Our top picks this week come from our roundtable discussion on Engineering and Construction. Analyst Tahira Afzal of KeyBanc Capital Markets tells us that the only part of her sector she can recommended is the part dealing with electric transmissions. She has two picks in this space:

• MYR Group (MYRG)
• Quanta (PWR)

Here’s why:

Ms. Afzal: I like names that are so dirt cheap that they are trading close to liquidation and, again, might have some catalyst ahead of them. I don’t think anyone wants to buy anything that doesn’t have a catalyst ahead of them. The names that I am pointing to within my coverage space would probably be the electric transmission names. I think that’s where I see a lot of project activity still going ahead. The names over there would be Quanta (PWR) and a smaller company called MYR Group (MYRG). Both are very highly leveraged in that space.

For the complete Engineering and Construction report, including a full overview of the space, an outlook for the future and more stock picks, click here.  

In our special focus on Engineering & Construction this week, we spoke with analyst John Kasprzak of BB&T Capital Markets about the state of this space. While the economic downturn has had a definite impact on E&C space, Kasprzak sees some hope for the future in how the new administration is talking about plans for construction:

Mr. Kasprzak: From a construction point of view, next year offers an interesting convergence of factors. First of all, the new administration has talked openly about trying to stimulate the economy within infrastructure spending. Every billion dollars of incremental spending creates over 40,000 jobs, for example, and so that seems to be an area of focus. Then when you consider that the current federal highway program expires September 30, 2009, and they come in six-year increments, Congress was already on tap to pass a new highway bill next year. So the timing could be good because the need is there to pass a new bill and you could combine that with a view from the new administration that an increase in spending in the new bill could help stimulate the economy.

For the complete Engineering & Construction report, including a complete interview with Mr. Kasprzak and a roundtable panel giving an overview of this space, click here.  

I recently came across an October 28, video/text story from Business Week given by Professor Edward E. Lawler III from the Marshall School of Business at the University of Southern California.  Lawler recently published a book called Talent.  In the Business Week piece Lawler focuses specifically on the issue of leadership.  He takes to task so-called imperial CEOs.  In the story, Lawler refers to CEOs who,

… make decisions and develop strategies with little input and discussion. Their decisions are above criticism and challenge. They adopt lifestyles that make them celebrities, and their companies become vehicles that make them “rock stars.” They are supported by technology that is designed to keep them in touch 24/7. But in reality, most imperial CEOs are dangerously out of touch with the people they lead, particularly when it comes to the issue of strategy implementation and development. Often they don’t hear bad news until it is too late (witness today’s problems in financial firms).   

Strategies and business plans in human capital-centric organizations are likely to be successfully developed and implemented only if the individuals who have to implement them have had a say in crafting them. Even if a brilliant CEO or senior executive can craft a successful strategy without input, the issue of how it is going to be implemented remains. Without individuals throughout the organization having a say in what comprises the strategy and agreeing that it is the right one, it’s highly unlikely they will want to or be able to implement it.

While I am not in total agreement with Lawler’s assessment, anyone interested in the issue of executive leadership should at least listen to the brief video/audio Lawler presents on the Business Week site.  You might even want to read his book entitled, Talent: Making People Your Competitive Advantage. 

Carly Fiorina, former chairman and CEO of Hewlett Packard, wrote an interesting editorial in today’s Wall Street Journal, entitled, Corporate Leadership and the Crisis, CEOs seeking bailout should be willing to resign.  According to Fiorina, 

In a fast-paced, hypercompetitive, technology-driven world, common sense, good judgment and ethics matter more than ever. The American people expect leaders to have sufficient wisdom and perspective to buck the crowd and defy conventional wisdom when necessary, even if it isn’t popular at the time. Quarterly earnings and share price cannot be the singular purpose of business or metric of success for CEOs. Shareholders are not the only constituency a CEO and board serve. Businesses have equally important obligations to employees and customers. A CEO’s job is to balance the competing requirements of all of these constituencies.  

Business has an important role to play in rebuilding confidence and restoring credibility. To strengthen accountability, boards should put all aspects of CEO pay up for shareholder vote on an annual basis. Clawback provisions, which require a CEO to return compensation to shareholders if promised results aren’t delivered following their departure, should be included. CEO pay should be based on a balanced scorecard that reflects customer satisfaction and investment in employees, in addition to achievement of financial goals

Every board seat should be voted on annually and board membership should be regularly refreshed to ensure that tough questions continue to be asked. And when CEOs go to Washington and ask for taxpayer money, they should also be prepared to submit their resignations and those of their boards. To earn a bailout, a CEO and board should be held accountable for the decisions they’ve made — or perhaps the actions they’ve failed to take. 

Fiorina, who I am not a fan of, has defined a number of proposals the new administration should take under advisement and consider implementing as we move further into the ongoing financial/credit crisis.  Please read her entire editorial, she has a number of very worthwhile ideas to consider.  

