Alexander's Bullish Bets
05/28/2004 12:00 am EST
For over two deacades, Gary Alexander has been the editor for some of the very best advisors in the business, such as John Dessauer and Richard Band. Now, long overdue, he offers his own newsletter, SmartMoney Investors Insights. Here's his outlook and top picks.
"Even though I’ve had a bullish bias since the 1980s, I still always want to hear both sides of the bull vs. bearish argument. I listen to both the bulls and the bears, because I think they both have something important to say. I encourage people to be agnostic in the process of determining a bullish or bearish market position. If you are confused after hearing many opinions, that’s good. Confusion is a way to reach a decision. It’s a necessary process in finding the answers that fit us best. You should always hear both sides of the story, well-represented before you act. Personally, my inclination is to remain bullish. The market tends to go up 8% to 10% a year. And a chart of every 20-year period ending in each of the last 10 years shows an average gain of 9.2%. The range is 6.5% to 12%. I don’t see how you make money in the long run by shorting the market because the bets are against you as the average market over the long term goes up. And I don’t how you can make a fortune in your lifetime by being in T-bills or cash. Gold can protect you to an extent, and I would advocate position in gold or bonds to protect ones assets. But that is not how you get rich.
"The only person who doesn’t take losses is a liar. You have to take some risks and some losses along the way to gains. Discipline your emotions. That is very important. Our fears motivate and drive us when the market is down, and our greed does the same thing at market tops. Don’t let you former financial wounds and scars keep you from getting rich today. This is the most important point. People who are now over 80 are scarred by the great depression. That caused them to fear stocks. Others growing up in the 70s were traumatized by inflation. And what we see now is an irrational fear of inflation in America. There are several factors dampening inflation today, but we fear and remember the scars of the 70s. We assume that inflation has to return and this keeps us from doing some smart things with our money now.
"In my view, the bearish story doesn’t come true except in a notable crash every few years. The mega-trend of the market has been up and up and up. For a logical reason, this trend is not a temporary bubble. Why? Because mankind has been improving so much over the last century in terms of technology. You can cite a new technological development for almost every decade – radio, cars, telephones, TV, air travel, the personal computer, the Internet, etc. Over that period, the Dow went from 40 to 10,000 – or a 250-fold gain. If we keep up the technological advances that we have seen, then there is no question that in another century, the market will also be 250-fold higher."
In the meantime, even for those with a "shorter" time horizon, Gary offers some current favorite stocks. He notes, "My picks include two stocks and two mutual funds, which comprise a balanced portfolio (25% bonds, 75% stocks). I am not shooting for the moon here, but I want to present you with a way to get started using my newsletter with just four balanced investment picks:
"The Al Frank Fund (VALUX) is my pick of the year, for those who want buy just one fund, based on the superb record of its manager, John Buckingham. In fact, when I began my newsletter last July, I chose this as my first ‘pick of the month’, and it is now up 50%. Small cap stocks outperform their larger brethren in recoveries and over the long term. If you can make just one small-stock buy, I prefer the safety and diversification of this fund, which holds hundreds of small cap stocks and is rated #4, from among 142 US small-cap funds. The majority are small-cap and micro-cap. John Buckingham’s Prudent Speculator is up 5,904% since mid-1980, almost four times the Wilshire 5000 in the same time. That’s an average of more than 19% per year since 1980. To buy the sum total of John’s prodigious track record, you can either subscribe to his #1-rated letter, or buy the Al Frank Fund, which remains my top pick for 2004.
"D.R. Horton (DHI NYSE) has come down on interest-rate worries, but I think that fear is overblown. Even if rates continue to rise (which isn’t a given), it will likely be because the U.S. economy is improving, which means personal incomes will be rising, and more people will be able to afford higher-priced homes. Here is a company that keeps doing things right. Don Horton began his construction company in 1978 and the firm is now American’s #1 home builder. How did that happen? Each regional director is an entrepreneur, responding to local needs. For its latest year, net income increased 48% to a record high, while earnings per share rose 40% to a $3.20 rate. Net sales orders increased 37% to $3.3 billion and sales contract backlog rose 32% to an all-time high of $4.6 billion. And the the dividend was just increased by 71%. Does this sound like the profile of a 10 P/E stock? In its conference call, Horton said that another record year (2004—the 27th in a row) is in the bag, so it is looking forward to 2005 and 2006 now. The company said it will exceed $10.2 billion in revenue in fiscal year 2004, and raise that bar 15% to 20% in each of the next two years. Don’t you think that deserves a bit more respect on Wall Street? I do.
"Biomet (BMET NASDAQ) is among the leaders in sales of orthopedic equipment, with sales of $1.4 billion a year, and no debt. The joint replacement business is booming, up 20% a year. Biomet has one of the strongest balance sheets in the orthopedic industry, with no long-term debt and $418 million in cash and investments. This cash flow has allowed them to make this many strategic acquisitions. The company also bought back two million shares this fiscal year. Since 1978, Biomet has notched 26-years of record sales and earnings. Over the past 15 years, Biomet’s net sales increased at a 19% compound annual growth rate, while operating income and basic earnings per share experienced a 23% rates. I want to hold this stock for a long time, partly because the people involved in the founding of the company have remained friends and partners for over 25 years, and are likely to remain at the helm for at least another decade. Meanwhile, as the population ages, the medical device market will grow to be one of the strongest health care sectors.
"Finally, I don’t talk much about bonds. They are in our portfolio to balance our risk in stocks. Like most market analysts, I am concerned about the fears of bonds falling in the wake of higher interest rates. But unlike most analysts, I am more concerned with the fears than the rates, since I don’t think we’re headed for significantly higher long-term rates. I recommend the Loomis Sayles Bond Fund (LSBRX), managed by Dan Fuss and Kathleen Gaffney. They do buy some junk bonds, but very carefully. (If the Fed raises rates, Dan will likely move more into short-term bonds, corporate bonds and foreign bonds.) Loomis Sayles is up 15% since last August and up 28.5% for all of 2003. The same managers can work the same magic in the future. Over the last 10 years, the fund has returned an average of 10.3% a year, which beat 65% of all stock funds—no mean feat—and 99% of bond funds. Dan is a smart cookie who gets up early to watch all of the global bond markets at once. I’d also note that Business Week selected him as one of the nine best mutual fund managers for 2004."