If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Bullish Buys from Battipaglia
08/15/2003 12:00 am EST
"The major part of the military efforts in Afghanistan and Iraq behind us, the war on terrorism underway, corporate scandals being met with the full force of regulatory reform, and the re-evaluation of equities suggest for the most part that the challenges in the market lay behind us," says an optimistic Joe Battipaglia. Here, the chief investment officer of Ryan, Beck & Co. outlines his reasons for bullishness, and his top stock picks.
"I believe the United States will successfully wage the war on terrorism and prosper at the same time. The best way to measure this is to take stock in how the government looks financially and how we look financially, because we, in essence, drive this economy. Looking at the balance sheet for the government, what you find is some interesting facts. We spend only 3.8% of our GDP on our military. During the Reagan years, the number was double that. As it stands today, the Federal debt is 60% of our GDP, which is also down substantially from prior periods–when these figures had been perhaps twice that. It is also a level that is significantly below that of many of our trading partners in the developed world. Overall, the US financial position is very strong relative to the rest of the developed world. As a result, these current account deficits–and more specifically our Federal budget deficits–can well be tolerated by the markets.
"Last year, the economy and the stock market–with all the challenges we are aware of–delivered growth. And this has continued into this year, with a surprisingly strong second quarter. Why? Well I think it is because of the individual balance sheets that make up the American economy. We’ve talked about the government’s balance sheet. But what about yours? It turns out that individuals are very well diversified. We have created more wealth in the last 20 years than perhaps in the last 100, and it turns out that in fact, we’ve kept most of it. According to the Federal Reserve, the balance sheet of individuals comprise about $48 trillion in assets and $8 trillion in debt, leaving $40 trillion in net worth. These assets are made up of real estate, stocks, bonds, and private businesses. Equities represent about 23%. Meanwhile, real estate and bonds have both done very well in the last couple of years, mitigating the effect of the falling stock market. And as far as being debt-laden is concerned if we carry $8 billion in debt against a balance sheet of $48 trillion in assets, you see a much better picture of where the consumer stands. Regarding stocks, our focus is on growth oriented sectors and market share leaders. Are there challenges? Yes, but when you look at the fundamentals as we’ve laid out, you find there are a lot of strong elements in this economy to drive us in a positive direction."
"In the healthcare category, two big names that make sense are Amgen (AMGN NASDAQ) and Genentech (DNA NYSE)–even at current prices. I see them having double digit growth rates. There is a dynamism to their product portfolios that make them interesting. Small-cap stocks in the same venue are Millennium Pharmaceuticals (MLNM NASDAQ), XOMA (XOMA NASDAQ), and a specialty pharmaceutical company, Connetics (CNCT NASDAQ).
"In financial services, I would focus on Merrill Lynch (MER NYSE) and Goldman Sachs (GS NYSE). I think their equity businesses are going to start to shine more in 2004 and lift their valuations. They have participated in the rally, but they have more to go. Among small- to mid-size banks, I like Sovereign Bank (SOV NYSE) and United National Bank (UNBJ NASDAQ ), a New Jersey financial institution.
"In technology, I’ve always been a fan of low cost producers that have a leading market share and have protected themselves during this downturn. Intel (INTC NASDAQ) and Dell (DELL NASDAQ) come to mind. Microsoft (MSFT NASDAQ) is going through an interesting transition. It will have a slower growth rate and have to distribute more cash. But I think Bill Gates and his partners will continue to reward shareholders.
"In our view, small- and mid-cap stocks are preferable to big caps. In particular, I am interested in value propositions in technology. This is where computer-aided design, and computer-aided engineering (CAD-CAM) comes in. We like Autodesk (ADSK NASDAQ) , MSC Software (MNS NYSE), and Ansys (ANSS NASDAQ). These companies feed into the CAD-CAM environment and as the economy comes around, the number of companies using this software will increase. They now trade at discount multiples to the market and at just a fraction above book value. This makes them interesting value plays.
"I also like consumer and industrials. We like Comcast (CMCSA NASDAQ), Viacom (VIA NYSE), Alcoa (AA NYSE), Gillette (G NYSE), and Procter & Gamble (PG NYSE). In the real estate investment trust arena, I like Weingarten Realty (WRI NYSE), which yields a tad over 5% at this point, Healthcare Property Investors (HCP NYSE) and a partnership in the oil pipeline business, Kinder Morgan Partners (KMP NYSE)."
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