As a second focus this week here at TWST, we focused on the Railroad space. While analyst Kevin Kirkeby of Standard & Poor’s is neutral on the space as a whole, he does point to the strength of 3 stocks in Railroads, all based on the east coast.  These are:

1. Norfolk Southern (NSC)
2. CSX (CSX)
3.  Canadian National (CNI)

His reasons for picking these, as opposed to their west coast counterparts are fairly simple:

Mr. Kirkeby: Thematically, we favor the East Coast rails over the Western ones…They operate in regions of the country with greater population density, and a greater number of freight corridors where rail intermodal service can displace trucks. Norfolk Southern, for one, is working on its Heartland Corridor and Crescent Corridor initiatives. CSX has its National Gateway project, linking inland distribution centers to the ports. These efforts will provide an added volume boost, in our view, even if the greater economic environment proves more difficult than anticipated.

For the full interview with Mr. Kirkeby, including a complete overview of this sector, where its headed, and more stock picks, click here.

While many economic experts foresee a tough climate for the foreseeable future, others are taking a more contrarian position. Christopher Zook of CAZ Investments, LP “officially turned bullish” on Thursday, November 27 and sees the current valuations in the market as “the buying opportunity of our generation.” We talked to him a little bit about how he came to this conclusion:

Mr. Zook: Valuations. Obviously the economy is going to continue to be very weak. We expect the economy to experience the worst recession since World War I. We expect that housing is not going to bottom for at least another two quarters, but will bottom probably in the second half of 2009 for a lot of reasons…What people have an incredible tendency to do is to totally forget the fact that the market is a discounting mechanism and the market has  now discounted the worst…It’s hard to find anything that’s not undervalued at this point.

For the complete interview with Mr. Zook, including a wide range of stock picks and an overview of his investment process, click here.

Tuesday afternoon Mitch Albom, the writer and radio talk show host (760 WJR AM out of Detroit), interviewed Mark Phelan, a reporter for the Detroit Free Press, and myself on whether or not Rick Wagoner, General Motors’ CEO should be forced out.  The interview took place while the U.S. Congress was considering bailing out the Big Three.  I was in favor of Wagoner’s removal and have been for over one year while Mr. Phelan contended he should stay.  If interested, check out the debate.   For more:  Economist (12/11) 

Continuing our special focus on Banks this week, analyst Chris Marinac of FIG partners has some advice for the smaller end of the banking spectrum:

“If you are a small or medium-sized bank, you have to be very nimble and very focused. It is not time to take on new customers with both hands, it’s time to be very selective and very opportunistic, and I think you need to be thoughtful about the customers that you want to support, the customers you want to take on.”

For the complete interview with Mr. Marinac, including a complete overview of the banking space and stock picks, click here.  

Paul Pendergast, who writes under the name of Jack Flack, wrote a memo in today’s New York Times Dealbook entitled, Rescue Memo to Vikram Pandit.  The memo is a worthwhile read outlining clever ideas on what Pandit needs to do to save his job.  According to the author,

… if you want to avoid hearing Gasparino (CNBC reporter) speculating on behalf of your critics every couple of weeks, you’ll need to make sure you manage perception as well as you manage reality. Unfortunately, you’re not particularly good at that, which is actually a common affliction among strong analytical thinkers like you.   

Flack goes on to outline a number of key areas Pandit needs to focus on:

Be yourself …, Stop not-apologizing …,  Define the model …,  Push a real purpose …,  Steward publicly …,  Forget internal …,  Manage Bob…     

If you follow Citi or are interested in the plight of financial CEOs, the memo is a must read.  

Our special focus this week here at TWST is on Banking. As part of this focus, this week we held a roundtable discussion with a vareity of analysts in this space. Despite a generally sanguine view of the present and immediate future, the analysts we spoke to did have a few stocks to recommend in this space:

• Mike Shafir, Sterne Agee: Some of the names that we have been recommending are Danvers (DNBK), about 20 miles north of Boston. While that’s a commercial lender, the valuation along with 15% capital allows investors to be pretty secure there with the company trading at 95% of tangible book.
• Anthony Polini, Raymond James & Associates: You certainly want to commit some funds to this industry. Our top pick, New York Community Bank (NYB), is experiencing margin expansion, loan growth acceleration, double-digit earnings growth, and trades near its 52-week low.
• Andrew Stapp, Riley & Co. : I like Signature Bank (SBNY). It has been generating extremely robust loan growth, with loans rising 62% year-over-year organically as of September 30,2008. What is amazing is that it has been realizing this pace of growth by cherry picking only prime quality credits. As a matter of fact, its weighted average risk rating on its loan portfolio has been coming down over the past several quarters due to the quality of the loans that they have been placing on their books. The company also has low exposure to construction and development loans at only 5% of total loans.

For the complete Banks report, including an overview of the sector as a whole- where its been in the past year, and where its headed, in addition to interviews with CEOs of top companies, click here.