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Stock market recovery in 2009?
Thursday December 04, 2008

NEW YORK -(Dow Jones)- Asked to describe his performance this year, value manager Bill Miller said that "terrible," "disastrous" and "awful" are words that come to mind. But Miller is expecting better for himself and other value managers in the coming year.

It looks as if the "bottom was made" in the stock market earlier this year, both from a psychology standpoint and "from what we've seen in the credit markets," said Miller, chairman and chief investment officer of Baltimore-based Legg Mason Inc.'s (LM) Legg Mason Capital Management Inc.

If we aren't going to have 20% unemployment and gross domestic product down 15% or 20%, historical odds favor the market being up well over 20% in the next year, Miller said at the money manager's year-end briefing.

"Panic is really hard to sustain," said Miller, so the worst case for next year "is the market just moving sideways."

Any recovery from this year's slaughter, however slight, would likely be a welcome respite for Miller. His Legg Mason Value Trust (LMNVX), which outperformed the S&P 500 for 15 consecutive calendar years through the beginning of 2006, is down more than 59% this year through Tuesday and more than 12% over five years, according to Morningstar Inc. In comparison, the average large blend fund has lost about 42.4% this year through Tuesday, and is down about 3.3% over five years, Morningstar said.

"We have performed far worse than I would have predicted we would," said Miller. "We have had maybe a tougher time than most value investors, but few are doing well because value spreads have widened." When those spreads start to narrow, value managers should do very well, he said.

Miller said he has seen characteristics of late that are consistent with a market bottom, such as a series of lows over a course of a few months. No one knows for sure whether those signs mark the end of this bear market or just a bear-market rally, he said. But Miller echoed Warren Buffett, saying, "If you can buy U.S. equities at these prices, you are likely to do well over time."

Value Trust is experiencing redemptions, though they have been "pretty steady" over the past year or so, meaning that they haven't accelerated or declined over the period, Miller said.

The fund is pretty much fully invested, though its cash position is currently higher than its normal "1% or so," he said. "It's not like we are sitting out there with 30% or 40% in cash like a lot of hedge funds are."

What he's trying to do and what he believes other value managers are trying to do is to "keep moving your capital to where it can give you the best risk- adjusted returns over whatever time horizon," Miller said.

Since the end of the second quarter, there's been "a pure scramble for liquidity," he said. "People sold without regard to value." As a result, quality is very cheap now, Miller said.

The only place where relative values aren't as good is the consumer staples sector as well as companies regarded as bulletproof, such as Wal-Mart Stores Inc. (WMT) and Johnson & Johnson (JNJ), Miller said. Colgate-Palmolive Co. (CL) is a good example, he said. He noted that at one point a few days ago, Colgate traded at a higher price/earnings multiple than Google Inc. (GOOG), likely because Google is younger and less well-known. Google was one of Value Trust's weakest performers in the quarter ended Sept. 30, according to a regulatory filing made Tuesday.

The Value Trust fund currently holds Time Warner Inc. (TWX), which closed at $ 9.11 Wednesday, and Citigroup Inc. (C), which closed at $7.82, but nothing else in the single digits, Miller said.

The fund took a stake in credit-card company American Express Co. (AXP) in the third quarter, according to the filing Tuesday. "You can buy now the No. 1 companies in a wide variety of industries" very cheaply, Miller said when asked about that purchase.

Value Trust also added positions in Bank of America Corp. (BAC), EMC Corp. ( EMC), Microsoft Corp. (MSFT), NYSE Euronext (NYX) and 3M Co. (MMM) in the third quarter, according to the SEC filing. Among the stocks the fund sold were American International Group Inc. (AIG), Countrywide Financial Corp., Expedia Inc. (EXPE), Freddie Mac (FRE), Goldman Sachs Group Inc. (GS) and Sprint Nextel Corp. (S), according to the filing. Bank of America bought Countrywide in July.

