We spoke to a portfolio manager this week who was, to say the least, very negative about the current state of the economy. Scott B. Williams, of Clutinger, Williams & Verhoye, has this to say to investors in the market today:

 Mr. Williams: The advice that we’re giving our clients is that there are major problems in the credit market, there are major problems in the mortgage market and it is going to affect the economy. We’re going to have a recession, so it is time to lower your equity exposure. For more aggressive clients, you can use the exchange traded ultra-shorts as a way to either hedge your equity position or in a more exaggerated stance make money while the market goes down. For more conservative clients, US Treasuries are a great place to be until our outlook turns around.

TWST: Is there anything that you want to add?

Mr. Williams: No, I think I was as pessimistic as I need to be.

For the complete interview with Mr. Williams, including an outlook for 2008 and a look back at what happened in 2007, click here.

Continuing our special focus on Biotech this week, we spoke to analyst Dr. Yaron Werber of Citi Investment Research, who talked a little bit about one of his pic in the Biotech space: Gilead Sciences (GILD).

 Dr. Werber: Gilead is one of the well-known large cap biotech companies that is specifically playing in the HIV, hepatitis, and now in the pulmonary arterial hypertension (PAH) spaces. The reason to like Gilead, even though this company is fairly well understood, is that the sellside consensus estimates do not fully reflect the magnitude of growth that is still available globally to the HIV franchise. The growth is driven by organic market growth, geographical expansion and pricing.
We also believe that the company is highly focused so they have terrific leverage on expenses. We continue to believe that the bottom line numbers on the Street are too conservative and investors are not really looking at the ongoing operating margin expansion.

For the full interview with Dr. Werber, including a complete overview of his sector of coverage in the Biotech space and more stock picks, click here.

Among the many investing sectors hit hard in ‘07, biotech was not immune. The analysts we spoke to this week said that 2007 was a very tough year for biotech, leading many investors to pull out of the space.

We asked two of them, Dr. Jason Kantor of RBC Capital Markets and Dr. Thomas Shrader of Rodman & Renshaw, what it would take to get investors to  look back at Biotech in ‘08: 

Dr. Kantor: I think we need to see more clinical successes. We have already begun to see some clinical trials coming off of this year with positive reads. Biogen (BIIB) and Genentech had positive results for Rituxan in rheumatoid arthritis, and Genentech and Roche (RHHGY) reported positive results of Avastin in metastatic breast cancer. One of the major catalysts for some of the big stocks as well as the little stocks is major Phase III readouts. Those are the kinds of events that can get investors more confident in the market.

Dr. Shrader: I will answer the question treating biotech as just another tech sector. What drives people into these riskier stocks is a need for differentiated returns. The people who comprise the buy side essentially compete against one another. As low risk stocks become more and more expensive and the potential for return gets worse and worse, it forces people to look for investment returns in other places. I think the need to differentiate returns is one of the things that drives non-specialists to look into biotech. In addition, one of the most common ways for people to turn back to the sector is for something really miraculous to happen with a drug or technology or platform — something that gets people really excited about the whole sector. Non-specialist investors hear pieces of the news start to creep back in emotionally and monetarily.

For the full Biotech report, including stock picks and interviews with CEOs from a wide variety of biotech companies, click here.  

Our other special focus this week is the automotive sector. With the slowing economy, we were curious about consumer interest in this space. We spoke with analyst Efraim Levy, who told us a little about where consumer interest lies, with regards to auto dealerships:

TWST: As you talk with investors about this space, what’s the interest level in these auto dealers at this point?

Mr. Levy: Right now, the interest level, if you judge it by the stock prices, has been decreasing. For 2007, the S&P Automotive Retail Index was down 12.9% and that contrasts with the S&P 500 being up 3.5% for the year. The reason that it went down, I believe, is because of the fears of slowing automotive demand and the weaker US economy that contributes to that slower automotive demand. Since the beginning of 2008 (through January 22), that group has been down significantly, which I think helps to create some opportunities as you look out over the next 12 months.

