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07/27/2011 7:00 am EST
Fund and asset manager Quint Tatro says industries poised for growth include natural gas and medical devices. In today’s interview with Kate Stalter, he also cautions investors to take a longer-term perspective about corporate earnings in a time of market volatility.
Kate Stalter: Today we are joined by Quint Tatro, of Tatro Financial in Lexington, Kentucky, and thanks so much, Quint, for being with us today.
Quint Tatro: My pleasure, thanks for having me, Kate.
Kate Stalter: Give us your take on the current market. What do you think is important for individual investors to be aware of right now?
Quint Tatro: I have to say that all media and news aside—and I’ll come back to that in a second—but news aside, I really like the market and would definitely say that I’m bullish on the market at this moment.
I’m seeing a lot in the way of corporate earnings that is not just a result of cutting back on employees and trimming the fat, but I see a lot of top line growth in certain areas. I see a lot of unique sectors popping up that I think can be market leaders over the next several years.
I see themes that we haven’t seen ever before developing, that are indicative of potential expansion. Themes like natural gas, which not just in the form of heating your home but in the form of alternative energy sources that can actually provide jobs and create industry, and so forth.
So, I’m seeing a lot of positives in the market that I like quite a bit, and I’m finding a lot of investments through those positives.
Obviously the cloud hovering is the backdrop of the news flow and the uncertainties, primarily out of Washington. That’s a real threat. We are in an environment now where we’re definitely trading on the headlines, but not as much as you would think.
I get the impression—and I don’t want to overlay any sort of bias or thought process that’s totally outside of the realm of the way in which I trade—but I get the impression that the political figures are trying to steal a page from the book of the bankers. They’re really trying to push through an agenda based on fear.
The market is in a totally different position than it was the middle of 2008, when we had to do some incredible financial reform and some incredible bailouts in our country. At that time, as you remember, bankers came out and political figureheads came out and said, “We have to do this, or we’re going to be really faced with a tremendous challenge.”
Obviously, the markets continued to unwind, and we did push through a lot of change, and it ultimately resulted in the bottom in 2009. The markets have recovered a dramatic amount, but it seems like I am hearing more than ever before, “If we don’t get this done, we’re just going to fall into a spiral. We’re just going to get annihilated.”
At least thus far, the market—which is typically a preliminary indicator—is not saying that. They’re sort of calling their bluffs and saying, “Look, just get what you need to get done, but we’re sort of marching along.”
That could change in a matter of hours, obviously. At least thus far, the market is not buying what the political figureheads are discussing via the media.
To go into your second part there, what does an individual investor really need to be aware of? I think they just need to be understanding that we’re in an environment that’s going to be very volatile, even though by historical standards we’re not in an incredibly volatile environment right now, whether you look at the VIX or whatever the metric is that you use to measure that.
By historical standards, we’re not in an incredibly volatile environment, but that doesn’t mean that one’s investments or the general market as a whole can’t have incredible swings over the next several days, weeks, and months.
Take a longer-term perspective—and it sounds cliché, it sounds a little bit opposite of what a trader might say, which is what I would quantify myself as. But understand that Intel (INTC), for example, yielding 3% and producing numbers and producing quarters that are the best in the company’s history, is not going to go away simply because we have some jockeying between what our debt ceiling will be.
They’re going to continue to pay 3% in a dividend yield, and they’re going to sell processors. They’re going to be put into computers that are going to be bought and sold all over the world. So, that’s not going to change.
So, whether Intel drops to $20 overnight or moves back up to $22 or $23, it doesn’t make any difference. Understanding that, and taking a long-term perspective, is key in this environment.
With the backdrop that if we start to see unwind, if we start to see a real change, where we start to see massive selling, liquidation again, then all bets are off.
I don’t care whether investors study the markets every day, look in the paper once a week, or tune in once a month. It makes no difference to me. But there has to be a sell strategy. There has to be a strategy in place where someone says, “Okay, if this happens, then I’m going to be out.”
Now, typically, that has to transpire through some sort of price action. So, whether it’s Dow 10,000, Dow 11,000, something has to happen before somebody says, “Okay, I’m going to trim back.” Because if we do start to see an unwind and a tremendous liquidation again, they have got to avoid getting hurt.
They’ve got to avoid going through what happened in 2008. I don’t think it’s going to happen—but if it does, they’ve got to have a plan.
Kate Stalter: You mentioned upfront, Quint, that you do see some industries or sectors showing particular strengths right now. What are some of those?|pagebreak|
Quint Tatro: My favorite has to be natural gas, from the producers all the way to the niche plays like compressed natural gas or liquefied natural gas. I like Chesapeake Energy (CHK) quite a bit. I like the fact that you’re seeing companies like BHP Billiton (BHP) make monstrous bids for natural gas companies like Petrohawk (HK), which just happened last week, and it was a 60% premium that they paid.