Among Value Trust's top 10 holdings as of Sept. 30 were Amazon.com Inc. (AMZN) , Citigroup, Sears Holdings Corp. (SHLD), General Electric Co. (GE), JPMorgan Chase & Co. (JPM) and Eastman Kodak Co. (EK).

Asked how far along we are in the delevering process, Miller made it clear that things can change quickly.

"There is a huge amount of cash sitting out there on the sidelines," he said. "To the extent that that cash starts coming in, delevering will essentially be over."

Miller said the Federal Reserve should "buy everything in sight" because "the taxpayer is going to make a killing." There is virtually no investor who doesn't believe there is value in the market, he said.

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Top 10 stocks for 2009
Thursday November 27, 2008
Stock #1Jacobs Engineering (JEC)

Jacobs Engineering (JEC) provides construction services for industrial, commercial and governmental customers around the world. When the U.S. economy hit a brick wall and brought the world to a standstill, companies like JEC suffered in the market.

After hitting its 52-week high of more than $100 at the start of the year, JEC now trades for under $30 per share. The company held up well for the first half of the year, but the credit crisis, as has been the case across the entire spectrum, was too much to endure. Investors sold en masse believing that a deep recession or worse was upon.

Well, that may be, but not if our new President has anything to say about matters. Riding a white horse with bags of cash, the new American administration has all but promised big spending in order to prevent a dangerous deflationary spiral. JEC will be a big beneficiary of stimulus spending and a bargain at these prices.

Stock #2: General Electric (GE)

Any company with exposure to the credit markets has been absolutely crushed in this market. That is certainly the case with General Electric (GE).

Already struggling to regain its footing, the company lost nearly one half of its market capitalization over the last two months. As a good friend of mine says, there is no need to make things difficult in a portfolio. There are so many blue chip companies that have lost substantial value and yet offer compelling growth potential. That is the case with GE.

Add in a dividend yield of more than 8%, and investors get paid to wait for a more normal economic business cycle to kick in. Even the Great Depression ended at some point. The same will happen here. Buying GE at these prices is too good to resist.

Check out this Wall St. Network interview w/ GE's Marketing Manager, Steve Peterson. (2008)Stock #3: Chesapeake Energy (CHK)

When markets fall rapidly, investors that use leverage can be burned. Margin calls have certainly added to the volatility of the recent bear market, but one would never expect the CEO of a company to be forced to liquidate an entire position as was the case with Chesapeake Energy (CHK).

Bad enough that the entire oil and gas complex was collapsing under the weight of overleveraged speculation, CHK lost more than 50% of its value helped in part by margin selling by its CEO. Wise investors will recognize that such selling has nothing to do with the future prospects of CHK. Natural gas can be expected to play a significant role in any alternative energy program. CHK will benefit as a result.

 

Stock #4: Pulte Homes (PHM)

Tired of people calling a bottom in the homebuilding sector? Me too, but this time may be different. I'm calling a bottom in the homebuilding sector.

Demographics alone are creating pent-up demand that will surely help the homebuilders going forward. So too will subsidized mortgages that may be coming in the near future. By that I mean 30-year fixed rate loans at 4% or so. Such a move would do wonders to spur buying in the market. That buying will eat up inventory that is currently hurting builders.

PHM is trading near its lows again after rallying strongly. An earlier call for the bottom in the sector may have been too early. That is not the case today. I'd be a buyer of PHM.

Stock #5: Tesoro Petroleum (TSO)

Volatility is a killer in the oil refining business. With oil prices fluctuating like a yo-yo on steroids, the entire oil refining sector has been in the dumps in 2008. That can be expected to change in 2009.

One of my favorite names in the space is Tesoro Petroleum (TSO). Its shares have dropped by more than 85% over the last year as oil prices became the victim of excessive and highly leveraged speculation.

If the new administration has the nerve to limit leverage in the oil pits, the refiners stand to benefit greatly as oil prices would be much less volatile. The capacity issues of the last few years have not changed. It has been quite some time since a new oil refinery was built, and that lack of capacity will bode well for TSO.

