Vahan's "Special Situation"
02/25/2005 12:00 am EST
Vahan Janjigian uses a quantitative system combining fundamental and value investing. Last year, his Special Situations Survey returned 26.6%, ranking him among the top newsletter performers. Here, he looks at the "housing bubble" as well as a favorite turnaround play.
"I continue to worry that there is a housing bubble. Yes, p/e ratios appear to be very reasonable. But there are other concerns. One of my favorite recent quotes that Alan Greenspan made was that anybody that has not hedged against rising interest rates is obviously desirous of losing money. The Fed will continue to raise short-term rates. And it’s only a matter of time before long-term rates start rising too. That, in turn, has negative implications for the housing market, as we all know that higher mortgage rates are certainly not good for housing stocks.
"Now, I don’t believe like some do that we are going to see a collapse in the housing market. But we don’t have to see a collapse for housing stocks to sell off. All we need to see is a slowdown in the rate of growth. Whether it starts now or in six months, I don’t know. But with housing prices having reached a level in many parts of the country that are beyond affordability for the average person, and with interest rates continuing to rise, I think we will see a slowdown in the growth of housing stocks.
"Meanwhile, I still like consumer cyclical stocks. We begin our analysis by using a quantitative model that ranks stocks, and currently retailers and other consumer cyclicals are still showing up at the top of the rankings. For my favorite stock, I’m sticking with Rite Aid (RAD NYSE). The company has had a lot of problems, and that is why it is so cheap. They had accounting scandals and former management is now in jail. But there is a new management team in there and this is a company that is generating nearly $17 billion a year in sales, yet it’s market cap is about one-tenth of that amount. The big risk is that they have a tremendous amount of debt, but they have been paying down debt and I think it’s only a matter of time before we will start to see the company generate some real earnings."