In these volatile times, knowing when to sell is of prime importance. We spoke to several money managers this week about when they know it’s time to sell:

• Bucky Hellwig, Morgan Asset Management (Large Cap Value):  ”We don’t set specific sell targets. A stock generally becomes a sell candidate when we see deterioration in its ranking within the value universe. When that occurs, it could trigger a sale unless the fundamental analysis is compelling for retaining the stock. Again, we want to try to avoid value traps, so we usually do not end up holding stocks that are laggards or exhibit poor relative strength. Also, we may exit a position or reduce it if it is removed from our benchmark index.”

• Sarat Sethi, Douglas C. Lane & Associates, Inc. (Multi-Strategy Core Investors): “As long-term investors, we do not use automatic sell triggers in our clients’ portfolios. We will sell stocks for a variety of fundamental reasons including change of control, an adverse change in management, negative shifts in strategy, or other factors that lead us to believe our original investment thesis is no longer valid. Of course, we will also sell stocks if valuations become excessive compared to our assessment of their long-term value.”

• Richard Parry, Tom Johnson Investment Management, Inc. (Deep Value & Relative Value Stocks): ”We create targets based on relative valuations. When we buy, say, Mattel, we might have a price target of $28, but that continues to be adjusted each quarter as we review their earnings, their cash flow, their debt and the valuation going on across the industry. But we certainly have targets. Each of us independently comes up with initial expectations and we continue to talk about them periodically as some of these prices approach their price targets. Historically and in general, our targets are not going to include much of a momentum valuation. We’re usually out of a stock a bit too early, but we’re willing to take profits to go and search for other value or relative value stocks.”

For the full investing strategies report, including full interviews with each of these portfolio managers, overviews of their investment philosophy and stock picks, click here. 

This week we’re looking at Commodity and Specialty Chemicals, here at TWST. We spoke with Dmitry Silversteyn, analyst at Longbow Research, who told us his pick in this space: Ecolab (ECL).

Ecolab is a company that develops a variety of chemical products, most notably for cleaning and sanitizing but also for pest elimination. Ecolab also provides a number of services including maintenance and repair to hotels, restaurants and healthcare and educational facilities.

Ecolab, according to Mr. Silversteyn, is a company that “through good times and bad delivers on expectations.”:

Mr. Silversteyn: You are looking at a companythat’s growing close to double digits, that has a 50% plus gross margin, that has a 20% plus return on equity and 15% average growth in earnings in a very predictable, stable way and investors have been willing to pay a higher multiple for that predictability. I think that will continue. And again, given the lack of economic sensitivity of this company, we think it has an appeal to both growth investors as well as those looking for a safe haven.  

For the full interview with Mr. Silversteyn, including an overview of the space in the second quarter of 2008, and some areas to avoid in this space, click here.  

Every week here at TWST, we speak with portfolio managers who tell us a little bit about why they invest in the companies they invest in. Whether they’re value or growth or GARP investors, each and every one of them has dedicated themselves to finding reasons to invest in some spaces, and not in others.

 While this may sound obvious, two money managers we spoke to this week had other ideas. They practice something called “Behavioral Finance”, which takes as its premise that the market participants are ”predictably  and persistently irrationally when they invest.” 

Christopher Blum and Theodore Dimig of JP Morgan Asset Management focus their behavioral finance philosophy on the behavior of investors in the market; investors who make the same mistakes time and again. They attempt to use these predictable blunders for the profit of their clients.

They gave the example of this behavior, and their own attempts to profit from it, in 2005, the case with Merck and Altria:

“Think of a company like Merck at the end of 2005 or Altria at the peak of the tobacco litigation. Many managers avoided those stocks because they didn’t want to have to listen to their clients saying, “What are you doing? Don’t you read the newspapers?” It’s very risky for a manager’s reputation to buy an Altria or Merck (during points of stress) because of all the headline risk out there. As a result, many stay away because it’s safer to err on the side of being conventionally wrong with the masses (and avoid such names) than to put yourself on an island and take a chance of being unconventionally right. In fact, that’s the exact reason why these cheap stocks consistently outperform expensive stocks, because emotionally many managers cannot bring themselves to buy these stocks.”  

For the complete interview with Mr. Blum and Mr. Dimig, including an overview of the investment climate from their unique perspective and stock picks, click here.   

With the market in such a volatile condition, knowing which stocks to avoid is of prime importance. Even high qualities companies are not immune- as evidenced by our stock to avoid this week- CSG Systems (CSGS).

Analyst Peter Jacobson of Brean Murray, Carret & Co. talked to us a little about this company. They provide customer interaction management on the behalf of companies.  Primarily, they provide billing services to two of the major cable companies in North America: Comcast and Dish Network. Mr. Jacobson called the company a “long-standing quality company that provides excellent service to its customers.”

However in the upcoming year, both their two major contracts will come up for renewal. Mr. Jacobson predicts that CSG Systems will be have some “pricing pressures and scope changes upon renewal”, and that earnings will decline in 2009. For this reason, Jacobson is saying shying away from CSG Systems.

For the full interview with Mr. Jacobson including an outlook for this space in the second quarter of 2008 and stock picks, click here.

One of our special focuses this week is on engineering and construction. Within this space, we spoke to analyst Steven Fisher, who talk to us a little bit about the niche he looks at in this space: the Energy & Transportation Infrastructure space.

We asked him what effect issues to do with pollution and Greenhouse gases were going to have on companies in this space. Here’s what he had to say:

TWST: We’ve got greenhouse gas issues and pollution issues. Is that a plus or a minus longer term?

