Auto Dealerships: What’s the interest?

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.

Domestic Oil Services Outlook

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.

Food Pick: Chiquita

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.

What’s Your Sell Discipline?

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.

Apparel Pick: Aeropostale

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.

Geller’s 5 Picks

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.

Food Inflation in 2007

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.

A Little Ray of Hope

With all the gloom and doom on Wall Street, and the Feds trying to get an economic stimulus package passed as soon as possible, what’s an investor to do? Portfolio Managers Lou Holtz and Yossi Lispker of Engemann Asset Management, an investment firm specializing in small and micro cap stocks, have an idea:

Mr. Lipsker: I think there’s opportunity. There’s always opportunity in the market. If something goes wrong in one area that just means that it opens up an opportunity somewhere else. Our goal is to go out and find opportunities to make positive returns for our clients.   

Here’s a few of Lipsker and Holtz opportunities for 2008:

1.   LKQ Corp. (LKQX)- ”This company is a dominant provider of salvaged parts and recycled parts for the automotive market… LKQ has done a good job of buying up smaller shops and putting together a national network for what had been a very fragmented market. There is a major benefit to the new, larger size. Due to their broad reach, they are able to identify the parts they need and thus are smarter buyers of parts. This leads to better inventory turnover, which is a key component of return on invested capital in this industry.”

 

2. Cogent Communications (CCOI) – “They’re a provider of broadband Internet service to enterprises. They have one major key advantage and it’s called price. They are the cheapest provider out there by about 70%, something like $10 per megabit is their price, I think, and I don’t know that you can get anything for less than $15 or $20 from some of the big providers like Verizon (VZ) and AT&T (T).”

 

3. Ramtron (RMTR)- It’s been in business since the 1980s and it’s the biggest provider of what’s called FRAM memory. FRAM memory is an alternative to other memory providers such as Flash and what’s called EEPROM. It’s a non-volatile semiconductor memory, which means you can write and rewrite to the semiconductor chip and it can save the data even when the power is off on the device. Ramtron’s customers include the metering and automobile industries where there is a need for semiconductor chips that can take in data and store it even when the power is turned off…there are not really any competitors to Ramtron in the FRAM space. In its little niche area of the world, it dominates what it does and we like that fact.”

For the full interview with Mr. Holtz and Mr. Lipsker, including a complete overview of their investment process, from buy to sell, and more stock picks, click here.   

Clashing Steel

In talking to analysts about our special focus on steel this week, we came across two analysts who had very different perspectives about where the steel space is headed in 2008. Dana Guido of Lehman Brothers Inc., while seeing some positives in 2008, is still neutral on steel while Mark Parr of KeyBanc Capital Markets sees the possibility of dynamic opportunities in steel in 2008. Mark Parr, Keybanc Capital Management:

“If you look at our current pricing levels in the global context, US pricing right now for flat-rolled products is lower than it is in China and it’s significantly lower than it is in Southern Europe. So there is plenty of room for pricing to move here in the US without any economic pickup and if the economy continues to stumble along, we are going to see higher prices emerge in 2008 and stronger volume from the mills. If we do get an economic pickup in the first part or, say, toward the middle of 2008, this could  become a very, very dynamic situation for the domestic producers.      

Dana Guido, Leman Brothers, Inc.:   

“We are neutral on steel for 2008. While the supply side looks good with low inventories and low imports, we have concerns on the demand side. Lehman Brothers is forecasting US GDP growth to average about 1.9% in 2008, down from 2.2% in 2007. In addition, our autos analyst is expecting a 5% decline in auto production in 2008. So while we believe that supply fundamentals can support steel prices at current levels, soft demand may diminish service center restocking and limit price increases.”    

For the full Steel report, including interview with analysts from a wide range of perspectives and stock picks, click here.  

Casual Dining Feels the Pinch

Moving back to our focus this week on Restaurants, analyst Jeff Bernstein spoke to us a little bit about the crunch in casual dining restaurants. Unlike quick service restaurants, casual dining restaurants aren’t franchises, and handle all operating costs themselves. Mr. Bernstein details how those costs have changed in the last year:

TWST: You mentioned the cost side of the equation. How bad is it?

Mr. Bernstein: We’ve seen double-digit increases in a number of core commodities. The biggest increases have come from grain, wheat and cheese prices, which obviously impact a lot of our sandwich makers from the bread side and pizza players from the cheese side. Across the board, we’ve seen increases on center of the plate commodities such as beef and chicken. It doesn’t seem to be abating as quickly as we would like, so the companies are forced to be more aggressive in terms of menu pricing to help to offset some of those cost pressures.

For the full interview with Mr. Bernstein, including a complete overview of the current market climate in the restaurant sector, and stock picks, click here.