Find What? Not Interest Rates

04/25/2003 12:00 am EST

Focus:

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

"It's very hard for me not to be bullish right now since events have converged to boost the stocks in my model portfolios," says Louis Navellier. "Investors have finally realized that their best defense is a strong offense of fundamentally superior stocks, such as those in my model portfolios. Treasury bonds are no longer a safe haven for investors." Here the editor of MPT Review explains the dangers of investing in bonds, and the importance of extreme selectivity among stocks.

 

The interest rate environment is now starting to hurt three specific areas.  First is the banking stocks. The flattening yield curve is now squeezing the profits at many banks. Banks like to borrow money in the short term and lend it out for the long term. They are also big buyers of Treasuries, and many banks have seen losses in their Treasury bond portfolios as interest rates have surged. In fact, banks don’t know where to invest their money as interest rates climb.

 

The bond market has already hurt the insurance industry, which is still reeling from big losses in corporate bonds last year. Most insurance companies, especially life insurance companies, are really just big bond portfolios and when rates rise, the values of their bonds erode, and their stocks tend to follow. Too many insurance companies had been pushing guaranteed or principal protection mutual funds that were collateralized with corporate or zero coupon bonds. Unfortunately, as interest rates rise, the insurance companies that sold these mutual funds are now facing huge liabilities.

 

“Finally, the other industry group that’s under siege is REITs. Conservative investors love REITs but too many have dividend yields that can’t be sustained much longer by their cash flows, particularly those that specialize in apartments, hotels, office buildings, and shopping centers. As a result, chasing the high dividend yields in REITs is now very dangerous. In fact, the highest-yielding REITs are usually the ones in the most trouble. Their dividend yields are often high because Wall Street is anticipating that their dividends will soon be cut or even eliminated.

 

“I plan to continue to concentrate on special-situation niche companies that dominate their industries. The average stock in my model portfolio has an average operating margin of 21.6%, which is extremely high and indicates how strongly these companies dominate their business sectors. One addition to my model portfolio is FindWhat.com (FWHT NASDAQ). FindWhat operates an online marketplace that studies which businesses and consumers are most likely to purchase specific goods and services. The company’s network includes hundreds of distribution partners, such as CNET’s Search.com, Excite, Webcrawler, NBCi, MetaCrawler, Dogpile, and Go2Net. Specifically, Internet advertisers bid against each other for particular keywords or phrases through an open, automated, bid-for-position system. The Internet advertiser with the highest bid appears first, with all other advertisers listed in descending order of their bids. FindWhat.com has a cost-effective, pay-for-performance model, which allows Internet advertisers to pay only for prospective customers when actual prospects click through to their Web sites. Unlike other Internet companies, FindWhat.com has strong sales, real earnings, expanding operating margins, and a reasonable price/earnings ratio (only 16.7 times trailing earnings). As the stock market becomes more selective, the high-operating margin, special-situation stocks such as FindWhat will become increasingly dominant and will represent an oasis for investors.”

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