Ready, Set .... ?
There was a comedian on the Fred Allen radio show
called the Mad Russian, whose entering line (in a heavy
Russian accent) was “How do you do?” Do what? Stand on
your head and read Ilda Grosswax’s 17,000 word essay on
the importance of breathing? Confused? If you have been
in the stock market lately you certainly are, and if
you’re not, toss this letter in the wastebasket and
return to GO.
From April 2000 to this past April the stock market
was in a slow decline, a steady erosion of prices;
nothing dramatic, but cumulatively devastating. But in
the past 90 days the bear has bared his teeth, taking a
wallet-pinching bite out of equity portfolios.
Hopefully, it will turn out to be his last gasp. Selling
has been frenetic and irrational, interpreted by some as
heralding the market bottom. A couple of record “up”
days has convinced many investors that, indeed, the
worst is over. Although there are still plenty of land
mines out there, investors are beginning to bargain
hunt. This week President Bush signed a bill that would
further regulate Wall Street and hold the feet of CEOs
to the fire. However, we do not expect investors to be
overly forgiving. The shadow of ENRON will be with us
for a long time and companies whose results do not meet
expectations can expect the “deep six”. Successful
companies such as CITIGROUP, the banking conglomerate;
DUANE-READE, a highly successful drug store chain; and
VERIZON, a leading telephone company, all have seen
their stock prices sharply cut when expectations were
Whose expectations?...... probably the group of
analysts who follow the stocks. While their record of
forecasting leaves much to be desired, brokerage
analysts still have great influence over prices of
stocks they follow. Let’s face it: what does the average
investor know about individual stocks he owns? The
problem is that in a few cases, stock analysts and
corporate officers have had higher priorities than
protecting stockholder interests. Hopefully that will
change. It looks like Merrill Lynch has been chosen to
be the whipping boy. But don’t put all the blame on the
brokerage fraternity. The bond rating agencies such as
Standard and Poors, Fitch and Moody’s are now trying to
make up for past oversights by showing no quarter when
analyzing balance sheets. A bond rating change can
literally destroy a company overnight and has done so in
too many cases. Also not helping the market is the
Fourth Estate, which seems to take great pleasure in
reporting the dark side of the financial world. The
public has loved (stocks) and lost, something the media
will not let them forget. Nor can CEO’s now forget or
claim ignorance of the numbers: certify financial
reports, signed and sealed, or go to jail! New found
caution on the part of top officers will undoubtedly put
pressure on the income statement. Soon we might be
asking, “Where have all the profits gone?”
Despite market anxieties, stocks have not gone out of
style. It has just become more difficult to find good
ones. Looks to us (and just about everybody else) that
the stock market has pretty well exhausted itself but
lacks incentive to rally. The overall economy has been
good for the past nine months. Yet, while it was heading
north, the stock market was heading south. The stock
market and the economy are out of sync, a not
unprecedented phenomenon. If the economy slows down in
the second half of the year, it should not necessarily
deter investors who are looking forward to better times
in 2003/2004. Sustaining the stock market should be a
weak dollar, continued very low interest rates, and the
prospect of increased government spending.
Having hedged our bets every which way, we still
believe this is the time for investors to reconsider
both additions to their portfolios and a general house
cleaning. The new buzz word on Wall Street is “total
return.” Shocking as it may seem, that figure is between
seven and ten percent, which includes dividend support.
More than ever, stock selection will be the key to
successful investing. Stocks at the moment which we feel
are favorably priced are…..
Citigroup (NYSE C, $33) eps $3.20, 10 times
earnings… quality at an attractive price for this
international financial giant.
IBM (NYSE IBM, $71.50) eps $4.00, 18 times
earnings… technology and market exposure. Company has
rising earnings outlook which does not appear to be
acknowledged by the market.
CIT Group (NYSE CIT, $21) eps $3.25, 6.5 times
earnings… IPO during bear market at depressed price
makes this leading financial lender look cheap. San Juan
Royalty Trust (NYSE SJT, $10.15) dividend yield 10%...
in natural gas we trust. Long reserve life, high yield
and no balance sheet risk. Natural gas, currently
depressed, has bullish long term outlook.
Cendent (NYSE CD, $13.80) eps $1.40, 10 times
earnings… travel and real estate services including
Avis, Howard Johnson, Ramada Inns, Century 21, Coldwell
Banker … well run with steady earnings growth…
management has consistently beat earnings estimates.
Echostar (OTC DISH, $16.25) growth in revenue
and profitability… excellent management team and strong
growth in cash flows makes this satellite broadcaster a
great long-term holding.
We urge you to read our
important notice about these letters and the
securities they mention.