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Current Newsletter: Volume 2, Issue 2 |
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page 2 Analyst’s View This year’s succession of negative economic data and disappointing earnings reports prompted many investors to indiscriminately sell significant portions of their portfolios in the face of falling stock prices. Rather than stick to their long-term investment plans, large numbers of investors responded emotionally to short-term, negative information flow. These panic-sellers failed to recognize that short-term economic cycles do not usually alter long-term secular trends. Despite the economic slowdown experienced by the U.S. in the past year, many sectors of our economy remain attractive and will flourish in the future, driven mainly by strong, underlying social, economic and demographic trends. Due to the market’s over-emotional response to short-term events, a number of stocks in these sectors are currently trading at attractive valuation levels, creating interesting long-term buying opportunities. A few of these opportunities are detailed below: Energy: For much of this year, energy stocks have suffered as investors have anticipated a return to sub-$20 oil prices. Although weakness in the global economies has depressed oil and gas demand, we believe the present decline in energy prices will be short-lived. Over the past decade a chronic under investment in energy exploration and development has created a nearly unavoidable long-term imbalance between supply and demand. Tight capacity and limited future supply should keep energy prices above their long-term average for the next several years. To exploit this trend, we have included in our portfolios a number of oil service companies that are well positioned to benefit from an inevitable increase in energy exploration and development. One of our holdings, Transocean Sedco Forex, Inc. is the dominant player in the deep-water rig market. With a 70% market share in the deep-water market, Transocean is the leader in one of the fastest growing segments of the energy industry Transportation and Logistics: The current economic slowdown has gravely effected the transportation and logistics sector. In particular, as the technology sector has retrenched, technology related trade from the Far East has fallen precipitously. Although the continuing negative capital expenditure trend may not have run its course as yet, trade has grown steadily over the long-term. As corporations focus on their core competency, they have increasingly out-sourced their manufacturing activities. Additionally, companies have aggressively cut inventory days in an effort to increase productivity. The result is that logistics and transportation play an increasing role in corporate activity, with airfreight volume growth in the mid-double digits for much of the 1990s. We believe that those entities involved in the management of the supply chain, such as airfreight companies, are well positioned to capitalize on the positive growth trends in trade and outsourcing. We have recently purchased Atlas Air, the world’s third largest airfreight company, as a pure-play on the inevitable return of global trade growth. Cyclical growth stocks: The demographic changes resulting from the aging of the U.S. population has created an attractive environment for certain sectors of the consumer goods industry. As a consequence of the aging population trend, cyclical growth sectors like financial services, leisure products, and healthcare have experienced unprecedented growth. Despite this long-term positive, investors’ jitters temporarily penalized many of these stocks based on short-term concerns. In taking a longer-term view, many consumer cyclicals should experience superior earnings growth for years to come. We have attempted to capitalize on the long-term demographic changes by focusing on consumer-related stocks with excellent competitive positioning. We currently own Tiffany & Co, one of the world’s premier specialty retailers, to capitalize on the increasing disposable income that results from an aging population. Similarly, we also own Royal Caribbean and Callaway Golf to capitalize on both increasing disposable income and increasing leisure time at the older age brackets. The three sectors above all share a common theme. Short-term market anxiety has created significant opportunities to invest in companies and industries with attractive secular growth trends. Not only are the companies long-term growth prospects intact, but the stocks are often trading at attractive valuation levels not seen in years. For long-term investors, this is the time to be opportunistic. Full Newsletter (Requires Adobe Acrobat Reader) |
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