By Hal Eddins, managing Director, Capital investment Council
Are the world’s economies heading into a recession? We won’t know until after the fact, but a recent perusal of the valuations assigned to the retail sector shows that the worst seems to be priced in. Many of the best and brightest in the retail space are selling with PE ratios in the 10 to 12 range. To put that in perspective, retailers have not sold at such an attractive relative valuation since the market meltdown of late 2000. At prices this cheap, investors can take their pick: American Eagle, Circuit City, Cabela’s or Whole Foods. We think they all look appealing. The American consumer is certainly trying to do their part. I loved this quote from an anonymous shopper at 3:40 AM on “Black Friday” after Thanksgiving Day: “What I want to buy is right in the middle of the store, where that woman is standing, and I hope I don’t have to knock her down getting to it.” You have to admire her passion. In the meantime, we know what you’ve “really” been doing at work on the Monday after Thanksgiving. The Wall Street Journal shows that 60% of all internet shopping orders on “Cyber Monday” came from “work” computers….big brother is watching.
One should never doubt the power of Oprah! Last month, Oprah Winfrey held her annual “Favorite Things” show. Audience members get to leave with each of Oprah’s favorite consumer products. The big ticket item this year was an LG refrigerator that featured a high definition TV screen on the door. Another item was the Discovery Channels DVD, “Planet Earth.” On the Monday after the Oprah show aired, the Discovery Channel did almost $2.5 million in sales; the majority of the sales were of the “Planet Earth” DVD. To put that number in perspective, the Discovery Channel had only $1.2 million in sales on that same day last year at both their web site and all of their retail stores. Love her or hate her, Oprah does know how to drive sales.
One of the most difficult things about being a contrarian investor is getting the timing right. It’s well and fine to buy a beaten up asset, but you want to make sure that your cheap asset will eventually become expensive again! Also, don’t forget that your new purchase needs to go from cheap to expensive in a timely manner. I recently came across this quote from Bill Miller: “Just as the right thing to do in 2002 was to buy what everyone was panicked about, I think the greatest gains over the next five years will be made in those securities people are panicked about today.” That was very well put, and we are beginning to research many of the most beleaguered sectors. We’re looking at housing stocks, but just looking so far. Many of the home manufacturers do not possess that type of balance sheet strength that we are looking for. We feel one solution to the problem of individual stock selection in the homebuilding group is to buy the XHB. XHB is the ETF that represents a cross section of the homebuilding related sector. With one trade, you become instantly diversified across a range of the homebuilding sector; the top holdings of XHB include Centex at 4.67% of assets, Toll Brothers at 4.56%, and Champion Enterprises at 4.7%.
Another group that has been hard hit is the banking sector. We’ve already dipped our toe in the pool on Citigroup and are also taking a look at Wachovia. I think there may be more downside to come at Wachovia as their problems run deeper than over at cross-town rival, Bank of America. However, we think Wachovia is selling at a deeper discount than B of A, so those problems may be priced in. We reported on the disconnect last month between the banking sector and the broader S&P 500. Well, the bank index has dropped another 9% since that report. Dividend yields are becoming attractive in the sector: Citi is paying 6.5% and Wachovia paying 6.49%. No matter which company you choose to buy, it makes sense to take your time and “scale” in your purchases. For example, your first buy should only be one third to one half of the position you ultimately want to own. I don’t think the banking sector will form a “V” bottom in which we hit a quick low and then take out the old highs six months later. We will likely see continued downward pressure on the banks over the next week. Once 2008 arrives, we think the tax selling pressure should abate and share prices could see some upward movement. Patience will be required, and the returns in the banks and brokers will likely develop much like they did off of the 2003 lows: slow and steady. I’ll keep you posted. If you have any comments feel free to contact me at [email protected] or ring me at 919-863-2362.
Disclosures:
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment. Capital Investment Counsel reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. All recommendations within preceding 12 months or applicable period are available upon request.
Capital Investment Counsel is a registered investment advisor. More information about the about the advisor including its investment strategies and objectives can be obtained by visiting www.capital-invest.com.
Comments