Mr. Fisher: I wouldn’t consider it a plus or a minus. It’s just one of many factors affecting project outlooks and it may just be creating shifts in the type of projects that move forward. There may be some companies that are better exposed. Take a company like Fluor (FLR). The things you mentioned primarily affect power markets. So if you were to say that CO2 emissions are going to make coal-fired power projects more challenged and it might create a shift to gas or wind or solar or nuclear, Fluor can do any of those different projects. For a company like Fluor, I wouldn’t consider it a plus or a minus; it’s just a shift in the type of project. But there are some companies that perhaps have a bit more exposure on the coal side currently, like Shaw Group (SGR) that it may affect more in the near term, but at the same time, they are probably one of the better exposed to the nuclear markets as those come on as a clean source of power.

For the full interview with Mr. Fisher, including a complete look at the outlook for this space and stock picks click here.

One of the major themes that keeps coming in portfolio manager interviews here at TWST is the emphasis on emerging markets. We spoke to Lou Gerken this week, of Gerken Capital Associates, who told us a little bit about where Emerging Markets, particularly in 2008, are headed:

Mr. Gerken: Our medium- to long-term outlook for the Greater China and Latam regions is quite positive, with 8%-9% GDP growth for China and 4%-6% for Latam. Although rising in the first half of 2008, we anticipate manageable levels of inflation and unemployment, given the soundness of emerging market government balance sheets and their inherent flexibility to react. We believe the 2008 investment climate and beyond will be different in that “rising tide” investing of the past several years is all but over, as emerging market companies have reached valuation levels of their global peers, and where asset managers must now be active in managing portfolios and discriminating in what they buy and sell, putting the premium on alpha.

For the complete interview with Mr. Gerken, including a complete overview of their investment philosophy and stock picks, click here.

Our other special focus this week is on Midwest Banks- a turbulent space to say the least. Analyst Peyton Green talked to us a little about how investors are feeling about the Midwest Banks space at this time:

Mr. Green: I think most investors look at the environment that has existed over the past decade and they say, “There is no way you can clear out the excesses that have occurred over the past five years in two quarters time.” The bad news tends to force the stocks lower over a longer period of time. When you see some good news come out, it tends to lead to short covering and catch-up buying (by those that are underweight bank stocks) and that causes a greater spike to the upside over a shorter period of time.

In our opinion that kind of pattern is not too inconsistent with past bear markets in bank stocks. What is different this time is that there is a whole lot more short interest across the space than there was. This increased activity by shorts has increased the volatility in almost every bank stock name that we cover.

For the complete interview with Mr. Green, including where banks are headed from his perspective and stock picks, click here.

“Looking back six months or even two or three years ago, I don’t think anyone expected  education analysts would be trying to figure out financial services impacts, but that is certainly what we are doing” - Brandon Dobell, William Blair & Company

It seems the credit crisis continues to spread to all corners of the marketplace, including the education space- one of our special focuses for this week. We spoke with a variety of analysts, and the number one concern they had for this space was how the credit crisis was going to impact it.

For James Maher, of ThinkPanmure LLC, the primary concern was how the credit crisis was going to influence the market in terms of the availbility and pricing of student loans.

Amy Junker of Robert W. Baird & Co. concurs- stating that unless schools decide to act as lenders, a part of the population that is termed “subprime” might be unable to attend college, “whether they are going to Harvard, or whether they are going to the University of Phoenix.”

For the full education report, including an overview of what 2008 holds in this space from a variety of perspectives, and stock picks, click here.

With the subprime collapse of last year, and the shocking news from Bear Stearns a few weeks ago, the current state of financials is risky at best.

Jonathan Compton, of the firm Bedlam Asset Management,  managed to avoid the current financial situation all together. How did he do this? As it turns out, Bedlam Asset Management has never owned a bank in the English-speaking world. Here’s why:

Mr. Compton: We have never held a bank in the English-speaking world. This has not been because we are smarter or dumber than other people, but because they were completely un-analyzable. We have talked to bank finance directors, big or small and told them how we construct five-year models- two-years forward and three years backward. When we then say to them, “We have done some work on your bank’s two-year model,” they all say, “We can’t model the next 12 weeks.” This was not the case 10 or 20 years ago, but if banks’ own finance directors can’t forecast three months out, how can we buy them for our investors? It would be a guess, a gamble, definitely not an investment. So there are no banks, absolutely none. This is not a new, fashionable thing; we have never had any.

For the complete interview with Mr. Compton, including a further exploration of his firm’s unique style and outlook for the rest of 2008, click here.

Recently, a studied showed that nearly 20 million households in the US have some sort of HDTV device. Analyst Murray Arenson sees strong growth for this area in the future of the digital media space . He talks to us a little bit about his pick in this space, DG Fast Channel (DGIT):

Mr. Arenson: The company I like in this space is called DG FastChannel, and it is the dominant deliverer of advertising for the television industry.  Today only 1% to 2% of the ads being delivered are in HD, and this company stands to generate a lot more revenue from the expansion to HD, since the per-transaction economics of HD delivery are much more attractive… What’s particularly compelling about DG’s HD play is that they can generate today roughly 10 times the revenue and cash flow for an HD ad delivery as they can for an SD (standard definition) ad delivery. And again, the premise here is that we’re starting at 1% to 2% HD ad penetration and ramping up that penetration as we approach that February 2009 deadline you talked about. There’s a pretty good possibility that HD ad penetration could be approaching double digits by the time we get to that 2009 time frame.

For the full interview with Mr. Arenson, including an overview of different areas in the digital media sector, and his outlook for 2008, click here.