Muhlenkamp: Back to Basics
11/07/2003 12:00 am EST
One of the market maxims from Ron Muhlenkamp is: "If you don't understand something, it is likely a bad deal." Here, from both his quarterly newsletter and his appearance at the Money Show, he offers his back-to-basics assessment of the market and his favorite stocks.
"The economy continues to expand. A few months ago, some commentators complained that the expansion was unsustainable unless capital spending participated. Now we're seeing capital spending beginning to pick up. The commentators now complain that the expansion is unsustainable unless employment picks up. Folks, I believe employment will pick up in due course. We're seeing the normal pattern which the economy tracks as it recovers from recession.
"If you reviewed a few newspapers and magazines from 1991 - the recovery year from the prior recession - you'll see that the current facts and the current commentary parallel those of 1991. We believe that bad news (and good news) will now come at a more normal frequency, and the economy will continue to expand along the pattern that it has exhibited following the prior nine recessions. We do expect the stock and bond markets to remain quite volatile.
"There is $6.3 trillion in MZM (money of zero maturity) and as consumer confidence comes up a little bit, it will either go into bonds or go into dividends, or it will get spent. But it just won’t sit in checking accounts forever. $6.3 trillion: that’s $22,000 per man, woman, and child in the country. That money is waiting to go someplace. It’s just been hiding for the couple of years.
"This is a stock pickers market. I’ll start with housing. The top ten public homebuilders over the past 10 years have seen their market share go from 10% to 20%, which means they have a long way to go. These are companies doing 18%-20% return on equity, that are working against backlogs, they are growing nicely, and they are selling at 8 times earnings. I keep hearing from the media that there is a housing bubble. But the only place I can find a housing bubble is in the media. At 8 times earnings, these things aren’t at bubble levels. You can almost take your pick – Centex (CTX NYSE), Meritage (MTH NYSE), NVR (NVR NYSE). Yes, they’ve tripled while earnings have doubled, and they’ve gone from 4 times earnings to 8 times earnings. But in our opinion, they still have a long way to go.
"Harley Davidson (HDI NYSE) looks kind of interesting. It’s at 20 times earnings. Harley came through this recession in great shape, as did Winnebago. So did Polaris. The people who make what we call adult toys. Several years ago we started asking people what they spend money on where they didn’t haggle about price. The answers tended to be adult toys. We also like Citigroup (C NYSE), as a world bank and Arkansas Best (ABFS NASDAQ), which is a trucking company. We think there is room in natural gas production. There’s a couple of firm’s called Patterson-UTI Energy (PTEN NASDAQ and Nabors Industries (NBR ASE), who have the majority of the rigs that aren’t working - so the leverage is there. This is a winter when your natural gas bills might be a little higher than they were last winter."