 

Stock #6: Chicago Bridge and Iron (CBI)

Huge increases in oil prices fueled project and infrastructure spending for the entire industry. Such a state benefits firms like Chicago Bridge and Iron (CBI) that specializes in building huge projects for the industry. The problem for CBI is that lower oil prices results in reduced spending for capital projects. Its shares have fallen off a cliff since oil peaked in July.

Now selling for slightly more than $5 per share, CBI is incredibly cheap. Though lower, oil prices are still at a relatively high level. Big infrastructure projects are still under way according to the major oil and gas companies. Even better for CBI is the movement to natural gas as a key to alternative energy plans. Liquid natural gas terminals can be expected to be in high demand as a result. I love CBI at these prices, and you should, too.

Stock #7: Mosaic (MOS)

One of the hottest sectors at the end of this bull market was fertilizer companies. Demand for food and agricultural needs across the globe took hold of stocks like Mosaic (MOS). The momentum crowd really did a job here. In the last year alone, MOS nearly tripled in value only to lose all of the gains and then some. The stock is down nearly 85% from its peak.

I call the action here forced hedge fund selling. Redemptions at the huge funds result in sales of perfectly good stocks like MOS. While the stock did indeed go higher than it should have, I am convinced the fall has been too severe. This company makes good money that shows no signs of abating. In fact, demand for ethanol should increase under the new administration with ties to agriculture. I would take advantage of the forced selling in MOS and establish a position at these prices.

Stock #8: Archer Daniels Midland (ADM)

The corn craze collapsed earlier this year as negative consequences of ethanol production came to the fore. The spotlight focused on the fact that corn production did little to reach its stated goal of reducing carbon emissions. Rapid increases in farming for corn resulted in water and energy use that exceeded any benefits, or so goes the argument against ethanol. When oil prices collapsed, that was the excuse that traders needed to dump the agriculture play. Archer Daniels Midland (ADM) lost half its value in the carnage.

Unlike the fertilizer play, ADM, though it had enjoyed solid growth, exhibited more Rational tendencies with respect to its valuation during all of this craziness. As such, losing half its value in this bear market is an opportunity for investors. I'm jumping on board making ADM one of Top 10 for 2009.

Stock #9: Transocean, Inc. (RIG)

The drill, baby drill crowd did not win the election, but fear not oil drilling is not disappearing anytime soon. Although pressure for alternative energy will increase in the near future, solutions are a long way off. In addition, there is reason to be optimistic that the Obama Presidency will reach across the aisle in regard to all issues. That means a prior willingness to open offshore drilling may still be on the table. If so, companies like Transocean, Inc. (RIG) will do just fine thank you.

Oh, and don't forget OPEC. Do you really think they will let go of $100 oil so easily? Think again. Crude is still the energy necessity of a growing economy. When our economy recovers, and it will eventually, owning RIG will be a wise decision. I think that time starts in 2009.

 

Stock #10: Fluor Corporation (FLR)

The President-Elect announced this past weekend a plan to add 2.5 million new jobs during the first two years of his time in office. Focusing on roads, bridges and schools that have been neglected for many years, a rebuilding boom of epic proportion appears to be in the works. This should not be a surprise given that the current crisis is being compared to the Great Depression.

I guess a big crisis requires a big government solution. No matter debating the political merits or lack thereof of such a response. Big spending is coming, and heavy construction-oriented companies like Fluor Corporation (FLR) will be huge beneficiaries. Of the 10 stocks in this gallery, FLR may be the one to buy before the end of the year. In fact, of the 10 on the list, this one is my favorite.

Check out this Wall St. Network interview with Fluor's CFO, Ken Lockwood. (2005)

  

Read the article as it was originally published, here.  

 

Comments: 1  Rating: 2  0
Small Cap Picks from Morningstar
Friday November 21, 2008

The following article was published on 11/17.  

