Dessauer's Market Drivers
10/08/2004 12:00 am EST
"The stock market has disappointed me since about the beginning of March," says John Dessauer, "but the underlying fundamentals have not." Here, the global investment expert offers his market outlook and a trio of stock favorites.
"When it comes to profits, I urge you to watch the overall profitability of companies that file tax returns in the US, and that’s the NIPA data. It comes along with the GDP data every quarter. When we look at NIPA profits going back to the second quarter of 2003, we see a lift off. They were up 13%. The next quarter was up 18%, followed by +21, and +23%. This represents every company that files a tax return in the US. We are at an all-time record high, and making new highs in profitability every quarter. It was up 13% last year. It was up another 18% in the second quarter of this year. I’ve been watching this data for a long time and I’ve never seen anything like it – quarter after quarter of double-digit profit growth. That tells me that the profitability drivers underneath this economy are a lot stronger than people on Wall Street understand.
"The outlook for profits for this year and next is quite healthy and I have no trouble finding companies with real earnings trading at really low p/e multiples. Company balance sheets today look terrific. They have been keeping cash, paying down debt. I’m not so sure that we’ve seen companies in this good shape in a long, long time. Meanwhile, the 10-year Treasury is trading at about 4%, and even if it goes back to 4.25%, we are still sitting in a situation where many stocks pay dividends that didn’t used to, and in many cases, the current yield is greater than the yield on the Treasury. Dividends represent good, old classic investing. And finally corporate governance has been cleaned up. If we return to a normalized p/e, then we should see the Dow up 20%, say around Dow 12,000, by Christmas of 2005.
"One of my favorite stocks is IndyMac (NDE NYSE), trading around $36 a share. The dividend is $1.32, and that could go up a bit. It is a hybrid organization – part mortgage bank and part thrift. So they benefit when short term interest rates go up, because deposits go up, providing more capital for their mortgage origination and lending activities. The business model is to take advantage of the situation we are in right now, where the refinancing boom is over and we are now dealing with a home purchase market. I believe the housing market will remain strong for some considerable period of time and IndyMac should be gaining market share as we go forward over the next several quarters. Michael Perry, who came out of CountryWide Financial, is the CEO. His goal is to earn $8 a share by 2008. Perry has a history of making predications and beating them. It’s pretty clear that the earnings estimate for this year of $3.55 per share is going to be exceeded.
"Nokia (NOK NYSE) is a no-brainer. The cellular telephone industry is in a transformation for the better. 3G technology is coming out. People are upgrading their networks and I think we will see more of that in the US. Cell phone usage is growing dramatically around the world and Nokia appears to be getting market share back. They do pay a dividend once a year, and they have a crystal clear balance sheet with a lot of cash and no debt. In addition, they have a super management team.
"In the technology area, I like to hedge my bets a bit and select a stock where the earnings recovery has already occurred. Thus, we don’t have to worry about the future of earnings. Phillips Electronics (PHG NYSE) already has good earnings right now. And it trades at a low p/e on those earnings – about 10 times. And it’s a company that pays a dividend as well. It is trading around $23. The earnings estimate for this year is $2.40. It’s trading cheap because Wall Street’s outlook for tech companies is not particularly optimistic. This is keeping the stock down at attractive levels."