Dessauer's Global Values
11/07/2003 12:00 am EST
Rather than rely on reports from others, John Dessauer has long traveled the world to directly research the best global value situations. I first met John in China in 1994, and have been a huge fan of his work ever since. Here he discusses his outlook for the dollar, and its impact on the economy - as well as some of his current favorites.
"Studies by the Fed suggest that a 5% decline in the trade-weighted dollar has the impact of a quarter percent Fed cut in short-term interest rates. The dollar is down over the past year about 10% - the equivalent an additional half point cut in the Fed funds rate. Now we know why the Fed – even though they are still concerned about sluggish economic growth in the US – didn’t have to cut interest rates recently.
"They keep saying they will if they have to; but if the dollar keeps going down at that rate they won’t have to. If the dollar falls another 10% - which I believe it will over the next 12 to 18 months – that’s the equivalent of another half point cut in rates. Then, all of a sudden, with low short-term interest rates, reasonable monetary growth, government spending, and tax cuts, we are putting in place just about everything imaginable to get this magnificent economy of ours going and growing.
"What’s going on in the currency markets now will accomplish what politicals can’t. I would argue that next year when we return to the Money Show in San Francisco, we will have seen that economic growth has picked up in Japan and Europe, because of the currency markets, which will force an acceleration of reforms. Our economy, in the meanwhile, will be creating new jobs and our stock portfolios will be significantly higher. And that’s why I argue that we are in a sweet spot for the next year or two. Don’t miss the opportunity.
"IndyMac (NDE NYSE), is a mortage company which began as a spinoff from Countrywide Credit, which has risen 23,000% since 1982. It is run by Michael Perry, who is just as brilliant as his mentors at Countrywide. Perry has delivered excellent results so far. Can he build IndyMac into a much larger financial company? There are no guarantees, but with superb management, a strong balance sheet, a new dividend, and a clear business plan, I am comfortable buying an overlooked stock like IndyMac.
"Nokia (NOK NYSE) has a whole list of new, exciting products. This company was out in front before, is out in front now, and will be out in front in the future. I see accelerating growth from Nokia both in standard wireless telephones, from the fact that the balance sheet has no debt, and from superb management. Everything this company touches turns to gold. Earnings are beginning to accelerate. I think next year could be a superb year for Nokia. This is a very high quality name and there is not much risk. This stock could double in 2004.
"Scientific Atlanta (SFA NYSE) makes the set top boxes you need on your TV. There is a renewed boom coming in capital spending by cable operators due to competition from satellite. Misguided investors sold SFA on the notion that set-top boxes would be eliminated by new plug-and-play systems. Not so: Set-top boxes will still be needed for interactive services. The TV will need a ‘smart card’ that allows a hookup with the cable company. Scientific Atlanta owns that technology. So however you look at what’s going on in TV, cable, and broadband, SFA will be a big winner.
"AFLAC (AFL NYSE) is a beneficiary of stronger growth in Japan and the falling dollar. AFLAC is the largest insurance company in Japan. Operations in Japan account for 76% of revenues and profits. Profits originate in yen, so a dollar decline boosts AFLAC's translated dollar earnings. Management said earnings will be $1.80 or better this year. Wall Street has a $1.86 estimate. For 2004, estimates rise to $2.10 or $2.15. These estimates do not take into account the potential for better-than-expected economic growth in Japan. My 12-month target is a new high at $40.
"Low interest rates, a falling dollar and faster economic growth are the perfect combination for Cendant (CD NYSE), which operates in travel and real estate. Since 9/11, travel has been in the doldrums, but real estate is booming.Rising rates temporarily cooled off the refinancing business, but it did not stop the vigorous housing market. What if Americans start traveling again? If so, Cendant's hotel franchising and rental cars would boom. The lower dollar is already making the US more attractive for foreign travelers. As the lower dollar and lower interest rates work through the economy, we will see an increase in business travel. Leisure travel is already showing signs of recovery. My 12-month target is $30.
"Rite Aid (RAD NYSE) is on a roll. Second fiscal quarter earnings were were excellent. The number of prescriptions filled was up, and Rite Aid still has lots of room for improvement. Now, we have all the evidence we need to see that Rite Aid has turned all the corners. All we need now is patience. As sales per store continue to rise, more cash will be generated and used to reduce debt or fund store growth. This is significant. Total sales could reach $17.5 billion next year (fiscal 2005). If investor confidence rises enough to warrant a value equal to 50% of sales, the stock (even after taking debt into account) can rise to $12 or $13."