Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
05/27/2005 12:00 am EST
"My outlook can be summed up in one sentence: it’s better than you think," says Richard Band who has been at The Money Show Las Vegas for 15 years and has deservedly been one of its most popular speakers. Here, the contrarian offers his favorite controversial buys.
"The period from 2000-2002 was a searing experience for investors. Ever since, investors have been looking over their shoulders, waiting for a bogeyman. Folks are afraid that there is a wolf at the door. I can tell you that someday there will be, but it isn’t right now. I think we have either seen the lows or are very close to it. It won’t be straight up from here, and we will see ups and downs through the summer months and into the early fall. But I believe we will end the year on the upside and market weakness should be viewed as an opportunity. There will be some event, such as a turn in interest rates, that will suddenly occur in the last few months of the year and all of a sudden, the folks who are sitting out there with long faces and glum looks, are going to say, ‘Wow, this isn’t so bad after all. I should be buying stocks.’ But the truth is that you should be buying them now.
"In this type of environment, you have to discipline yourself to do two things. The first is to buy the dips, which is where we are right now. A 5%-7% pullback in the S&P from its yearly highs is my definition of a good dip. Second, focus on stocks that pay good dividends. Going back a hundred years, dividend-paying stocks outperform those that don’t pay dividends. One way to invest in dividend-paying stocks is to simply buy the Dow Jones Select Dividend Index Fund (DVY NYSE). If you invest in nothing else over the next 10 or 15 years, invest in dividend-paying stocks. That’s the way to go. This fund owns 100 of the highest-yielding stocks on the listed US exchanges, screened by Dow Jones for certain quality criteria.
"Meanwhile, among individual stocks, there is really a lot of great value out there, particularly among issues that have some controversy surrounding them. My current favorites all have some controversy attached to them. If you are going to make money in this market, and over the next few years, you are going to have to be prepared to buy when conditions are somewhat unsettled and there are some controversial headlines out there.
"The first one I would be buying at this time is Wal-Mart (WMT NYSE). The stock is very depressed. This is a company that is now out of favor due to doubts about whether the company can continue to grow at its regular pace here in the US. But in my view, the reason to buy Wal-Mart is not for its domestic growth. Rather, I would look toward growth in Asia, specifically in China. I think over the next five to 10 years, they will bring American retailing techniques to China and that will be its next great growth phase. Meanwhile, the company is paying a decent dividend, which could be increased. They are buying in stock and the shares are trading at a ten-year low based on its forward p/e ratio.
"Another great value is Morgan Stanley (MWD NYSE), which you've been reading about in the press, as five of their top officers have left the company. You might say ‘Oh my goodness, isn’t that going to bring them down.’ The fact of the matter is that the investment banking business is full of talent. The people who left the firm have already been replaced from within and if others are needed, that can be done very easily. Investors have worked themselves into frenzy over the loss of a few people in executive management. Meanwhile the company has a great franchise, the stock pays a decent dividend, and the shares are selling at only ten times earnings.
"Another favorite right now is Berkshire Hathaway (BRK.B NYSE), which has also been drawn into the AIG insurance scandal. Berkshire, of course, is Warren Buffet’s holding company, and the firm is sitting on $44 billion worth of cash. The stock is at about the deepest discount to the estimated value of its parts that it has sold at in the past 15 years. It’s selling well below its breakup value. And as Buffett said at its most recent annual meeting, there’s a chance they may start paying a dividend. I think that would be a great boost to Berkshire. I’d recommend the class B shares, which trade at one-tenth the price of the class A shares.
"Another controversial stock I like is within the technology space—Hewlett Packard (HPQ NYSE). The thing I like about the company is that they fired their CEO. While it seems counter-intuitive, it’s often a good sign when a CEO is fired, because it shows recognition by the company that a strategy has not worked out. In this case the merger with Compaq turned out to be an ‘underwhelming’ event. I think that merger will be undone sometime in the next year or two under the new management. In my view, the stock will be worth $30 when it is sliced and diced into different pieces."
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