On the geopolitical front nothing has changed since
our January letter. In fact, the political climate
continues to deteriorate. The United States has made a
few more enemies in the eyes of whom this nation has
abdicated its role as the world's peacemaker. We are now
the bad guys. It is Saddam's word against ours, and
yesterday's good deeds are soon forgotten. The strained
relations amongst supposed friends continue to rattle
the stock market both here and abroad. Domestically, the
Columbia tragedy didn't help morale, and the recent
blizzard that hit the Northeast over Presidents' Day
weekend wiped out the second biggest shopping day of the
year. Investors haven't had much to cheer about recently
and their anxiety has been reflected in the stock
market. To make any money, one had to be long snow
blowers and short everything else.
Actually, if one believes government statistics, the
economy is not too bad (huffing and puffing yet still on
the plus side) but "the war" takes precedence over
everything. The cold weather in the eastern and central
parts of the country has pushed natural gas prices up
sharply; the price of gasoline also has jumped.
Surprisingly though, natural gas and oil stocks have
responded only half-heartedly. Even gold shares are
down, while the metal is trading close to a six year
high. Investors, en masse, have withdrawn to the
sidelines. … For many investors "corporate governance"
is key. Too many CEO's have been putting their personal
welfare ahead of the interests of their stockholders. A
new set of rules is changing the name of the game, but
no one is yet sure how this new scenario will play out….
In the meantime, the butcher wants to be paid so we must
anticipate rather than repent.
A year ago, investors were disgusted with the stock
market; today they are just confused. Nothing seems well
defined. Is a tax cut good or bad for the economy?
Should we be concerned about the multi-billion dollar
deficit? Will the consumer keep spending? Hopefully,
consumers will continue to be the driving force of the
economy. The Federal Reserve has kept interest rates
low, sustaining the public's appetite, which appears to
be insatiable. On the other hand, spending by the
corporate sector continues to disappoint. The avalanche
of downgrades of corporate debt has had a negative
effect on corporate expansion as companies concentrate
on cleaning up their balance sheets.
As mentioned earlier, the actual economic statistics
are mostly positive, while the intangibles are negative.
The short-term outlook for the stock market looks
cloudy, but we believe investors should anticipate
sunnier days and not denude themselves of common stock.
A boom is not in the offing, but, excluding tech stocks,
the market is reasonably priced. There are many solid
citizens selling at ten times earnings. Bonds, on the
other hand, do not appeal to us. There is very little
room on the down side for interest rate cuts so the odds
now favor a reversal of the trend. For the past four
years, bonds have outperformed stocks and, since
investors are increasingly shifting from equity mutual
funds into bond funds, our thought is also a
What do we like? Falling in the crack between equity
and bonds are PREFERRED STOCKS, the orphans of Wall
Street. "A" rated paper yielding 8% can still be found
(if you know where to look). As for common stocks…..
CIT GROUP (CIT,$18) Since every loan of this
financial lender cannot be scrutinized, analysts have
taken a negative approach to the unknown. However, the
company has been able to tap the capital markets and has
no trouble putting the money to work. Its expanding
railroad freight car leasing operation should prove to
be a bonanza. CIT stock price is under book value of
$22.50, and estimated earnings for 2003 are around
DVI (DVI, $7.50) along with GE Capital has a
virtual lock on financing high-end medical equipment,
e.g. MRI's. However, expansion into South America a
couple of years ago proved to be a disaster, which has
finally been brought under control. Earnings for the
fiscal year ending June 30 are expected to rebound from
a $0.28/share loss in 2002 to a $1.20 profit in 2003.
Medical equipment is becoming more sophisticated
(expensive) and demand is growing. So who could wish for
CHRISTOPHER & BANKS (CBK,$16) is a specialty
retailer of women's clothes in the Midwest and along the
northern tier of the country. The company currently
operates 380 stores and expects to open 90 more during
the coming year with sales projected to be in the $425
million dollar range. Earnings for fiscal year, ending
February 28, 2003, should be around $1.40/share growing
to $1.75/share in the next 12-month period. The
uniqueness of this company is that it has no debt, and,
in fact, management has announced a million share
buy-back. Many companies are undervalued today, so why
not this one?
SEARS ROEBUCK & COMPANY (S, $23) is another
out-of-favor retailer. This "once upon a time" blue chip
is currently selling at five times 2003 estimated
earnings, a figure the president of the company gave out
in January. Rumors have plagued the company that its
credit card receivables have large losses. The company
claims they are under control. Double or nothing… While
we are not yet prepared to recommend the stock, we will
be monitoring it.
We continue to recommend MARATHON OIL (MRO, $22) as
a core position in the oil industry. While oil prices
have soared to $37/bbl, oil stocks remain near their
lows; the market seems to expect a collapse in oil
prices once the geopolitical situation improves. We
think, however, that the underlying supply/demand
situation will result in oil trading at prices ($25/bbl)
higher that anticipated. Meanwhile, companies like
Marathon should continue to show strong results as we
move into the seasonally strong refining season. Selling
under ten times earnings with a 4.2% dividend yield,
Marathon remains attractive.
Tomorrow's market? …. Call Saddam.
Please read our
important notice about these letters and the
securities they mention.