As we discussed in previous articles, one of the best and easiest ways to screen for new investment ideas is by monitoring the activity and holdings of successful fund managers. The aim of Morningstar's Small-Cap Superstars is to combine some of the best ideas from our favorite small-cap fund managers with those of our fellow analysts here at Morningstar.

Our Methodology 
As a reminder, deciding which stocks to highlight as picks is pretty simple: First, the stock must have a Morningstar Rating of 5 stars, and second, it must be held by at least a handful of the 25 small-cap fund managers on our watch list (see below). We also consider the size of the holding in the respective funds as well as the funds' recent trading activity as ways to further refine our selection process.

Our Two New Picks 
After running our screens and analyzing the respective merits of the Superstars' holdings, two stocks met our criteria. Both stocks trade at substantial discounts to our estimates of their fair value and each is held by five of our favorite small-cap fund managers. In addition, we believe that these companies are in solid financial shape and that they benefit from strong competitive advantages.

Our first pick is narrow-moat rated Resources Global Professionals (RECN). The project-based consulting firm provides experienced temporary labor, specializing in complex projects. Backed by a highly competent workforce, Resources has been able to establish and build strong relationships with its clients, including 84 companies in the Fortune 100. Stock analyst Vishnu Lekraj believes the quality of the firm's projects and temporary workforce feed upon each other to form a strong network, making it a preferred provider for both businesses and workers. Also, unlike a typical consultancy, Resources employs its workers on a project basis and pays them an hourly rate instead of an annual salary, which allows for more flexibility in meeting its clients' needs. Lekraj also notes that the firm delivers very high returns on invested capital. Risks include clients putting off projects in these difficult economic times and a shrinking pool of highly experienced and skilled labor as baby boomers approach retirement.

Our second pick is wide-moat rated Landstar System (LSTR), which has established a broad asset-light freight shipping network across North America. According to stock analyst Keith Schoonmaker, the cost and time required to replicate Landstar's extensive system (including 1,397 agents, 25,000 truck broker carriers, and 9,000 Landstar-dedicated drivers) serves as a barrier to entry that discourages new entrants to the national truck brokerage market. The company benefits from a strong network effect, whereby Landstar's huge roster of shippers and truckers makes a relationship with Landstar more valuable to both parties. Landstar's low asset intensity enables the firm to deliver very high returns on invested capital and its independent contractor broker model minimizes fixed costs. Risks include exposure to the cyclical trucking market as well as traffic accidents. 

 

Comments: 4  Rating: 3  0
Stocks I'm Following
NameSymbolLastChange% ChgOpenHighLowVolume
Avantair IncAAIR0.95-0.10 -9.52%1.071.070.9029,100
Action Prods Intl IncAPII1.21+0.03 +2.54%1.251.331.1040,500
Red Point Bio CorpRPBC0.100.00 -+0.00%0.100.100.1071,325
N.a.ANRGF0.42-0.09 -17.29%0.460.460.4212,000
Flame Seal Prods IncFLMP0.31+0.03 +10.71%0.310.310.311,000
Yongye Biotechnology Intl InYGYB2.00+0.48 +31.58%2.002.001.9911,000
Jetblue Airways CorpJBLU5.44+0.26 +5.02%5.055.644.916,217,099
Eastman Kodak CoEK6.95-0.24 -3.34%7.097.476.755,452,202
Jpmorgan & Chase & CoJPM31.08+0.83 +2.74%29.8132.9029.7580,726,595
General Electric CoGE17.55-0.58 -3.20%17.8018.2117.12112,163,192
My Rookie Stats* View Rookie Portfolio
Total Equity69,001.86 Total Return-30.998
Cash69,001.86 Daily Gain/Loss0.00
Daily Return0.000 Daily Standing427
Weekly Return0.000 Weekly Standing445
Monthly Return0.000 Monthly Standing412
*Based on previous market close data. Last update: December 04, 2008
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