Very quiet session today, but notable in that modest good news on China trade did not simulate the m...
Global Guru Says “Buy American”
03/06/2015 10:00 am EST
Global expert Richard Stavros surprisingly now sees the best opportunities in US stocks; the editor of Global Income Edge discusses his latest advice to "Buy American."
Steven Halpern: Our guest today is Richard Stavros, editor of Investing Daily’s Global Income Edge. How are you doing today, Richard?
Richard Stavros: I’m doing great, Steven. Thank you so much for having me on the show.
Steven Halpern: Well, thank you for taking the time to join us. Your newsletter, Global Income Edge, as its name implies, focuses on the best opportunities on the global basis. I thought it was particularly interesting to see your latest featured report entitled “Buy American.” Could you explain the reasoning behind this emphasis on domestic stocks?
Richard Stavros: Certainly. As you may or may not know, but I think everybody knows by now, that the US is in full recovery and that the United States economy has had one of its best years, US GDP growth between 2010 and 2013 was around 2.2%, and now we’re seeing that in 2014, it was 2.4.
And growth is expected to exceed 3% this year, according to the IMS, so one thing we do look at very closely is the strength of global economy—and the companies within them—and so that really has us very, very excited about the prospects for many of the businesses that are in the US.
I mean, certainly, this is just the beginning of the beginning, I think, in the overall global recovery, and people still expect the recovery could be choppy in different areas, so not only are we excited that the economy is improving, but we’re also excited by different businesses that we’ve identified that have competitive advantage or pursuing different trends that really put them kind of at the top of their sector.
So I think if you combine those two things, the fact that the economy is improving and then you have these different businesses that we’ve identified that really have some sort of an economy of scale, competitive pricing advantage, that’s really what we’re looking at, at this point, in terms of what brought us to our Buy American focus.
Steven Halpern: Along those lines, there are two companies that are dominant in the telecom sector that you’re attracted to. First, could you tell us the attraction of the telecom sector in general, and also AT&T (T) and Verizon (VZ) in particular, which you recommend?
Richard Stavros: Certainly. Telecom I’ve been watching for many, many years. I did my graduate work at Oxford University in finance and strategy and I spent a lot of time looking at competitive business models.
When you have an incumbent network like the telecom networks, I mean, that is an extremely competitive model and the telecoms have gone beyond being sleepy utilities.
These days, they’re providing all sorts of modern services that, obviously, they weren’t providing before that many people are aware of, as you know, on demand movies, telecom, WiFi, and WiFi in your car.
So the thing I like about telecom, particularly, is how it’s transformed into this sort of new model—with these very high-tech new goods and services—has become a platform in a marketplace for a lot of the new things, and new technologies, and new services that are coming out.
I think that there are a few companies in there that are actually head and shoulders above the competition and really moving in directions that have us very interested, which we’re watching with a lot of interest.
Steven Halpern: So AT&T and Verizon you would cite as both ideas for growth investors, as well as for Income Net.
Richard Stavros: Yeah, I mean one of the things that our global income portfolio companies has to have is growth—and it has to be infrastructural or incumbent—or companies that have a competitive advantage that continue to reinvest in their businesses.
I’ve recently been reading a really great book called Zero to One by PayPal founder, Peter Field, and he describes how some companies go through this thing called zero to one—in which a typical venture capitalist will invest in ten companies.
And the ones that typically win or do well—maybe it’s one or two companies—but these two companies usually exceed the potential of all the other nine companies put together that they invested in.
And I think my observation is that they’ve gone from $40 billion market cap in 1988 to $540 billion in 2014, always thinking about business and technology.
So this result shows that these two companies have been exceptional in terms of really finding that niche and that competitive advantage or have developed a culture to really exceed relative to other telecoms.
Steven Halpern: Now, you also note that you’re a strong proponent of US electric utilities for income investors and you cite Southern Company (SO) as a favorite. Could you share your thoughts?
Richard Stavros: Yes, well, energy utilities is near and dear to my heart, since a good bit of my career has been spent in the energy utilities space. I was a strategy executive for a major energy utility and built power plants and renewable projects and advised on strategy.
I also used to manage Public Utilities Fortnightly, which is the industry’s most prestigious energy journal, and so utilities, I’ve had a lot of experience with understanding how their business works.
They also follow on my thesis that at this point in the recovery, income investors should continue to focus on companies that have a competitive advantage, that have pricing power, and Southern Company really is emblematic of my thesis that I’m pursuing.
It is one of the largest US utilities in the United States. I have known three CEOs of that company, including the current one, and it’s always been managed extremely conservatively. From a financial standpoint, they have always delivered a very strong dividend.
In the last year, I’ll note that there’s been some headwinds, because they’re building a modern state-of-the-art integrated gasification plant called Kemper and they’re also building a new nuclear project, but those headwinds largely had been dissolved last year.
Actually, when we got into the stock last year—it was at a really good price—and one of the things that Southern has—that not a lot of other utilities have—is that it’s really investing in its infrastructure and business.
Some utilities are building power plants, and if you really want future income, you have to have businesses that are reinvesting, and so this nuclear power plant in the future is going to deliver new income, as will the other projects that they’re working on.
From a management standpoint, they’ve been honored by Fortune magazine as the most admired company for six years now, and with the US recovery, they’re in a service territory that’s expected to grow 1.3% this year.
And then, I have developed early identification system for the dividend to identify opportunities called DuPont Hybrid Model that looks at dividends and the strength of dividends, and I can tell you that Southern Company has had 12 consecutive quarters of positive return on equity, so this is about as solid as any energy truly gets.
They do have some issues related to continuing to finish those plans, but I do think that’s largely been resolved and we really can expect Southern to start really, really showing favorable results with the improvement in their service territory and the overall US economy.
Steven Halpern: We only have a minute left, but I did want to touch on one other area that you’ve highlighted in your latest issue, and that’s the need to replace and enhance America’s aging infrastructure, and you mentioned that you see some exciting opportunities in that area. I was wondering if—in our last minute—you could maybe mention the income opportunities you see there.
Richard Stavros: As everybody knows, with the economic downturn, a lot of states have been impacted. Their budgets, in terms of replacing bridges, roads, and even energy infrastructure in places has not been replaced and a lot of these states do not have the capital to be able to do this and so the new, new thing right now is public and private partnerships.
The new trend is basically that the private sector is going to be helping renew America’s infrastructure and they say that there is going to be at least a trillion dollars needed for infrastructure investments in the US for the next seven to ten years.
I’ve been following this very, very closely given my infrastructure background, and I found two companies that I think, in the US, are going to benefit greatly, who are participating in this renewal. One of them is Macquarie Infrastructure (MIC) and then ABB (ABB).
Both those firms have unique niches in terms of building and investing in new infrastructure, so I’ll start with Macquarie Infrastructure. They have aviation, tank terminals, gas and contractive power. They recently signed a big deal on a power plant that they’re going to be operating and using.
And then ABB is an expert in transmission and distribution, so it’s overall engineering and power plant related development, so I think these two firms are going to be at the forefront of America’s renewal and so I focused on these.
I think there’s going to be more firms in the future that will also be participating as one of the things that we’re looking at is these private public partnerships are only starting to get started I guess, and as this trend really, really gets moving and gets a lot of momentum, I really think you’re going to see many more firms come into the fold that will be focusing on this infrastructure play.
Steven Halpern: Well, again, our guest is Richard Stavros, editor of Investing Daily’s Global Income Edge. Thank you for your insights today.
Richard Stavros: Thank you so much for your time, good to be here.
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