By George! Alternative Stocks
05/23/2003 12:00 am EST
I am always fascinated by reading or listening to Neil George. His recommendations and market outlook come from a global outlook, are often controversial, and at a minimum will make any investor think. Neil writes a daily e-mail called by george!, operates a Web site called bygeorgenewsletter.com, and is a contributing editor to both Personal Finance and Wall Street Winners.
"How many of you have done better in Vegas last night vs. the last few years on Wall Street? The problem is that we are in a really, really crummy market. You've seen the news reports, you've seen your brokerage statements, 401(k)s, etc. More than likely, these things in general have been going down. It's been difficult to make money by picking stocks. Well there are guys out there with multi-million dollar salaries who gave you bad stock ideas before and are now apparently better stock pickers and giving out new picks. The point is that Wall Street really doesn't care. The ink hasn't even dried on the settlements and the firms are already violating the terms of their agreements. 'Buyer beware' has to be the watchword with the market today."
"Where are we going to find stocks that will actually make money in these difficult times? The bulk of what I invest in is income-related, because I don't really see a lot of opportunity when it comes to growth. Nevertheless, there are some companies that still fit the criteria that you can still buy and hold for a bit longer. The first group would be cash cow companies. These are either companies that are just moving good on a consistent basis or collecting fees. I also look at very long-term growth stories. Finally, I look at deals, things that are very specific to certain industries or particular to a company."
"With the cash cow companies, businesses that are generally very steady, you don't have to expect any major growth to justify buying these stocks. They pay very high dividends; they earn their cash and they give it to their own shareholders. The first company I would mention is Thornburg Mortgage (TMA NYSE), a mortgage bank in Santa Fe, New Mexico. When I invest in a company I like to talk to management and I know theses guys pretty well. The company simply lends money to people who are buying houses. That is obviously a fairly decent growth industry. Their specialty is adjustable rate mortgages. They also protect themselves by investing in high credit score customers. As a result, it's probably one of the most defensive portfolios in the business. You can also earn a nice double-digit yield -- above 10% -- on this stock."
"Another company in the lending business, W.R. Carey (WPC NYSE), is basically a pawn shop for corporations. Companies that need some cash but are sitting on a lot -- whether it's a big distribution center or a Wal-Mart or a corporate headquarters, what this company will do is step in during the bad times and buy the properties at discounts, and then do long-term triple net leases back to the original occupants. They've been doing this for a long time. Bill Carey is the patriarch of the family. I know him well, and he and his family own large stakes in the company. (It is structured as a pass-through so there are some tax considerations for investors to consider.) Nevertheless, it is a very interesting company and it throws off a dividend yield of about 7% and it's also starting to show some appreciation. One thing I like with both W.R. Carey and with Thornburg is that virtually no analysts cover these companies. That's a good thing from my perspective, because I know they are not doing any investment banking business with anyone."
"The third company I'd mention is in the oil and gas business. I'm not particularly an oil bull. In fact, I could see oil drop into the upper teens. But I am more optimistic about natural gas. I think we will see increased longer term demand and therefore there will be good demand for gas prices. We may not see gas above $6, but I think it will certainly stabilize above $4. This is a Canadian company called Enerplus Resources Trust (ERF NYSE). This is a company that will go out and borrow money and raise capital through share sales and bank loans, and often times some fixed debentures. Then in turn, what they will do is go around and buy productive assets. These could be pipelines, ongoing production, etc. They collect revenues as royalties on a regular basis from the cash that is generated from the pumping of the gas or the oil. They pay or service their debt, they pay their expenses for running the company, and the rest is passed on to shareholders. The company is now throwing off a dividend yield of about 15%, which reflects of course that they are leveraged. They have debt that is funding the royalties. You can now buy the stock for about 1.4 times the value of the assets less the debt. In my assessment, as long as oil remains above $15 a barrel and gas stays above $2, then this company remains profitable."
"Where are the opportunities for growth? From my perspective, one of the areas that does represent a great deal of potential and value will be the Asian market. I spend a lot of my time in Asia, having postponed my latest travels due to SARS. This disease will definitely have some impact on Asia, such as travel and tourism, and the retail side. But in terms of manufacturing, contracting, and the core of business, SARS will not have a major impact. Rather than buy individual companies in areas such as China, my recommendation would be to buy a fund and deal with a manager that goes and kicks the tires directly and buy things they know first-hand. Our top choice is the Matthews China Fund (MCHFX). The other market I recommend is Korea, and the Matthews Korea Fund (MAKOX). The Korean market sports a 5-year average return of more than 19%. And Korean companies are about the most cheaply valued on the globe; this fund should be a bargain hunter's dream for years to come. A way to gain broad exposure to China and Korea is through the Matthews Asia Growth & Income Fund (MACSX). It has a hybrid mix of stocks and bonds and some convertible issues, and some preferred issues. It is probably the most conservative of the Asian funds."
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