Dessauer: Turnaround Time
05/21/2004 12:00 am EST
John Dessauer is without question, one of the best stock pickers in the business. He generally has a conservative, fundamental-based focus. But with Las Vegas as a backdrop, the advisor tries his hand at a package of speculative, higher-risk, turnaround situations.
"The biggest and broadest measure of corporate profitability in the US is published by the government under what is called the NIPA statistics. This stands for National Income Product Accounts. This is data coming from corporate tax returns for both public and private companies. Here’s an amazing statistic. When the market turned around in March of last year, it was about six months behind the curve, because NIPA had already shown a turn up in corporate profits that began in the fourth quarter of 2002. We’ve had quarter after quarter now, since the end of 2002, of rising profits on the broadest possible measure. The measure of NIPA profits in the fourth quarter of 2003 is now 20% higher than at the previous peak in 1997. Yet the Dow is nowhere near as robust as then. My view of this is very positive. I don’t mind that the market is soft here. If the broad market doesn’t go up as much as corporate profits, we'll see better valuations. I am still quite optimistic.
"I also feel that the blip we saw in inflation in the first quarter will not be repeated and that inflation will probably settle back down in the 2% range for the rest of the year. In that case, interest rates would not go much higher than where they already are. I also think the market has already discounted a rise in interest rates–a rise that I don’t think will happen. So overall, I find this a good environment for stock pickers and I think the best bet is to still be in the stock market. While I am generally more conservative, I have chosen to select some stocks that are a great deal more aggressive than usual. Here are five top picks. I would caution that not all of the five will go up, but hopefully some will go up significantly.
"The most speculative of the bunch is Bally Total Fitness (BFT NYSE). The company lost money in the opening quarter of the year. But memberships at the fitness clubs have been rising, and if they keep rising due to an increase in jobs, then this stock could do really well. However, it is clearly the most speculative of my picks.
"Another speculative pick is LSI Logic (LSI NYSE). They have a data-storage business that they plan to turn into a public offering and eventually spin off to shareholders. They are involved in manufacturing chips that are the brains of products such as the Sony Playstation, and other consumer products such as DVDs and DVRs. LSI expects to have a very good second half as companies start ramping up inventories for the Christmas selling season.
"A name that I think is a high-quality player that has been knocked down by investors is Nokia (NOK NYSE). This is the great brand name in the cellular phone business. There has been all kinds of turbulence and turmoil in this business. It’s a highly competitive market. But Nokia is a company with a clean balance sheet, a superb management, and an excellent track record. The worst case for this stock is that we don’t make a lot of money.
"Another turnaround with an interesting story is Ahold (AHO NYSE). This is a grocery store company that has been traumatized over an investment they made that ‘blew up’ both the company and the stock. AH was once in the $30s and is now below $8. If this company gets its act together–and can be in a position to pay a dividend in 2005 (as suggested by its CEO)–then this stock could be a winner.
"Finally, a long-time favorite is Rite Aid (RAD NYSE), which is a turnaround story in the drug-store business. They really have turned this company around. The ‘front end’ part of this business is doing extremely well. They have specific and very exciting plans for how to get the sales numbers up again in the pharmacy part."