Advice to Investors

In his interview with TWST this week, portfolio manager Cory Krebs talked a little about where investors should be looking in the near future. He recommends not looking for bottom level buys in financials or  consumers now, but to go where the larger themes are. For him, it’s looking at a global demand for base materials:

 Mr. Krebs: Financials still look to be a bit of a mess. I wouldn’t bottom-fish n the finance arena trying to find some wonderful turnaround story. Even though here might be value there and the price might be below whatever the intrinsic value of that security is, it’s going to be difficult to get investors back into that space to make the price move in the short run to that value. I just don’t see a whole lot in that area unless you are counting maybe some REITs in that space. So there might be a little bit in that, but not from the true finance standpoint — not a bank or a diversified finance firm.

In addition, there is the discretionary consumer spending. Although retail same-store numbers look pretty positive today, it probably doesn’t have a whole lot of bang at this point. That is probably a little later in the cycle. The stimulus checks will help. Tax rebates will help, but it will probably be a little further out rather than anything immediate. So from that standpoint, I would say that those areas are maybe trouble points.

However, there are pockets of strength in this market. The theme that has been outlined — a global demand for base materials — is a persistent theme. It was there last year and it will probably be there again next year when I talk to you. There are companies that are well positioned to take advantage of that. I believe that investing in those securities is your best bet at this point.

For the full interview with Krebs, including an overview of his investment style and stock picks, click here.

Investment Filters

Every week here at TWST, we speak to portfolio managers who talk to us about how and why they invest the way they do. This week, Frank Martin laid out a concise list of filters companies have to go through in order for his company, Martin Capital Management to invest in them:

1. The Management Filter: “We want to make sure that their incentives are in line with ours as shareholders, that they are competent, that they are visionaries and oftentimes that they are large shareholders of the company, not because of egregious option programs but because they are founding shareholders. These are more and more difficult to find, but when we find them we really like them.”

2. The Price Filter: “I think it’s critically important at this juncture to talk about price. Given the prevailing financial and assumed-to-be economic circumstances, we need a purchase price that gives us a margin of safety that’s appropriate for the circumstance.”

3. The Understanding Filter: “We like businesses that we can understand. Many technology companies, for instance, would not pass this filter. We don’t know when the next competing product will come out of somebody’s proverbial garage and displace the leading players. All technology is subject to this kind of technological obsolescence, so it is very difficult. We stick with more understandable and, sometimes, more mundane businesses, and concentrate on buying them at prices that will give us an attractive return.”

For the full interview with Mr. Martin, including a complete overview of his investment strategy, and his value driven stock picks, click here.

Russia the Sleeping Giant

Our special focus this week is on Paper and Forest Products. We spoke with Analyst Don Roberts of CIBC World Markets, and he calls the current changes going on in paper “the biggest we have seen since the end of the Colonial era”.

One of these changes he cites in the emergence of the Russian Forest Sector:

Mr. Roberts: Russia has been a sleeping giant. In the short term, they are probably going to pull back out of the market as they implement their dramatic export tax on logs. However, the government has publicly stated that it is targeting to have over $50 billion invested in the sector between now and 2020. Now, a lot of that will have to go to infrastructure and a lot of central governments put out targets that are never met. However, they have a guy in the driver’s seat in Moscow who is relatively serious. We may not agree with how he’s doing things, but bear in mind that at the end of the day Russia has more standing timber than Canada and Brazil combined. Despite that tremendous resource, Russia ran a trade deficit in paper and forest products last year. I don’t think that that is going to last.So we are in the midst of some big-picture changes.

For the full roundtable discussion on Paper, including an overview of potential problem areas, and stock picks, click here.

India Over China

With quite significant growth over the past few years, many portfolio mangers we speak to here at TWST cite China and Chinese companies as one of their favorite places to invest. Keith Walter of Julius Baer Investment Management feels differently. To him, India is better bet as far as emerging markets are concerned:

Mr. Walter: “China is our least favorite market in Asia…India is our favorite, based on the structure of their economy. While heir growth profile is similar to China, we believe India will be less susceptible to a global slowdown since their economy’s industry mix is more focused on services. In addition, we believe that India has a stronger corporate governance culture, which can often be lacking when investing in the emerging markets.”

For the full interview with Mr. Walter, including a complete discussion of his investment strategy, and an  overview of global markets, click here.

