Down but not Out—Bargain Hunting in the US

11/30/2007 12:00 am EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

Moderator Howard Gold, executive editor, MoneyShow.com, and his panel of international financial pros shared their reasons for the continued attractiveness of the US economy and financial markets—and recommended ways to play it.

Watch the complete workshop here…

Gold opened the discussion, telling attendees that although the US certainly faces challenges such as the subprime crisis, the shrinking dollar, slower economic growth, big trade deficits, and a decline in global stature as a result of the Iraq War, he believes that many of these concerns are overblown.

The US remains the world’s foremost economic and military power, has by far the largest stock market and economy, and is the leading source of cutting edge research. It graduates more than 1,000 PhDs in computer science annually, compared with only 25 to 50 in India. Additionally, the US is still the world’s chief manufacturer, although China is expected to catch up by 2020.
 
And lastly, Gold remarked that the housing market will pinch Gross Domestic Product growth by approximately one percentage point, but with employment remaining strong, US consumers haven’t stopped spending; they have just slightly tightened their belts. Overall, the average US household has some half-a-million-dollars in net worth.

Neil George, editor, Personal Finance, commented that the US continues to be a major destination for global cash and the dollar seems to be a bargain right now. He also noted that the current credit crunch is global, mentioning that while certain international banks have required bailouts, there have been none attached to US banks. George remarked that a substantial amount of heavy money from places like the Mideast and the Gulf regions is finding its way into companies such as WP Carey (NYSE: WPC). This company operates in the property sale and leaseback business and pays a strong dividend (more than 5%).

Marguerite (Meg) McMullen, president and CEO of New England Research and Management, concurred, saying that with the increased volatility, subprime crisis, and weak US dollar, bargain hunting in the US has never been better. She said her clients have benefited from merger mania in regional bank stocks, reaping the rewards of two buyouts last year. That continues to be the sector in which they have the most confidence.

These banks operate in small communities, which will help many of them escape the subprime problem. Additionally, they pay strong dividends and are excellent buyout targets by foreigners or domestic companies that have coffers full of cash. She cited some potential candidates such as Colonial Bancgroup (NYSE: CNB), an excellent Southeastern franchise with quality conscious management; FNB Corp. (NYSE: FNB) in Pennsylvania, which has proven itself excellent at expanding its footprint in areas in the state with weak unemployment and growing industries, and US Bancorp (NYSE: USB), which has a $55-billion market capitalization, pays a strong dividend (4.9%), and is located in Minneapolis.

Prosperity Bancshares (NASDAQ: PRSP) is probably their favorite, a top-notch takeout candidate located in Houston, is benefiting from the oil and gas boom, and is next to the second largest port in the US. McMullen’s company is looking for a takeover, perhaps within the next year.

Tom Lydon, president of Global Trend Investors, discussed the residential and commercial construction markets. He suggested that it’s not yet time to buy them, but a few he is keeping his eye on include Centex (NYSE: CTX), one of the top home builders in the country, with a great reputation for quality. The shares are now 76% off their highs and the company has reduced inventories and cut expenses. He is looking for a turnaround when the economy gets better.

In the financial arena, Lydon will be looking toward the opportunities in companies like Bank of America (NYSE: BAC), which is down 41% but recently made a $2-billion investment in CountryWide Financial (NYSE: CFC), for which the jury is still out. The bank is also spending some $6 billion to support one of its funds that is involved with subprime entities. Another possible investment candidate is Citigroup (NYSE: C), [more than 40%] off its high, a bank that recently received a capital infusion to shore up its balance sheet.

Lydon also said that currently, we are coming into a critical time for retailers in the US with the big questions of how much consumers will spend for the holidays. Lydon suggested that one company to watch for future prospects might be Home Depot (NYSE: HD), the big home improvement retailer.

Gold wound up the discussion by recommending areas of the US market that focus on large, big-cap growth stocks, which underperformed in the last few years but which have done better recently. Gold noted that these stocks would provide some protection even if the US were to go into a recession.

For UK investors, he suggested a couple of highly-rated funds, with low expenses: Gartmore US Opportunities Fund and ThreadNeedle American Select Institutional Fund. (The institutional classes of those funds don’t have sales charges, according to Morningstar.) For US investors, he likes T. Rowe Price Blue Chip Growth fund (TRBCX) and two ETFs, the iShares Russell 1000 Growth Index fund (NYSE: IWF) and Vanguard Growth ETF (AMEX: VUG).

During the question period, one attendee asked about Sears Holdings (NASDAQ: SHLD). George replied that this “retailer” has turned into a real estate play, like a publicly traded hedge fund. However, before diving in, he would like to see full disclosure of what exactly is on their books. His feeling is that there is probably less to be concerned about than what the market is thinking. Gold added that the company is now run by Eddie Lampert, a well-known hedge fund manager who spearheaded a turnaround of discount retailer Kmart, and then merged that company with Sears.

The panelists also responded to a question regarding real estate investment trusts (REITs). Gold observed that he doesn’t think the fundamentals will be good for REITs for quite some time. George noted that investors might look toward foreign regions that are receiving inflows that used to go into US real estate. He also recommended “pass-through” type REIT structures that are resource-related, such as timber entities, such as Canadian-based TimberWest Forest (TO: TWF-UN).

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