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Archive for the 'General Investing' Category

Unrecognized Growth at a Reasonable Price in Asian Equities

Posted in General Investing on February 10th, 2012

With slower GDP growth expected in the Asia Pacific region in 2012, investment themes focus more on economic-sensitive sectors where unrecognized growth at a reasonable price is likely to be unearthed in Asian equities, says Khiem Do, Chairman of Asia Multi Asset Team and Member of the Global Multi Asset Team at Baring Asset Management.

“We continue to be underweight in the more expensively valued defensive sectors, including utilities and telecom. We also remained underweight in the financials sector, although over the past few months we have been adding to Chinese banks and some other Chinese financials,” he said. “In the overweight sectors, we continue to like technology, consumer discretionary, industrials and energy.”

Do says he expects China will grow by about 8% to 8.5% in 2012, although lower than last year’s GDP growth rate of 9.2%, this year’s forecast still will be deemed as a solid and respectable growth rate to be exhibited by the second-largest economy in the world, especially within the context of a sluggish OECD economy.

“Net net, I hope that over the next five to 10 years, instead of dumping Asian equities at the first sign of macro risk, foreign investors would consider to do exactly the reverse. In other words, they would look to add to long positions if and when Asian markets were to fall in sympathy with their Western counterparts,” he said.

A Focus on Diversification, Discounts & Distributions

Posted in General Investing on February 9th, 2012

Diversification across asset classes, an emphasis on buying stocks at a discount from net asset value and an intense focus on distributions provide investors ways to hedge against unpredictable moves in the market this year, says Jonathan S. Raclin, a registered Principal of Barrington Asset Management, Inc. and Managing Director of its Enterprise Portfolio.

“I don’t see much new on the horizon for 2012. Almost everything relates to politics in Europe and their massive debts as well as in our country, where we seem locked in place, both parties stuck in a pit of re-election considerations,” he said. “I would imagine we will probably have a number of surprises this year as well. It is hard to anticipate natural disaster, revolutions and debt crises.”

Raclin says his firm is equally weighted in a cash reserves fund, a gold and silver bullion fund, a convertible and high-yield bond fund, a high-yield stock fund, a large-capitalization growth fund, an emerging markets fund, an energy fund and a natural resources fund with concentration in agriculture and water.

“As emerging economies continue to become more prosperous, one result is an increase in demand for protein. Protein means meat, and protein means the consumption of soybean-based products for feedstock,” he said. “I also think coal will be a very important area, mostly because China and India are enormous consumers of electricity, and they have coal-based electrical infrastructure.”

Macro Trends Lead to Long-Term Value-Oriented Approach

Posted in General Investing on February 8th, 2012

Large-cap, high-quality stocks with high dividends, global exposure and high barriers to entry are the types of above-average businesses to focus on in the current volatile macroeconomic environment, says Robert Joseph Sanborn, CFA, Partner and Portfolio Manager at Sanborn Kilcollin Partners, LLC.

“We continue to think it’s more of a downside-oriented capital preservation environment as opposed to an upside-oriented opportunity environment. And what we are looking for in our stocks generally is, very simplistically, we like to buy a long that has a market value this is much less than what we think a rational LBO buyer would pay for it,” he said.

Sanborn points to Altria Group Inc. (MO) as an example of a large name in an industry with high barriers to entry. He says the tobacco industry is essentially a worldwide duopoly in most markets benefiting from partnerships with governments, few strong competitors and brand loyalty of its customers.

“You have a very stable competitive environment with a very stable product, and the one in which you can look out over the long term, and say that the odds of technological change or obsolescence are very low, and the net result is Altria has outperformed the market over a one-, five-, 10-, 20-, 30- and 40-year basis, a significant factor,” Sanborn said.

Midwestern Regional Banks To Grow Through Consolidation

Posted in General Investing on February 7th, 2012

Increased consolidation activity in the banking industry is expected to offer more opportunities to generate earnings and franchise value growth for regional names, potentially as early as this spring, when the industry will enter a new round of M&A, says Tom Mitchell, Senior Analyst at Miller Tabak + Co., LLC.

