If the world would only stop for a few days there
would be no problem getting this report out on time.
Three times, we have had to "stop the presses" when
overnight news destroyed our line of thought. Although
we have in our thinking a bullish bias, we were not
prepared for the explosive performances (up) of the
stock market in the first week of trading in the new
year. Investors are so starved for good news that they
are prepared to overlook negative economic data.
However, we believe (near term) the market will be under
the influence of political events rather than economic
On the political front, there are five roadblocks,
which could destroy investor's hopes. In Venezuela, a
six-week general strike against the government has cut
that country's oil production from three million barrels
a day to 300,000. Although OPEC has said it would step
into the breech, the loss of Venezuelan oil (which
counts for 15% of our imports) has caused a spike in the
oil price from the mid-$20's to the low $30's. This
could not have come at a worse time for the American
economy, which is struggling to gain upside momentum. A
fuel price increase is the last thing the airlines need.
The four other problems are Iraq, the
Israeli-Palestinian Conflict, North Korea, and bin
Laden. If someone could bring in bin Laden's scalp, it
would be worth 1,000 points in the stock averages. As
for resolving the others, let us hope that President
Bush can pull off the hat trick. Today, our outlook, not
only towards investing, but also towards our daily life,
is influenced by political events over which we have no
control. On the New York Stock Exchange, volume has
fallen sharply, as buyers and seller prefer to sit out
the "dance." No wonder, for the market is swinging like
a pendulum. Tax cuts one day, President Kim the next.
There is light at the end of the tunnel (!) coming
from a votive candle lit in the hopes that Fed Chairman
Alan Greenspan's old fashioned economic religion still
works. Its dogma being that low interest rates and a
plentiful money supply can deliver us from economic
purgatory. With patience, it has always worked in the
past. However, today we are faced with a new devil, the
declining dollar. This should help American exporters,
but could be a depressant on our financial markets as
foreigners decide to repatriate their money. The
withdrawal of funds should be gradual though, as the
underlying strength of the American economy and the
stability of our political system keep our country the
world's "safe haven." Keep your eye on the gold price,
and take that European vacation sooner than later.
Most bulls and bears agree that October saw the
bottom of the bear market, but opinion is divided on
where we go from here. We also believe that the bond
market topped out the last week in December, so probably
the bond party is over. This should again favor
investors seeking income as interest rates rise.
Consumer spending, which has been the life support of
the economy the last two years, appears also to have
peaked. Although stocks are not cheap on earnings
multiples, stock prices have come down drastically. Low
multiple stocks should prove profitable, affording a
margin of safety. So, for starters, we list five stocks,
which should out-perform the market in 2003.
CANNED VEGETABLES and fruits are not as
exciting as PC's. However, the canned food business is
stable, in fact so stable that there has been mass
exodus from the business. In fact, today, there are only
three major canners left: SENECA FOODS ($15), DEL MONTE
FOODS ($8), and Chiquita ($14.70). After many years of
intense competition, the lack of same is now permitting
the above to raise prices…. and profits. Selling at less
than ten times earning, the first two are our picks.
They could even, possibly, turn into growth stocks.
Downside risk, almost nil.
CIT GROUP ($20). This old-line commercial
lender was sold last year in an IPO by owner TYCO at the
fire sale price of $23. Since then, the shares have
declined even more as loan quality concerns have dogged
the company. Nevertheless, at 6.8 times estimated 2002
earnings of $2.93 and a 15% discount to its book value
of $22.49, the stock looks cheap to us. A better economy
resulting in improved asset quality should expand the
earnings multiple significantly and, if you can ever buy
a financial stock under book value do it.
NVIDIA ($12.50). This maker of advanced video
semiconductor chips for PC's and video games such as the
Xbox, sold by Microsoft, has seen its share price
collapse in the last year from $70 to as low as $7, as a
result of a delayed new product launch and the bear
market. However, the company has remained profitable
throughout the downturn with earnings estimates of
$0.70/share for the year ended January 2003. A new
product launch early this year coupled with economic
recovery should make NVIDIA a strong performer.
MARATHON OIL ($21.50). Oil and gas stocks look
especially well positioned to gain in 2003 when higher
oil prices may prove less vulnerable to decline than
widely expected. The world supply balance is tighter
than it has been for decades, while the stock price for
a well-established producer like Marathon Oil is little
more than half its commodity value. In addition to
making most of its profit from producing natural gas and
oil, Marathon is a major supplier of refined products in
the U.S. Midwest where profits have been down from two
years ago, but now are on the rise again. The smallest
of the "major" oil companies, Marathon is also an
attractive target for acquisition by a giant. The $0.92
dividend (4.25%) helps make the waiting worthwhile.
PREFERRED STOCKS are the stepchildren of the
financial world, neglected. However, their price
stability has well served farsighted investors who
included them in their IRA's and pension funds. When ten
year treasuries were yielding 3.57% in mid-December,
Public Service Electric & Gas, New Jersey's largest
utility, issued, at par ($25), a 8.45% cumulative
preferred stock, callable in 2007. It is only rated BBB,
but its parent stock trades on the NYSE at $30 with
earnings estimated $3.50/share for 2002. (Our experience
is that the rating services are too severe on Preferred
stocks). Anyone interested in income should consider
this group. Ask us.
We urge you to read our
important notice about these letters and the
securities they mention.