Stephen Leeb likes oilfield service stocks:
BusinessWeek Online
INVESTING -- "The Worst Is Clearly Over"
Personal Investing: INVESTING Q&A
The economy could be in for a dramatic recovery and the stock market may be poised for good news in the next 12 months, believes Stephen Leeb, president of Leeb Capital Management. While there could be some testing of the recent rally, he thinks the market may have seen a psychological bottom. Leeb sees signs of recovery in both tech and energy stocks, and he also recommends investors look at financial services and consumer franchises. He is especially high on oil-service stocks such as Schlumberger and Nabors Industries because of the sensitive situation in the Middle East.
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Leeb was a guest in a chat presented Oct. 11 by BusinessWeek Online on America Online. He was responding to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Edited excerpts from this chat follow. A complete transcript of this chat is available from BW Online on AOL, keyword: BW Talk.
Q: We've had some very encouraging numbers from the market -- is this a rally that might last?
A: America has shown every sign of overcoming the psychological and physical shocks of September 11, and with policymakers on full alert for a major recession, I think the odds of a dramatic recovery from a mild recession are great. While the recent rally in the market could give way to some testing, the worst is clearly over, and as investors, we have a lot to look forward to over the next 12 months.
Q: Have you noticed anything special in this week's market recovery -- like new leaders or strength in any one group?
A: Nothing that really stands out, other than the breadth of the rally. More specifically, though, and these are tentative signs, we have seen strength in technology and energy. These are both economically sensitive areas, which I expect will continue to be market leaders, along with small-cap stocks.
Q: Has the market hit enough of a psychological bottom for a bull market to begin?
A: In my opinion, yes. Volume the week the market reopened shattered previous records by a wide margin. In a sense, you had capitulation virtually every day of that week. That kind of intense fear-related selling is, in my opinion, a very strong marker of a major market bottom.
Q: If you were buying only one stock now, what would it be?
A: I'm going to give you three. My speculative choice would be Apex. Less speculative would be the Irish pharmaceutical company Elan (NYSE:ELN - news). And my safest choice would be Pfizer (NYSE:PFE - news).
Q: How do you like JDS Uniphase (NasdaqNM:JDSU) at this current $9 price? I own 125 at $40. Should I average down?
A: No. If it comes back, that's great. But I think there are plenty of other tech stocks that offer at least comparable value. One of my favorites, for example, would be Selectron (NYSE:SLR - news), which is an EMS [electronic manufacturing services] company that has a leveraged stake in virtually every technology arena and is fundamentally much stronger than JDSU.
Q: What do you think of oil-service stocks -- e.g., Schlumberger (NYSE:SLB - news)?
A: Glad you asked, as I believe oil-service companies are among the most attractive groups on the board.... I think one thing September 11 brings home, on a long-term basis, is the utter necessity of a strong -- indeed, very strong -- energy policy, one of whose goals is energy independence from the Middle East.
Oil-service companies have an absolutely vital role to play. The stocks, by and large, are very cheap, relative to historical benchmarks. If I'm right about the economy, however, natural-gas prices and very likely oil prices will be rising sharply next year, which will be yet another sign that we will have to drill very frantically for oil and natural gas, as well as develop other alternatives.
I think all investors should own oil-service companies, of which Schlumberger should be a core holding. Another one should be Nabors (NBR), which is the world's largest land driller. They are an utterly vital cog in any efforts to increase natural-gas production in this country.
Q: What about EMC, as firms look to data security?
A: No, I just don't like EMC, though I do think data security is going to be a very important area. EMC is basically a commodity play. A much better company in the storage area would be Veritas (VRTS), which is a software company with much greater long-term potential than EMC.
Q: Over to consumer stocks -- Dial (DL) had good earnings and a nice runup. Should I sell now?
A: Probably. With a p-e well above 25 and long-term growth potential of just a bit more than 10%, the stock appears, if anything, to be overvalued. If you want a great consumer-related stock that hasn't run-up and is, in fact, way off its high, try a name you are well familiar with: AOL.
Q: Would you hold on to Compaq (CPQ)?
A: No, I wouldn't. In my opinion, neither Compaq nor Hewlett-Packard (HWP) is a particularly well-managed company. My favorite way of playing the PC industry would be with Intel (INTC), followed by Dell (DELL) and maybe even Microsoft (MSFT).
Q: Do you see any stocks especially benefiting from the new kind of war we are starting to wage?
A: Well, clearly a company like Lockheed Martin (LMT) is going to get more funding as a result of our increased surveillance activities. There are many companies that will benefit, but very few pure plays. For example, Tyco (TYC), which is a favorite of mine, has several product lines whose growth will be enhanced by virtue of our war on terrorism.
Q: Will Corning (GLW) ever make a rebound?
A: Yes, I think it will. If I were to bet on one telecom-equipment company, it would probably be Corning. That said, given the carnage and overcapacity that still exist in this industry, it would not be a big bet. But I do think Corning is a definite survivor, and probably a future growth company again.
Q: You always liked Burlington Resources (BR). Do you still like it?
A: Yes, I do. But to be honest, I've become somewhat disenchanted with the management, though I think it will be hard to miss with any good natural-gas play.... Two natural-gas plays I like even more are Apache (APA) and Anadarko (APC), and these would be my top choices in the natural-gas arena. But I would not sell Burlington to buy them, as I think the group will move together.
Q: Retailers are showing some strength. Are there any retailers you like now?
A: Yes. We basically like the consumer franchises, and three favorites would be Home Depot (HD), AutoZone (AZO), and a more controversial choice, which over the long haul has tremendous potential, Tiffany (TIF).
Q: Would you buy Carnival Cruise Lines (CCL) or Royal Caribbean Cruises (RCL) at this time?
A: Given my feelings about the economy, and the resilience of the American people and the fact that both stocks have come down very hard in the wake of the September 11 attacks, I would rate each of them a buy. RCL is clearly more speculative -- that is, more risk, but more upside potential. I wouldn't be surprised to find both at least 20% higher 12 months from now.
Q: So with the market perhaps at a turning point, what sectors should we be putting money into?
A: To sum up, I think it always makes sense to invest in sectors that represent strong long-term growth. My five favorites are technology, energy, financial services, consumer franchises, and health care.
Q: Any names to add as we close?
A: Sure. In financial services a couple of favorite names would be J.P. Morgan Chase (JPM), which incidentally has a 4% yield, nearly twice that of T-bills, and prospects for double-digit growth. Also, we like well-capitalized insurance companies, like Ace (ACE) and St. Paul (SPC). |