For the full interview with Mr. Levy, including a look at auto dealerships in 2007 and an outlook for 2008, click here.

Our special focus this week is on Domestic Oil Services. We spoke with several analysts about the state of oil services, and Mark Urness of Calyon Securities gave us his insights into what 2008 holds, domestically, for oil services:

Mr. Urness: I think it is going to be more of the same to a large degree, with more pressure on costs and less pricing power, if you will. Clearly, North America is going to be a challenging market for most companies this year in terms of being able to offset cost increases, and price increases will be few and far between, at least until we start to see the rig count move back up again.

For the complete Oil Services Roundtable, including perspectives from 3 other analysts and stock picks, click here.

In our discussions on Food and Processed food with Analyst Heather Jones this week, one of her top picks was the familiar company, Chiquita (CQB).

Starting with their famous bananas, pricing is currently very firm both in the US and overseas. She says that this reflects a more rational competitive environment, and a greater demand- made by a lack of supply by other competing fruits.

The weakness of the US dollar is another factor that is positive for Chiquita. For every penny move up in the euro, it means $5 million in annualized EBIT.

In terms of cost, the WTO ruling against the EU’s discrimnatory banana import trade regime, which could lead to significant cost saving in the future.

For the full Food and Processed food issue, including interviews with CEOs from a variety of food and processed food companies, and more stock picks, click here.

In this difficult economic time, one of the most important thing on the minds of investors is: when do I sell? We spoke with several portfolio managers this week who talked to us a little bit about when they decide to sell.

John Lemry, Emerson Investment Management (Large Cap Growth):

Mr. Lemry: If a company has underperformed the S&P 500 by 20%, our discipline requires us to review the holding, examine the thesis for owning the stock and make a case for continuing to hold the position. The decision to sell is not a rote decision, but unless the whole sector or industry is down, such as financials today, we will typically look for a good exit point. Examples of sales triggered by this process in 2007 were Genworth (GNW) and Kohl’s (KSS).Conversely, when stocks do very well and exceed their intrinsic values, we are also sellers. An example was Ambac, which hit our price target last year and we exited at $88. That was a particularly good sale for us as the stock is now trading at less than $12 per share.

John Kattar, Eastern Investment Advisors (Separate Account, Sector Specific) 

Mr. Kattar: The sell process is the opposite of the buy process. I mentioned before that we have three parts to our process: top-down, quantitative, and bottom-up, which is really the core of what we do. We are very conservative managers, so stocks have to score well on each of those three disciplines in order to find their way into the portfolio. In other words, it has to fit our macro themes, has to look good on our quantitative models and also has to be validated by our bottom-up inputs. In order for a stock to be sold, it only has to run afoul of one of those disciplines. The idea is that we don’t mind missing a very good stock because we have been too conservative — there are always other stocks to buy — but we do not want to hold a bad stock because we weren’t conservative enough.

Jason Beckman, The Oxford Private Client Group (Top-Down, Equity and Fixed Income)

Mr. Beckman: We have a different discipline depending on whether the target is on the way up or on the way down. When we take a position, we will set a sell target on the way up technically. When we buy a stock at $30, we’ll set our target at, say, $39; that is a 30% return. When it hits $39, pretty much regardless of what happens, we will sell the position, period. On the way down, however, we will take a little different approach. It is not so much technically driven as it is fundamentally driven. If we buy the same stock at $30, we’ve done our due diligence and we believe that is a good place to purchase the stock. But also understand that we don’t go all in. If we are going to take, let’s say, a 4% position in a $30 stock, we are not going to take a 4% position on day one. We are going to work our position in over maybe four or five increments, so 1% or less on every placement.

For the complete investment strategies report, including full interviews with each of these portfolio managers and others, click here.

Moving back into our focus on Apparel Retailers this week, we spoke to Linda Tsai- an analyst who covers the teen and children’s apparel space. She had one top pick out of all apparel retailers in this tough time: Aeropostale (ARO).

