Dessauer: Against the Grain
07/29/2005 12:00 am EST
John Dessauer often finds himself at odds with the consensus. He has been a dollar bull, and now argues for a drop in oil and dispels concerns of a housing bubble. Also going against the grain, some of his favorite stocks are in the out-of-favor banking and drug sectors.
"Six months ago, just about everyone believed that the US dollar had only one way to go, down. I was one of the few who forecast that the dollar would rise. My analysis proved correct. The pessimists have been totally wrong about the US current-account deficit and the dollar. But that hasn’t stopped them. I still see gloomy articles about the US being dependent on foreign bond buyers, and the horrible consequences that will follow if nobody buys our debt. That’s fine, because we need someone to keep fueling the worries that keep most investors pessimistic. We don’t want the crowd to catch on to the truth about America’s strength and bid stocks so high that we have to start worrying about another stock bubble.
"The crowd seems to hunger for reasons to believe that the US is headed for an economic crisis. Many passionately believe that the energy crisis is for real. They also believe that we have a major housing bubble that is about to burst. They feverishly argue that the combination of rising oil prices and falling home prices will crush the US economy and bring stocks crashing down. In my opinion, the facts justified oil’s fall below $50 but do not support the run back up to a new high. I still expect oil to come down to $35 a barrel by the end of 2005. I won’t be surprised if house prices rise at less than an 8% rate the rest of this year and 5% in 2006. Don’t hold your breath waiting for a housing bubble to burst. When there is growth, housing is strong.
"Wall Street doesn’t like bank stocks, fearing a substantial slowdown in the economy. True, banks suffer in recessions, but they’ll prosper in good times. I like Citigroup (C NYSE), both for the coming six months and for the next couple of years. In the first quarter, Citigroup raised its dividend another 10% and bought back 19 million shares, at a cost of roughly $900 million. Citigroup is the world’s premier financial institution and is poised to benefit when China opens its economy fully to foreign banks in 2007. If you are looking for a low-risk China play, look no further than Citigroup. Citigroup can deliver substantial gains in the coming months. I think a 2005 target of $56 is modest and $65 is realistic for 2006, so Citigroup stays in my Top 10 portfolio.
"Pfizer (PFE NYSE) is a bargain. All the bad news on Celebrex and related drugs is out. From here, the news will get better. It already has. Pfizer received FDA approval on three new drugs: Lyrica for epilepsy, Revatio for pulmonary arterial hypertension, and Zmax, a once-only antibiotic. Pfizer increased its activity in biotechnology by acquiring Vicuron Pharmaceuticals, which focuses on developing anti-infectives. Wall Street is raising this year’s estimate to $1.98 a share. Next year’s estimate is $2.17. At under 15 times depressed estimates for 2005, Pfizer stays in my Top 10. Rite Aid (RAD NYSE) reported a sharp decline in first fiscal quarter earnings, at $0.05 a share, down from $0.10 a year ago. The company expects no earnings growth over the next three quarters, but Rite Aid has positive free cash flow and is moving aggressively to get the pharmacy business growing through small acquisitions. The turnaround has already happened and now they are investing for long-term growth, so Rite Aid remains in my Top 10."