“One of the things that everybody has to do right now is tighten their belt. There’s nothing like an intelligently structured consolidation to reduce the expense ratios of the combined entities. At the margin, that reduces the expense ratio of the whole industry. I think there will be a lot of more of that kind of activity,” he said.

Mitchell names Fifth Third Bancorp (FITB), an Ohio-based bank, as a top pick. He says he believes the Midwestern area of the U.S. offers particular opportunities, partly because the automobile industry in the region shows improvement, which is a positive directional factor for the regional banking industry.

“What will get investors most interested again will turn out to be consolidation activity, which will change the way that investors look at the area,” Mitchell said. “We do analysis on what we think the stripped-out balance sheet values of banks assets and liabilities are. In most cases, we think that the excess value in the deposit franchise is a good deal higher than tangible book value.”

Offshore Drilling & Oil Services to Resecure Pricing Power

Posted in General Investing on February 6th, 2012

Demand growth for deepwater drilling and well-completion services in the oil and gas industry is expected to outpace supply, and allow the industry to resecure pricing power due to customer spending plans and contracts, which will execute the growth embedded in the plans, says Scott Gruber, CFA, Senior Research Analyst at Sanford C. Bernstein & Co., LLC.

“One of the very few segments within oil services which has yet to secure pricing power is offshore drilling and well-completion services,” he said. “And I think there is a very high probability that the international service companies like Schlumberger, Halliburton and Baker Hughes secure pricing power for their offshore services in 2012.”

Gruber has chosen Schlumberger N.V. (SLB) as his top pick among the international oil services companies because it is one of the highest-quality companies in the space, and has a healthy balance sheet. He says SLB should generate $5 billion in free cash flow over the next two years, which will be used to facilitate continued buybacks.

“For the near-term investor, there is controversy around a key catalyst, and that catalyst is offshore well drilling and well-completion pricing. We’re confident that Schlumberger secures pricing power this year and margins will rise, and as a result the earnings growth that we foresee into 2013 is achievable, and therefore, the stock is cheap at the current valuation,” Gruber said.

Cellular Baseband Providers to Benefit from Shift to 4G

Posted in General Investing on February 3rd, 2012

Cellular baseband providers in the telecommunications sector are expected to benefit from the shift to 4G technology in wireless devices as capacity expansions are being pursued to achieve growth to keep up with global demand, says Craig Berger, a Managing Director at FBR Capital Markets Corp.

“We are seeing the world slowly convert over to smartphones, and at some point almost every phone will be a smartphone. As this happens, the bits and bytes of data required is going to increase meaningfully. Therefore, network capacity also needs to increase meaningfully. We have already seen this with the iPhone effect,” he said.

Berger likes Broadcom Corporation (BRCM), a cellular baseband provider. He says the stock seems to have stabilized over the past month, and he believes the company’s fundamentals are set to improve in the middle of the year. Berger also says the stock is widely disliked among investors, so it is a good time to buy.

“There are fears that they could lose the Wi-Fi Bluetooth connectivity socket in the iPhone or iPad this year. I do not believe that will happen, but that is the concern out in the market,” Berger said. “There are fears that Qualcomm’s next-generation basebands, which integrate Wi-Fi, will take away some of Broadcom’s significant Wi-Fi or combo chip revenues.”

Diversification & Limited Risk Benefit Investment Porfolios

Posted in General Investing on January 31st, 2012

Keeping a well-diversified portfolio and understanding levels of risk tolerance are key to accomplishing investment goals and objectives over the long term, says Don Reilly, Chief Executive Officer and Co-Founder of Reilly Financial Advisors.

“You have to stay diversified, and you have to keep that discipline to stay diversified, even if you’ve got one stock in there that’s really hot, you can’t be tempted to switch more money into that, simply because then you’re going beyond the risk that you originally wanted or need,” he said.

