Looking Where Expectations Are Low
05/24/2007 12:00 am EST
John Dessauer, president of John Dessauer Investments and editor of John Dessauer’s Investor’s World, shared some contrarian ideas with attendees at last week’s Las Vegas Money Show.
[I] look for companies where Wall Street has low expectations. Where are Wall Street’s expectations the lowest? Housing. Where are they the second lowest? Financial institutions, because they are connected to housing, so therefore when the news is bad and the headlines and scary and Wall Street expectations go down, that’s where old ducks like me go shopping. And that’s where I would argue you will find your bargains.
Indy Mac (NYSE: IMB), a spin-off originally from Countrywide Financial (NYSE: CPC), really got hammered with this subprime mortgage scare. They have done everything in their power to open up their balance sheet. They did declare their dividend for the quarter, which is 50 cents a share. You had insider buying: chairman and chief executive officer Michael Perry ponied up a million bucks to buy the shares, not options—he really wrote the check for the stuff just below $30. There were about six or eight officers of the company who did the same thing in various amounts. (IndyMac closed just below $35.50 Wednesday, about 25% off its all-time high—Editor.)
We all know the scary headlines: mortgage foreclosures up 62%, house prices going down for the first time in 30 years. Countrywide Financial is hiring 2,000 more sales people [and] forming a reverse-mortgage banking unit. They are going into the reverse-mortgage business like Indy Mac.
Now Countrywide Financial’s [founder and chief executive officer] Angelo Mozilo is one of the brightest guys in the game. What is that telling you? It is telling you there is all that hype out there in terms of housing—a lot of reality, a lot of problems, but also a lot of hype. Secondly, the strong guys like Countrywide see this as a big opportunity to just increase their market share. Countrywide was at 10% or so market share, they are going to go to 15% or 16%, or 17% or something. So it just gives you an idea, you know, where the headlines are the scariest is often where the opportunity is the greatest. (Countrywide closed just below $41 Wednesday, about 10% off its all-time high—Editor.)
Home Depot (NYSE: HD) had earnings that were a little worse than expected—six cents off the target. Home Depot is again connected to housing, of course. But there is another aspect to Home Depot: They own around 85% of their stores. Stores tend to be big properties on busy streets. There is a lot of value in Home Depot. I’ve seen calculations that if you just broke the company up and liquidated you would come away with $56 a share. (It closed below $39 Wednesday—Editor.) So, Home Depot comes in a category of a company where Wall Street has very low expectations—but also a company where you have real underlying asset value that could be realized if necessary.