Hazard and Outrage
05/27/2005 12:00 am EST
While always aware of the risks, Joe Battipaglia is unabashedly bullish on corporate America, and sees great opportunity for those with a long-investment horizon. Here, he looks at the psychology behind today’s markets, and highlights some favorite ideas.
"We’ve all had the experience where one day we walk in and see something and say ‘That’s it’ and we come to grips with how it works. A recent book on social phenomena describes risk as 'hazard plus outrage.' In other words, the actual hazard is the event— high energy prices, terrorist attack, recession, etc. But the outrage is the noise surrounding it that is multiplied by such things as the Internet and the real time world that we live in. Now sometimes, we don’t see the hazard because the 'outrage' feels good. In the late 1990s when p/e’s were at 100 times, we knew that there was risk in stocks. But it felt so good to have momentum that investors talked about the good times going on forever. I’m as guilty as the next guy. So with no apparent outrage, the risk was perceived to be low.
"Let’s look at more recent phenomena, where there is hazard, but the outrage is very high. Oil prices. You’re paying $2.25 for a gallon of gas. That is outrageous and investors believe the economy is going to roll over and play dead. However, we don’t consider that oil prices are cheaper now than they were 20 years ago. And nobody is mentioning that although we’ve had higher energy prices for a year and a half, the economy is still growing at a rate of over 3.5%. You can use this analysis for every hazard that is coming your way. But in my opinion, while we are seeing outrage today, we are not facing a real hazard for investors.
"So where are we? The economy is growing. Corporate profits are up 9.5% or so for the quarter just ended and will continue to expand by 9%. Interest rates are going up very slowly to reflect the recovery in the economy— no more, no less. And if Alan Greenspan’s ‘hazard’ is pricing power in the economy, I’d say let’s have more of it. We’ve never had an inflationary spiral where pricing power was the villain. We have a good economy and we have an S&P 500 that is right now undervalued by about 12%, which gives a broad based portfolio of large-cap stocks a great chance to make money. Overall, the US stock market will have good year this year.
"Green Mountain Coffee Roasters (GMCR NASDAQ) and Capital Title (CTGI NASDAQ) both trade fairly thinly so I would caution investors not to go stampeding into these stocks. Green Mountain is a wholesale coffee company, with premium brands that is going national with its product. They also sell a machine for individual coffee brewing, which has more applicability in the commercial marketplace than for homes. But due to the accounting treatment of their investment in this product, they can deduct it from their earnings. I won’t bore you with the details, but I believe that earnings are understated by 15 to 20 cents per quarter. It’s a very interesting growth company. Meanwhile, Capital Title, just as its name implies, provides the full panoply of services to the commercial and residential market space when it comes to real estate transactions. I think they are building a very large company and as a result creating a lot of value for shareholders.
"In addition, North Fork Bank (NFB NYSE) is ‘plopped’ right there in the asset capital of the world, which is New York and its environs. In terms of core deposits, loans, you name it, they are growing rapidly, taking market share from the behemoth banks that just don’t understand what it means to offer customer service anymore. Weingarten Realty (WRI NYSE) is a very consistent grower, operating small strip shopping centers throughout the US. It offers consistent dividend growth; the current yield is roughly 4.5%. I think it’s a great real estate portfolio to have, even in this environment. Lastly, I would suggest Procter & Gamble (PG NYSE). The company recently acquired Gillette, and what that will do for that brand is what they have done for their own brands— and that is to reenergize the products, accelerate growth, and create bigger margins. This is a big-cap global name, which should see a lot of future dividend growth."