It’s not some accident that companies like Exxon Mobil (XOM), which bought XTO last year, are finding value in these companies. They’re seeing what is happening. The writing is on the wall that a bridge towards total alternative fuel or clean fuel source in this country is natural gas.
T. Boone Pickens is right. There’s a lot that I like about the guy. There’s a lot that I don’t like about the guy, but he’s dead right when he talks about the fact that the United States could run on natural gas immediately. Not six years from now, not two years from now. They could run tomorrow.
Obviously, that there is a conversion time period in place there. But, it could happen. We could move away from foreign oil. That is slowly taking shape.
The niche plays that I like: Smaller companies like Westport Innovations (WPRT). They work on compressed natural gas, particularly on Cummins (CMI), which is sort of a play on that as well. But you have a movement in this space that I believe is entering a secular bull market.
Now investors need to be aware that this is not a play on going out and buying natural gas. Could natural gas as a commodity increase in price? Sure. As demand increases, maybe it increases, but there’s so much of the stuff that odds are it doesn’t. Odds are it stays relatively sedate in the $4 to $5 range, but it does mean that there’s incredible opportunities in these areas.
Again, to name just a few, but I like Chesapeake as far as the big names are concerns. I like Encana (ECA), as far as the actual producers, but the niche plays are what really interest me. Clean Energy (CLNE), Westport Innovations, Cheniere (LNG).
These are all names that I own, in full disclosure, but they are names that are actually creating and innovating, which is what we obviously need to see in this country. I like that space quite a bit. It’s got to be my favorite play right now.
Kate Stalter: Going to the opposite end of the spectrum then, what are some sectors, or perhaps global regions or asset classes, that you feel investors should avoid at the moment?
Quint Tatro: No matter how good they look as far as value is concerned, I think there’s too much risk wrapped up in financials right now.
Being in Kentucky—and a lot of my clients are from this region—I equate that style to horse racing. I’m not saying it’s a bad style. I mean, you’d be foolish to say that value investing doesn’t work. It obviously does.
But what I relay to people, is that it’s the equivalent of going to a horse race. The horse race has begun, and all of a sudden you run to the window and you want to put money on the horse running in last place. It makes no sense.
Now, if it’s one of 40 races and you can bet on the next 40 races for that horse, then, yeah, maybe that value investment might make sense. But right now, with your money, with timeframes that are not 20 years for most people—they’re typically months to maybe a year or two—going in and saying, “I want to buy this horse because he’s not running with the rest of the pack,” is foolish.
So, the group that might have a bounce back, or might not, in my opinion, which is to at least stabilize the market, is the financials. But I don’t believe that people being drawn to them for an investment is a smart move right now.
I think it’s a very dangerous play. There’s a lot of headline risk wrapped up, and it’s just not worth it.
Kate Stalter: You’ve mentioned a few of the tickers earlier—the natural gas stocks, for example. Any other investment vehicles that you’re turning to to meet your client’s objectives, or any stocks or funds that you believe inventors should take a look at?|pagebreak|
Quint Tatro: Sure. I have sort of two different mindsets.
I manage a no-load mutual fund, as you know, the Tatro Capital Tactical Appreciation Fund (TCTNX), where I primarily will use equities. I will at times use options futures. It’s really an alpha strategy, so we can go with the market, or we can go against the market.
I have a variety of different investments in there right now. Groups like medical devices, I like quite a bit. Intuitive Surgical (ISRG) is a large position that we have.
I’m also a separate account manager, so we have private clients for whom we don’t just purchase our own mutual fund, but we do a variety of other areas in there. I’m a very plain vanilla guy when it comes to that. I will stick with indices, and I do like the S&P 500.
Believe it or not, I like the S&P 500, which has been trading in a range, despite all this negativity and all of this, “We’re going to die and the markets are going to zero!”
The market has been trading in a sideways range—really since January, if you look at the 1,250 to 1,350 range. We’ve been moving inside that range for the entire year. We’re at the upper end of that range, which means we have the potential to break out to the upside.
At this moment, I actually like the indices. If we started trading back below 1,300 and hung out there, then I would move away from that.
As far as outside or other investments that I’m using right now, on the fixed-income side I like the fact that Bill Gross moved away from US Treasuries and went into overseas bonds and so forth. So, we’re using his Pimco Total Return Fund (PTTAX) on the institutional side for some fixed income.
We have an inflation-protected securities fund as well, using some TIPS. I’m not in the hyperinflation camp, but I’m definitely in the inflation camp, so I want some protection from that as well.
But we’re good, old-fashioned stock pickers, and we are primarily using the equity mutual fund to find our growth. Again, we’re having to really be stock pickers, finding some good niche plays, because at least for the last year, the market hasn’t had this broad sweeping trend higher like we saw at the end of 2010.
It may come. We don’t know. But at this point it’s definitely a stock picker’s market, which is an overused term. I even hate to use it in an interview, but it definitely is right now that way I see it.
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