Battipaglia's Bullish Bets
08/20/2004 12:00 am EST
Joe Battipaglia, chief investment officer at Ryan Beck & Co., is a formidable force, both in stature—he's 6'7"—and reputation. He has long been one of the most popular speakers at Money Shows. Here's he offers his market outlook and some of his top bullish picks.
"The stock market is behaving badly. There is guarded caution ahead of an election season and the upcoming conventions have been reason for concern and heightened vigilance following the Madrid train bombings earlier this spring. Beyond the near-term ‘doom and gloom’, however, there is another point of view to consider. It is never easy and it seldom feels good to buy into a declining market. Nonetheless, the best opportunities can be found when prices are weaker. In the past several weeks, we have witnessed a dramatic sell-off in equity prices brought about mostly by reaction to fear and uncertainty. The fundamental underpinnings of the economy and markets, however, appear intact. The quarter’s earnings figures have been dramatically positive (S&P 500 operating earnings up 30%) and the economy continues to produce more jobs and higher incomes.
"There has, however, been a significant and measurable increase in the level of anxiety quotient. We now estimate that investors are pricing in the highest risk premium seen in the market since the beginning of the war in Iraq. In short, the economic fundamentals that drive stock price performance are in good stead and should eventually yield higher equity valuations. The palpable nervousness surrounding a heightened terrorism watch and other geopolitical issues may well prove to be temporal and not translate into changes in behavior. In time, we would expect economic reality to assert itself on asset prices and, hence, would use weakness as an opportunity to commit capital in a portfolio.
"In the big-cap stock category, we like Proctor & Gamble (PG NYSE). Among consumer discretionary stocks, it is an ideal candidate for a portfolio. They reinvent their product lines, they add where they have holes, and quite frankly, I think the earnings are strong.
"In the REIT category, I like Pan Pacific Real Properties (PNC NYSE), Health Care Properties Investors (HCPI NYSE), and Weingarten Realty (WRI NYSE). I think they are an excellent substitute for traditional fixed income portfolio. The dividend streams will rise as this economy succeeds, providing the ultimate hedge against inflation. Weingarten in particular, offers geographically diverse properties, and it’s an ideal equity-based portfolio for a total return investor
"In the retail sector, look at Gymboree (GYMB NASDAQ), Joseph A. Banks (JOSB NASDAQ), and Bakers Footwear Group (BKRS NASDAQ). I also like Neiman Marcus (NMG.B NYSE). I think in the specialty and high end of retailing there has been no cessation of appetite for these products. Recent quarterly results did not move the stock because of general market concerns. I think in the coming quarter we will again see strong relative performance, which will attract investors to a high quality retailing name like Neiman Marcus.
"Lo-Jack Corp. (LOJN NASDAQ) makes a homing system for identifying automobiles. These products are becoming more widely accepted; they have a more dynamic approach to selling to new auto purchasers. They are also looking to address the truck fleets that are out there. From the point of view of homeland security, identifying where trucks are, may be an important market. Lo-Jack would be among the small-cap names I would recommend."
"As the economy improves and the industrial companies do better, I think some of the human resource companies—suppliers of individuals who do accounting, etc.— will also improve. Two names in this market are CDI Corp. (CDI NYSE) and Navigant Consulting (NCI NYSE)."
"Let’s talk about financial services. I think that while large banks are not as attractive now as their smaller constituents, there is value to be had in names like Citigroup (C NYSE) and Merrill Lynch (MER NYSE), which have a bright future based in part on the fact that capital markets have reopened for them, they are getting past some of the issues that they needed settled, and they now have a better profile for their earnings. But among smaller banks, which is a great place for investors, I would look at Synovus (SNV NYSE), Zion Bancorp (ZION NASDAQ), Sovereign Bank (SOV NYSE), Independence Community Bank (ICBC NASDAQ).
"Among big name technology stocks, the one that I would recommend for you to consider is Hewlett-Packard (HPQ NYSE). This is a different kind of animal. What you are paying for now is only their printer and the supply business and you are getting their computer business for free. To the extent that they can become competitive against Dell, I think there is value to be found in Hewlett-Packard shares and we may see the stock moving to the higher 20s.
"Another name among big tech stock that is getting slaughtered regularly is Nokia (NOK NYSE). This stock is becoming more and more interesting to me. At some point, value investors will circle around this name. The firm has introduced a couple of changes to the product profile to stem the loss of market share. It’s trading down to levels that we have not seen for a long time, and this may very well create a buying opportunity for investors."