No Slowdown in IT Spending

Our special focus this week is on Internet Services. We spoke to analyst Moshe Katri of Cowen and Company, who covers the IT services area of this space, Mr Katri had some interesting points about IT spending during the turbulent time in the economy:

• At present, there is no massive slowdown in IT spending.
• The pattern of IT spending, whether or not it does slowdown in the future, will be significantly different than the slowdown that occurred in 2001-2003.
• The reason for this is that IT spending growth has been very disciplined of late: about 2% or 3%. Compare this with the 15% to 20%, and you can see why, if there is a slowdown, it will significantly less dramatic.
• The only place that have seen dramatic slowdowns so far as place connected with the financial institutions that are facing the fallout of the subprime issue.
• Despite this, Mr. Katri points to several companies that are well positioned in this area: Infosys Technologies (INFY), Cognizant Technology Solutions (CTSH), as well as Accenture (ACN), and the service arm of IBM (IBM).

For the full interview with Mr. Katri, including a complete outlook for what’s to come in rest of 2008, and more stock picks, click here.

What happens when technology becomes obsolete?

One of the major problems that many of the portfolio managers have with investing in technology is the obsolescence factor: how is a long term investor supposed to invest a company when even their flagship product has the potential become obsolete? Ryan Jacob- whose portfolio management firm invests solely in internet related companies- talked to us about this:

TWST: What about the obsolescence factor in technology? Do you have to do research into the different technologies?

Mr. Jacob: Absolutely. It’s one of the challenges in the technology sector, in that product cycles seem to be getting shorter and shorter. It really makes it very dangerous, especially on the hardware side, to really make investments and stay with those investments. It’s probably one of the reasons why we tend to favor some of the larger players in areas where we think obsolescence could be an issue — those companies that want to tend to have the lowest costs and also the greatest economies of scale. It’s constantly something to consider, and it’s one of the reasons why we felt it’s really important to have a manager who is following this sector full-time.

For the full interview with Mr. Jacob, including a complete overview of his investment style, and stock picks, click here.

One Analyst’s Darling

Our other focus this week is on Waste and Environmental Services. One analyst we spoke to this week told us about one of the companies he covers in this space: Darling International (DAR):

“Darling is the largest renderer of animals fats and yellow grease.” The company, over 100 years old, has been listed on AMEX for 50 of those years.  According to this analyst, “Darling is immune to the fuel versus food debate due to the fact that they are servicing a product that is the cheapest commodity feedstock.” While other feedstock- corn, soybeans and soymeal- are escalating in price, Darling’s product remains a cheap alternative.

 Additionally, Darling has a competitive advantage due to the fact that their product base is waste, which continues to benefit from a very favorable operating environment. The demand from around the world, especially Europe and South America, combined with rising levels of biofuel usage, have rocketed prices to never-before-seen levels.”Given the volume of sizable amounts of feedstock, Darling remains well-positioned to capitalize on market trends.” 

 For the full roundtable on Solid Waste & Environmental Services, including an overview of the current market in this space and an outlook for the rest of 2008, click here.    

80% good news, 20% bad

One of our special focuses this week is on Industrial Manufacturing and Machinery. The news is this space, according to many analysts is a mixed bag of good and bad news. Analyst James Lucas talked us about one company that’s representative of this, IDEX (IEX).

IDEX is a company that is a “mid-cap, mutli-industry company that is in a number of markets”. While two-thirds of its business are in life-sciences, the other third is “everything from paint dispensers that you find in Home to Depot or Shwerin-Williams to the Jaws of Life that are on fire trucks. Here’s what James had to say about this company:

 “This is a company where 80% of the portfolio is doing well, and 20% has been facing headwinds lately, whether it’s OEM fire truck builds to a couple of OEM contracts in their life science business that they are winding down because of not being at the profitability levels that they liked. While Home Depot and Sherwin-Williams are growing their paint departments, some of the more  traditional hardware stores, the small mom ‘n’ pop hardware retailers, aren’t necessarily investing in new paint dispensing machines. But if you look at the 80% that is doing well, which could be anything from chemical processing to oil to water and wastewater, you see that IDEX is in a number of end markets that are doing very nicely, and this is a company that has a very strong track record on the cash flow front.”

For the full interview with Mr. Lucas, including a complete overview of this space, what’s to come, and more stock picks, click here. 

What’s your Sell Discipline?

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. 

Specialty Chemical Pick: Ecolab (ECL)

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.