Big-Gain Hunting

02/08/2008 12:00 am EST

Focus: STOCKS

Michael J. Cuggino

President and Portfolio Manager, Permanent Portfolio Family of Funds, Inc.

Jack Hough, associate editor of SmartMoney.com, moderated a panel of market pros who are scouring the globe for bargains that offer the highest potential returns.

Hough began by asking the panelists, in light of the recent market volatility, are stocks now a bargain?

Michael Cuggino, president and portfolio manager of the Permanent Portfolio Family of Funds, noted that the time to buy is when there is blood on the streets.

Cuggino stated that his company focuses on long-term investing, seeking companies that are market leaders, have proven management teams, one or more catalysts that drive value, active R&D, pricing power in the marketplace, and the ability to reduce or control fixed costs.

Cuggino expects slower growth in both the second and third quarter, but anticipates a boost when the Federal Reserve’s rate cuts kick in during the second half of 2008. He believes that some of the negativity in the market is excessive, especially when he looks at the growth in corporate earnings, minus the financials. Additionally, consumer spending has slowed but has not stopped.

Cuggino noted that emerging markets still hold promise with their stellar growth, although the valuation is on the high side, while the US is relatively cheap right now on a price/earnings basis. Nonetheless markets are still under pressure due to the credit and housing crises.

Bill Donoghue, chairman of W.E. Donoghue & Co., made the case for emerging market exchange-traded funds (ETFs), particularly in Asia. With a much larger population than America and tremendous growth rates, Asia is the driving force in the global market place. And although Asian markets have corrected numerous times in the last five years, they have subsequently hit new highs each time.

Donoghue said that buying and holding the Standard & Poor’s 500 stocks is no longer a valid strategy. He urged attendees considering US investments to learn how to sell short, or at the very least leave substantial resources in cash.

Ron Muhlenkamp, founder, president and portfolio manager of Muhlenkamp & Company, remarked that five years ago, the rest of the world was much cheaper than the US; now they are roughly on par. He also noted that investors interested in spreading out globally should remember that in places like China, the rules are whatever the Communist Party says they are. Therefore, he thinks it’s safer and smarter to invest in US companies that are selling their products globally.

Muhlenkamp is not overly concerned about a recession, saying that it’s really just a part of the normal cycle, which will be followed by another growth cycle. Now we have the unwinding of leverage firms built up over the past few years. Still, he said, many US stocks are now bargains.

Michael Williams, global strategist of Tocqueville Asset Management, is a value/contrarian investor, a self-described bargain shopper. His company asks, “What does everyone hate today?” and invests accordingly. They have a long history of doing what seems most uncomfortable and doing well in the end.

Hough then asked panelists for some specific ideas.

Cuggino likes gold as he expects worldwide demand to continue. Investors also can use it to diversify their portfolios and guard against inflation. He also likes the energy sector, particularly commodities, but does expect some cooling off if worldwide economic growth slows.

His managers like biotechs and pharmaceuticals that have more focused product lines and business plans, including Genentech (Nyse: DNA), Gilead Sciences (Nasdaq: GILD), and Amgen (Nasdaq: AMGN). Even some financials such as Morgan Stanley (Nyse: MS), Bear Stearns (Nyse: BSC), and Goldman Sachs (Nyse: GS) are currently in their holdings. For investors with strong stomachs, homebuilding shares like Toll Brothers (Nyse: TOL) and Ryland Group (Nyse: RYL) may be worth a look. And lastly, worldwide infrastructure players such as Fluor (Nyse: FLR) look interesting.
 
Donoghue suggested exchange traded funds as a better alternative than mutual funds, specifically recommending short-selling ETFs from Barclays and Rydex, as well as foreign currency money markets through Everbank.
 
Muhlenkamp noted that corporate average returns on shareholder investments are running around 13% to 14%, so his company looks for businesses with returns on equity (ROE) beating that level and whose price/earnings ratios are lower than their ROE. He prefers stocks over ETFs, since you can’t pick and choose the companies in the ETFs. Muhlenkamp noted that he expects stocks to return 8% to 10% annually over the next couple of years.

In the last six months, his managers have purchased Cisco (Nasdaq: CSCO), Caterpillar (Nyse: CAT), Amgen (Nasdaq: AMGN), Oracle (Nasdaq: ORCL) and Corning (Nyse: GLW).

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