Ms. Tsai: I like Aeropostale a lot. We talked a little about that because theyhave been improving their fashions over the past few years. A larger percentage of their merchandise mix used to be dedicated to what they call “core,” which are their basic categories like a plain tank or a plain pair of jeans. Over time they’ve increased the percentage of their “fashion” category. Fashion, despite carrying a slightly higher price point, allows them to drive demand because of a higher level of differentiation. For example, let’s say one year a shopper goes there and sees a pink tank top, but the next season it’s the pink tank top with a ruffle. You see the same style at its competitors but it’s priced a lot less. You will spend the extra dollar to get the ruffle because that’s something that you want. That’s one thing they have gotten really strong at in terms of understanding fashion trends and interpreting them, so that price-wise it remains accessible to its core customer, but still commands a slightly higher price point. That’s one of the reasons why I think they are positioned to take share.

For the full interview with Ms. Tsai, including a complete overview of the teen and children apparel space, and an outlook for 2008, click here.

Our 5 picks this week come from Bruce Geller, portfolio manager at Dalton, Greiner, Hartman, Maher  & Co. The company is a small cap value investor, and has interesting ideas on where the picks are these days:

1. TJX (TJX)- “TJX owns several underlying retail chains. The ones that are most popular are T.J. Maxx and Marshalls…Basically this company has been able to capitalize on a lot of the problems in the retail and apparel sectors, because as an off-price retailer, T.J. Maxx goes and buys the excess production runs and inventory that other players have too much of — T.J. is able to go in and buy high quality brand name merchandise at a substantial discount to take it off the hands of these other players. They can then go and sell that merchandise to their customer base at a very attractive price, a much lower price than their customers would be paying in the department stores or at other specialty retailers.”




2. Bed Bath and Beyond (BBBY)- “Considering the significant slowdown in home turnover, a lot of the products they sell play into this market, but this is without a doubt the premier player in that business, and I think they are going to be able to capitalize on the weakness we are seeing at some of their competitors.”
3. Brinker (EAT)- “Chili’s is their flagship chain. They also own Macaroni Grill, On The Border Mexican Grill and Maggiano’s, which is a higher end Italian concept. And what I like about Brinker is that the management team has been very aggressive in monetizing fixed assets and using that cash flow to benefit shareholders. They have initiated a very substantial share repurchase program. I believe they bought back over 15% of their shares outstanding in the past 12 months, and I think that they will continue to do that. “
4. 3M (MMM)- “It is really a very well diversified company. We all use a lot of their products all day long without even realizing it. It is an extremely high quality company. They probably have among the highest returns on assets of any industrial company out there, and they have been doing it forever. It is really attributed to how well the businesses are run and also to the incredible R&D effort that the company has. It has always been one of the most innovative companies in the US, and they continue to roll out many new products and receive patents on a significant number of new products across their different businesses every year.”
5. AptarGroup (ATR)- “This is a company that makes dispensing equipment and closures. They also have over 50% of their sales that are outside of the US. And they also have some markets that will perform better in a cyclical downturn because a lot of it is healthcare and personal care related, which are less cyclical than your traditional industrial markets. So Aptar is another stock that I like for a more defensive type of a play.”

For the complete interview with Mr. Geller, detailing his investment philosophy in full and talking a little bit more about the outlook for 2008, click here.

Our other special focus this week is on Food. Heather Jones, analyst at BB&T Capital Markets,  talked to us a little bit about the reasons for inflation in foods in 2007.

 TWST: What drove inflation during the year and got it above where you expected it to be?

Ms. Jones: Commodities, specifically wheat and vegetable oils. Fuel oil also accelerated later in 2007. Corn also took off late in the year, but it had already risen dramatically going into 2007. Coming into 2007, wheat had stabilized somewhat, but in the second half it surged well beyond what I expected. Soybean oil and other food oils took off as well, registering year-over-year increases well north of 100%.

For the full interview with Ms. Jones, including a complete overview of Food and Processed Food in 2007, and the outlook for 2008, click here.