a jump in the stock market was attributed to the reported rise in retail sales, a move cancelled the next day by a rise in the unemployment figures. Only the weather is more unreliable. We used to joke that “long term” was a month; now it has become compressed into 24 hours. Caution remains our watchword. The stock market has been declining for over two years; still the bear seems to be in no hurry to hibernate. Interestingly, during this period the economy has remained surprisingly strong, supported by consumer demand and low interest rates, stimuli that are no longer available to spark a market recovery. We expect the economy and profits to improve as the year goes on, but stocks, as measured by the popular averages, are still not cheap.

Nevertheless, there are always stocks which fall between the cracks, stocks that represent good value in the traditional sense. In this area we are concentrating our efforts. We see value in gold shares, natural gas companies and in some very beat-up stocks which were caught in the wave of panic selling. Today most investors are not looking for reasons to buy, only to sell. Of the above-mentioned groups, we favor natural gas, which, between ENRON and three warm winters in a row, has become a Wall Street “stiefkind.” However, if next December “the North Wind doth blow…” there will be great leverage afforded the natural gas companies. Domestic demand for natural gas is growing at about 2% a year, while supply is falling at about the same rate. But… the disparity jumps when the temperature falls. Our favorite in the group is a gas royalty trust, San Juan (NYSE: SJT, $11.25), which at current gas prices should pay out between 8 and 10 percent, a number which could rise sharply if Jack Frost obliges. (You can hedge this by pawning your overcoat.)

In last month’s letter we apparently jumped the gun in writing about AMDOCS (NYSE: DOX, $17.50) and TYCO (NYSE:TYC, $24). TYCO, which six months ago was the “toast” of Wall Street, found itself caught in the accounting backlash from ENRON. To our satisfaction, management has come up with necessary corrections including the promised sale of its CIT financial subsidiary. This will sharpen up the company’s balance sheet. With this year’s earnings estimate of $2.65 PER SHARE (a goal which both management and Wall Street agree on), the stock appeals to us.

As far as AMDOCS is concerned, there seems to be no specific reason for the collapse of the stock price. With close to one billion dollars in cash and little debt, finances are under control. The problem is that the company is a major player in a minor industry. Its software, which handles billings for telephone companies, dominates the field. What probably explains the share price decline is the realization that future growth will drop from 30% to between 10 and 15%, about that’s for real and for a long, long time. A P/E ratio of 15 for the current year (September 30th) seems to discount the bad news. For traders, TYCO is our choice; for investors the nod goes to AMDOCS… A parting shot: if you hate OPEC and believe in charts, FUEL CELL ENERGY ($13, OTC: FCEL) intrigues.

From the tone of this letter, it is obvious that we are “talking our book.” Unlike the giants of Wall Street, P.R. Herzig & Co. has no underwriting business to pick the pockets of its retail clients, so our success will depend on our ability to analyze stocks and integrate the results within the trends of the market. We’re loaded with MBAs, CFAs, everything but a scratch golfer. I can only surmise what Admiral Farragut would say if today he steamed up the Hudson River towards Wall Street, with a pocket full of greenbacks, “Damn the pessimists, half speed ahead!”

Philip Herzig

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