NYT -- "Grim" investment realities (thoughts from Martin J. Whitman).
September 23, 2001
MARKET WATCH
Grim Realities, Here to Stay
By GRETCHEN MORGENSON
Investors like to look to history to divine
what might happen next in the financial
markets. But across the nation, from the
smallest stock market dabbler to the largest
institution, investors are facing an adversity
unlike any experienced before. Even stock
market veterans who survived the bear market
of 1974 say that comparisons to that painful
period are of no help.
There are investors who specialize in analyzing
industries under stress and identifying companies with the best shot at a
comeback. One of the most able and experienced of these investors is Martin J.
Whitman, manager of Third Avenue Funds, three mutual funds that invest in
companies whose stocks are cheap despite having solid balance sheets and good
earnings potential down the road. His experience may give investors some
guidance for what lies ahead.
Mr. Whitman's performance has been enviable. For the three-year period ended
Aug. 31, the average annual return in his largest fund, Third Avenue Value, was
19 percent. The fund has lost 12 percent of its value this year, but one of his
other funds, Third Avenue Real Estate, is up 6.4 percent for the year, while Third
Avenue Small Cap is down just 1.6 percent.
Where Mr. Whitman can provide value to all investors is in his perspective on the
current investment scene. He is a man who calls 'em as he sees 'em. His
prognostications are not the sugarcoated version of what may transpire — like
some of those emanating from big Wall Street firms.
His macro view is simple and dark. "I don't think we ought to be worried about
the recession," he said.
A far greater concern is what he calls permanent impairment, an accounting term
that refers to an asset that has been so damaged that it will never return to its
previous value. He argues that some industries have been permanently impaired
by the events of Sept. 11.
"We will never again go back to the way things were in the airline industry,
hotels, in small property and casualty reinsurers, maybe computer box
manufacturers," he said, though the computer problem predated the terrorist
attacks. "And things may stay bad for an indefinite period."
But that is not to say that Mr. Whitman is all doom and gloom. In fact, he says
the stock market holds exceedingly compelling bargains now, companies that
have solid financial positions and good potential for earnings rebounds. Yet these
companies are selling at price-to-earnings ratios that are well below 10 times the
profits that Mr. Whitman expects from them in a recovery. Some are trading at
discounts to their readily ascertainable net asset values.
Here are some companies Mr. Whitman has been buying in recent days:
• The Brascan Corporation (news/quote) has operations in real estate and base
metals, electric power generation and financial services. Its stock, which closed
at $15.82 on Friday, is trading at around 11 times future earnings.
• Forest City Enterprises (news/quote) is a builder and a manager of commercial
and residential real estate, including shopping centers, industrial parks and
apartment houses. Its shares are at $50.70, up about 25 percent this year.
• Paccar Inc. makes Peterbilt and Kenworth trucks and industrial parts, and has a
"big, big balance sheet," Mr. Whitman said. Its stock fetched $44.86 last week
and has a dividend yield of 2.7 percent.
• Trinity Industries (news/quote) is a highly efficient manufacturer of
transportation, construction and industrial products like freight rail cars, highway
guardrails and barges, Mr. Whitman said. The stock, now at $21, has a dividend
yield of 3.4 percent.
[Note from Jon -- these two companies sure seem like potential candidates for being a place to park money that used to be in T-bills or 2-year T-notes ...]
Make no mistake: these are not stocks that will pop in the short term. Mr.
Whitman is a patient investor in the most traditional sense of the word. His is an
approach that was ridiculed in the stock market mania that now seems so very
long ago and far away. But with the short term looking so grim, investing for the
long term is the only tack for investors to take now.
Copyright 2001 The New York Times Company |