Reilly says his firm’s portfolio is approximately 20% in large growth, 20% in large value, about 10% in the small cap and 10% in medium, with international at about 15%, and cash roughly at 3% or 4%. He says the portfolio is broken down by asset class, and then within each class he has eight to 10 stocks of individual companies.

“We’ll never have more than approximately 2% to 2.5% of the portfolio in any one stock, ever. If it goes up a lot and gets way above that, we’ll cut back on it. That way you have a well-diversified portfolio; you have limited risk with each company that you own, and you will benefit,” Reilly said.

Size of Bankruptcy Key to Investing in Distressed Companies

Posted in General Investing on January 30th, 2012

With limited opportunities for investing in distressed companies right now, the size and phase of a bankruptcy are key factors for possible investments as part of a credit portfolio, says Nancy Havens, Founder of Havens Advisors, and Richard Goldstein, Managing Director at the firm.

“We try and do full-out bankruptcies. And on the bankruptcy side, there are not that many bankruptcies to do right now. We’re interested right now in the size of the bankruptcies,” Ms. Havens said. “In credit, we are in a bunch of bankruptcies and strict event situations as well as high-yield situations that are also event related.”

Ms. Havens gives AMR Corporation (AAMRQ.PK), parent company of American Airlines, as an example of an investment opportunity for her firm. She said her firm has been known to short securities of companies that it believes will go into bankruptcy and/or are going to have a fairly substantial hill to climb in the future.

“We were blessed with a new one, recently American Airlines, which was a very nice big one,” she said. “We expect the bankruptcy business to continue, and do prefer, generally, and have larger positions in these specific situations in general.”

Cost Variabilization Boosts Equipment Rental, Leasing Demand

Posted in General Investing on January 27th, 2012

Large contractors and firms in the construction space have reported revenue growth rates despite the weakened market for construction in the U.S. as their cost structure variabilization increases toward more rental and leasing of heavy equipment, says David Wells, a Senior Equity Analyst at Thompson Research Group.

“There’s going to be a lot of business that’s going to go to the rental channel because they’ve seen the services they can provide, the reliability and the fact that you don’t have to pay interest, you don’t have to pay taxes, you don’t have to maintain the asset,” he said.

Wells has a “buy” rating on United Rentals (URI) due to the company’s ability to buy heavy equipment, and rent it out to clients quickly. He says this activity by URI is another example of the level of demand in the marketplace right now.

“The interesting thing is if you look at the capex that they’ve done, United is expecting a gross capex figure of $775 million in 2011, pretty high level of capex. They’ve actually grown their overall fleet size, but they’re still able to rent out that equipment at very high rates of utilization,” Wells said. “In the last quarter, they reported utilization of 73.5% and low to mid 70s is kind of the theoretical max there.”

Wireless Usage Growth Leads to Competition for Spectrum

Posted in General Investing on January 26th, 2012

The increase in data demand and the limited spectrum availability are shifting competitive dynamics in the wireless communications space, leading carriers to engage in a mix of capex, partnerships and M&A activity to satisfy the seemingly unquenchable thirst for faster data transfers by smartphone users, says Jonathan Chaplin, Senior Analyst at Credit Suisse.

“You’ve basically got a land grab for spectrum going on right now, and there is very limited supply, and it has interesting implications for a couple of companies,” he said. “There are two options, either moderate usage or demand or increase prices. Right now, we don’t see a big demand moderation. Either the quality of service on wireless networks is going to go down or pricing is going to go up.”

Chaplin likes Clearwire Corporation (CLWR) in the near term although the company had a difficult time in 2011 from a stock performance perspective. He says Clearwire is the one company in the wireless communications space with massive amounts of unused spectrum, and he believes the company’s spectrum is going to increase in value significantly as data demand increases.

“In the case of Clearwire, we think with the breakdown of the AT&T/T-Mobile merger, there’s going to be a big increase in demand for their spectrum. AT&T is going to need more spectrum. T-Mobile is going to need more spectrum. Leap and MetroPCS, who had planned to buy spectrum, need more spectrum,” Chaplin said.