02/11/2005 12:00 am EST
"We’ve gone through the recovery stage and are now in the expansion phase. We are looking for growth in the range of 3% in real terms this year, some moderation in the consumer sector, and continued expansion of capital expenditures by corporations taking on more risk. I expect continued quarter-point increases that take the Fed funds rate to 3½ % by year-end. I would hope that the S&P 500 could achieve approximately 1300 as a year-end target, which would represent another year of modest gains. I think we have a very good scenario ahead for growth investors, both nationally and internationally. I would note, however, that I would be concerned if consumer confidence took a nosedive. At 70% of the economy, the consumer is king. If they loose their will to spend, the economy will contract.
"What is the best way for investors to gain global exposure? We have to recognize several things that are evolving. Outside the US, there are very well capitalized markets and economies that are currently in sync with the US. So as the US expands, they expand. Beyond that are some smaller, more exotic countries—the emerging markets—that have a counter-cyclical aspect to them that can provide great opportunity. The way to invest in those areas is with a portfolio of securities or with growth managers with a record there. The reality is either you know those markets, or you don’t.
"The other way to approach it on a longer-term basis is that we will look for best-of-breed companies, based on valuation and not geography. Toyota gets 75% of its operating profits from the US and North America. Intel gets 50% of its revenues from Asia. You tell me which one is a US company and which one is Japanese? Having said that, you broaden you’re horizons to pick best-of-breed companies based on valuation. China today has a lot of overpriced stuff trading in the US. These companies are not as good as the prices suggest. They don’t have the future growth prospects. So you have to be very careful about the stocks billed in the US as 'Chinese investments.'
"For some current stock picks, I would concentrate on five companies that should have corporate events and developments in the course of 2005 that will make a revaluation evident. Centennial Communications (CYCL NASDAQ) is an interesting company because it has a CLECs and a wireless business in the Caribbean. You want to talk about emerging markets. This company has a lock on that market and the value of this company is somewhere between $12 and $15. Hewlett Packard (HPQ NYSE) seems to have gone nowhere in prices, and at this point I would says that the company is pretty much impervious to bad news. Although we are running out of patience with this holding, we would note that there is $30 worth of value in this company that they have yet to realize. JPMorgan Chase (JPM NYSE) has been held back by the fallout from the 1990s and their baggage. But their acquisition strategy gives them a domestic footprint in commercial and consumer banking. I think the team that is in there is going to make something happen. And with a multiple below the market and a yield that is higher than the market, it looks very attractive to me. Sanderson Farms (SAFM NASDAQ) is a chicken processing company. It is very well run. If you look at it on a valuation basis, the stock is cheap. I also like Western Digital (WDC NYSE), which makes very prosaic technology. Although its products are not cutting-edge, disk drives still have a growing place in the consumer electronics marketplace in the years ahead. The company just reported a very good quarter. I think the stock is worth $14 to $15 sometime in 2005."
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