Today the market has been up and sideways basically, perhaps a little more defensive this afternoon,...
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A Baker’s Dozen of Growth Picks
07/21/2011 7:00 am EST
In today’s interview, Jon Markman of Trader’s Advantage explains how he has identified companies with growth potential, even though he sees an overall industrial slowdown. He tells MoneyShow.com’s Kate Stalter about his favorites, including some REITs and blue chips worth a look.
Kate Stalter: We’re joined today by Jon Markman of Markman Capital Insight in Seattle. Thanks very much, Jon, for being with us today.
Jon Markman: Thanks for having me.
Kate Stalter: I wanted to start out by asking you about your current market outlook. What do you think that individual investors need to know about right now?
Jon Markman: I think the most important thing to recognize right now is that the US and the global economy are both in a cyclical, industrial slowdown. We’re also deflating a debt bubble. So there are going to be lots of individual months and individual stocks that will do well for short periods of time.
What I think that people have to generally get into their heads is that industrial growth is slowing down, and it’s going to continue to slow down until such time as it reaches equilibrium.
The problem was the debt bubble that built up in 2008. I know it’s kind of boring to go all the way back then—back then, to the mid-2000s—but it’s really super important. You see, both governments and individuals borrowed a lot of money.
Then we had a credit crisis, in which that problem was eliminated. Then the central banks, all in a row, locked hands and flooded the markets with money. They managed to boost their economies with short-term financing that pushed the markets up more than 100% in the past two years.
But now governments are reaching the end of their tether on that boosting mechanism, and they’re all beginning to cut back. They’re cutting back with their “austerity budgets,” and they’re undergoing debates like we are in the United States as to how much debt is too much.
So once you decide that you’ve reached the limits of your debt tether, then it’s time to start cutting back. Right now, we can see the effects of that in Greece. We can see the effects in Italy and in Portugal, and we’re going to start to see that in the United States.
We’re moving from a culture in which people had been really focused on consumption, and now people are becoming much more focused on paying down their debts. That’s not just governments, but it’s also individuals.
If you say to somebody, “You can make a great trade tomorrow, and you’ll make $2,000. What will you do with that money? Are you going to put it towards a boat, or are you going to pay off your credit cards, or are you going to make an extra payment on your mortgage?”
Most people will tell you today, according to the data that I see, that they will pay down their credit cards, that they will pay off a mortgage debt, or make some other gesture toward improving their balance sheets, rather than buying something new. That’s a central problem for industrial growth.
Kate Stalter: Is there anything out there showing strength at the moment, in terms of an asset class, for example, or a sector?
Jon Markman: Oh, absolutely. Right now, we have this amazing divergence going on between the financials and some of the consumer-tech companies. Right now we have Apple (AAPL) this week showing a new high, at the same time that the companies that are at the center of credit expansion in the United States, Bank of America (BAC) and Goldman Sachs (GS), are falling to new multi-year lows.
So, I think what’s happening, generally speaking, is that investors are trying to buy some of the stocks that are the most liquid and have the most opportunity to go up in the short-term. They’re all jumping onto this smaller and smaller list of names.
That can work for a while, and it is going to work this summer for a short while. But a healthy market advance lifts all boats, and the most important boat to see lifted is financials. When you see the financials hurting in the way that they are today, you really have to worry about the sustainability of any short-term uptrend.
So, what I see right now working well are the defensive names. These are the companies that tend to have a stronger and broader base, such that when there’s an economic downturn, they don’t fall as much. So we’re talking about McDonald’s (MCD), or ketchup maker Heinz (HNZ).
Some of the more business-oriented computer companies—software companies like Oracle (ORCL)—can actually do fairly well, and some of the really cheaper companies like Dell (DELL) can actually do fairly well in an environment like this. But generally speaking, I think you’re going to see that the defensives are the place to be.
Kate Stalter: Are there any particular areas that you are putting your clients into these days?
Jon Markman: For my money-management clients, we follow a model that I developed ten years ago, in which we buy ten stocks a month and hold those stocks for a month, and roll them over into the next month. That’s proven to be a just a terrific methodology for making money over the past ten years.
We don’t really make individual sector calls one by one. We make them by the month. It can really vary quite a bit. This month, the model likes real estate.
The model also likes some of the peripheral aerospace companies. One of them is called Transdigm (TDG). That’s a really wonderful company that has great prospects, because it’s got a very multi-dimensional aspect to its business. It produces parts that are spec’d out long in advance, and it’s very hard for other companies to come in and replace them.
Another company that our model has liked for a long time is Balchem (BCPC). It’s a chemical maker that makes food additives and drug additives. Again, it’s one of these companies that’s got a unique place in the industrial supply chain. It makes certain products that other companies cannot home into because they’re not spec’d out for it. So, Balchem is another company that we’ve liked a long time.
In terms of defensives that have nice growth aspects to them, we like Perrigo (PRGO). That’s an over-the-counter drug maker. They make generic drugs.
So if you go to a Walgreens and you see Advil—which costs, just throwing out a number, I’ll say $7 a bottle. Then you’ll see the house brand right next to it, that’s like $4 a bottle. Perrigo makes those $4-a-bottle versions of the over-the-counter drugs. That’s a terrific business, and they’re expanding overseas quite rapidly, so we like that one a lot.
In terms of industrial companies, again, we like the ones that have a lot of irons in the fire, and one of them is Gardner Denver (GDI).
Then, in energy, I think we’re going to see a pretty good move in energy over the next couple of months, possibly more related to geopolitics than to supply, but I think we’re going to see a pretty good move there in some of the energy news.
One other that we like a lot, one of the energy names that we like a lot is Core Labs (CLB). They specialize in mapping out the reservoirs, big oil companies’ reserves.
And another company that we’ve been recommending recently is a specialist in fracking, or getting the most out of shale gas fields. The company’s called Flotek (FTK) and it has a lot of upside potential.
Then one other company that sort of straddles the worlds between technology and health care is Cerner Corp. (CERN). It’s one that I’ve been recommending for several years, and it’s a specialist in the automation of medical records.
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