Rational Values

02/20/2004 12:00 am EST


Jamie Dlugosch

Editor, The Rational Investor

Last year, Jamie Dlugosch launched The Rational Investor, which he calls his "attempt to carry the torch" of his former friend, mentor, and business partner-the late Al Frank. Jamie explains his investment philosophy and offers a trio of top picks that meet his value criteria.

"Our philosophy is to use fundamental, value-driven analysis to make buy and sell decisions with respect to US equities. We will also use elements of behavioral psychology, philosophy, and macroeconomics in order to maximize portfolio returns.  Ultimately our goal is to buy low and sell high. This powerful yet simple approach made Al Frank a very wealthy man and since its inception in October of 2002, my real-dollar model portfolio has generated a return of 75%. And the real attraction of this style of investing is that it can work in a rising or falling market.

"So where are we today?  The market run of 2003 has been quite impressive.  As a result, valuations on the major indexes are slightly above historical averages.  At the same time, interest rates remain at historically low levels with inflation being non-existent.  Most prognosticators expect the markets to gain 5-10%.  I think that number is much too conservative.  Clearly there is not the same type of momentum and hype that precipitated the start of the bear market. A more reasonable expectation would be the long-term historical return of 10-15%.  With the average bull market lasing four years we are still in the early stages of the current cycle.  More importantly, the weaker dollar and low-interest-rate environment bodes well for the US economy.

"Many individual companies still trade for lower valuations while demonstrating earnings growth in the high teen double digits.  While not a proxy for success, the ingredients are ripe for further gains in the market.  As such our portfolio is long while using a fair amount of margin in order to enhance returns. The following are a few of my favorite stocks in the current environment:

"Digital Generation Systems (DGIT NASDAQ), a distributor of digital audio/video content for the advertising market, has a clean balance sheet, low valuation, and potential to significantly grow earnings as the advertising industry recovers from a recession.

"Sanderson Farms (SAFM NASDAQ), the poultry producer, is poised for significant growth well above the current ten times earnings multiple.  The growing interest in high-protein, lean diets promises to fuel growth at SAFM for some time.  The mad cow scare will also benefit the company.

"Stelmar Shipping (SJH NYSE) operates a fleet of oil tankers.  The company trades for around ten times earnings and slightly less forward earnings.  Analysts forecast earnings to grow in excess of 20%.  Given the growing world economy and seemingly insatiable demand for oil, SJH makes for a quite Rational Investment in my opinion."

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