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At the Movies
11/04/2005 12:00 am EST
Like the crowds at his workshops, I'm extremely impressed with Marc Gerstein a specialist in stock screening and editor of the Reuters Value Review and the Reuters Growth Review. Here's a sample of his common-sense outlook and a trio of "theatrical" plays.
"Remember when commentators complained of there being too much optimism in the market? Considering how the market has behaved so far in October, we shouldn’t be hearing about that much longer. Actually, though, we will continue to hear it . . . indefinitely. As I recall, there were countless pundits wagging their fingers at bulls all through 2002 and early 2003, as the market was forming what we now know was a major bottom.
"In this era of more and more commentary with more and more reasons cited for whythings do or do not happen, I think the biggest contribution I can make now to your understanding of stock market issues is to remind you how much of that is just random noise. If we can keep our eyes on the big picture, we can see that a lot more of what the market does, more than most pundits realize, reflects big-picture considerations, referred to by some as scripts or playbooks. That, I think, is the main story of 2005.
"Yes, we have issues. Oil is up. The housing bubble is looking tenuous. The consumer is looking strained (as has been the case for ages, so it would seem). The Middle East is sill looking tense. China scares us economically and fiscally. Etc., etc., etc. I don’t mean to belittle such concerns. But the fact is that we always have issues. In fact, I challenge historians to point to any period of time since the emergence of human civilization when it appeared, from the perspective of people alive at the time, like a good time to invest. Chances are they’d come up empty, given all the famines wars, and so forth.
"Assuming there is a logic to long-term trend lines, I continue to believe we can say the main problems we faced in 2004 and 2005 is that we were continuing to correct following periods of unusual trend deviations in 1998-2003. In other words, company fundamentals have needed to catch up to stock prices. Hence the bad news is that there’s reason to expect more sideways movement over the balance of this year. The good news is that absent some economic cataclysm outside the range of what we can now plausibly forecast, 2006 has the potential to be better. By then, I think we will have accomplished the catch-up.
"This scenario is not a slam dunk. I remain very concerned about prospects for blue-chip stocks, the ones most likely to trade on the basis of reputation and changes in global fund flows. But I am much more encouraged about the broader universe of stocks, the ones that trade based on what the companies show themselves to be (based on standard fundamental considerations) rather than stature.
"Entertainment Properties Trust (EPR NYSE) leases property to operators of mega-plex movie theaters. The REIT’s 5.9% yield, and prospects for 6-7% annual dividend growth, make me willing to tolerate the present price choppiness. Some are concerned about Hollywood’s rotten summer. That doesn’t bother me at all. EPR is a landlord to movie theaters, not a movie producer or even an exhibitor. It’s getting its money. Another theme in the headlines involves the planned merger between its largest tenant AMC and Loews Cineplex. There is a risk of theater closings, but I think the probability of anything significant along these lines is low. The toughest, issue, perhaps, may be an increasing tendency on the part of EPR to lease for non-theater entertainment activities such as arcades, bowling alleys, or restaurants. But I think the stock’s yield compensates for that risk.
"Meanwhile, at Realty Income Trust (O NYSE), analysts have focused a lot of attention on O’s purchase of a sale-and-leaseback deal involving 17 mega-plex movie theater properties. The positives are that the deal is immediately accretive to Funds From Operations and that it better diversifies its tenant mix, which was previously top-heavy in convenience stores and child-care centers. A negative is the opinion of some that the REIT paid too much. But I’m OK with the deal. Mega-plex theaters are the cream of the crop and if re-leasing should become necessary, I believe that could be accomplished. And like with EPR, I’m not bothered by a box-office slump, as Realty Income is the landlord, not a producer. As to valuation, I think the stock is OK if the 6.1% yield it now offers can be supplemented with a dividend growth rate of at least 3.7%, a target I think is achievable.
"Meanwhile, J&J Snack Foods (JJSF NASDAQ) sells soft pretzels through movie theater concession stands. It is a quiet little company that continues to roll along, powered by acquisitions, new products, and new distribution deals. Soft pretzels, the company’s main line of business, have been especially strong. Stuffed and savory varieties of pretzels are opening up opportunities beyond movie theaters and JJSF is now getting into bars and restaurants. Traction here could keep the company’s growth rate elevated for quite some time. Another plus is that the firm won exclusive status in its category with food-service distribution leader Sysco. Despite good performance for the shares (up 20% versus gains of 2.6% for the Russell 2000), the stock still has valuation appeal. I figure the company needs to grow only 7.1% per year to make the stock price work."
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