INVESTING -- Sticking with Stock Market Leaders
Thursday December 6, 11:13 am Eastern Time
BusinessWeek Online
Personal Investing: INVESTING Q&A
Where to invest in the post-September 11 world? Donald L. Luskin, chief investment officer of Trend Macrolytics, makes two points: Look at defense and security stocks, and in technology seek out the leader in each category. He thinks companies that aren't dominant are doomed to mediocrity.
Despite the market's significant recent recovery, Luskin believes it's nowhere near becoming a new bull and sees it still in the downturn that began in March, 2000. He also sees no catalyst to reverse the global recession that's in progress. He cautions investors to avoid companies with heavy debt loads and pension-fund obligations -- both of which could cause serious trouble if the recession continues.
Luskin's comments were made in a chat presented Nov. 29 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Edited excerpts from this chat follow. A complete transcript is available from BusinessWeek Online on AOL, keyword: BW Talk.
Q: On balance, the stock market has rallied nicely since Sept. 21. Do you see this trend continuing?
A: Welcome to the great bull market that has restored us all the way up to the levels of last August. I think investors need to understand the difference between a recovery and a bull market. By every definition, we're still in the downturn that began in March, 2000, and we've managed to fight our way back up to the upper [boundary] of that downturn. We've recovered from the disaster after September 11, but all that has done has restored us to the recessionary levels of last August.
Q: What do you see as the driving force of the market now?
A: Stocks get valued with two major inputs: expected earnings and investor willingness to bear risk. Over the last few months, we've seen an increasing willingness by investors to bear risk.... Real growth prospects are another matter, and right now, those are just hopes and fantasies. The tech sector now is valued exactly as it was in March, 2000.... Stocks are priced for real earnings growth, and if we don't start seeing it, look out.
Q: Have you recommended any changes in investment strategy since September 11?
A: Yes. On one level, it has been an obvious recommendation, but investors often miss opportunities by forgetting the obvious -- invest in stocks related to defense and security.... There are many stocks in this sector that are exciting growth stocks on their own merit [and were even before September 11], and others that were marginal that I think now could be superstars.
The war on terrorism is not just about missiles and bombs and guns. It is about biotechnology to combat bioterrorism, and it's about domestic security, so there is a whole new definition of defense stocks.
Q: So what are some of those stocks?
A: The biotech stocks I like are: Abgenix (NasdaqNM:ABGX - news), Acambis (NasdaqNM:ACAM - news), BioReliance (NasdaqNM:BREL - news), and Gilead Sciences (NasdaqNM:GILD - news). And in my biodefense portfolio, I am short on SureBeam (NasdaqNM:SURE - news). BioReliance and Acambis both made major news-driven moves [on Nov. 29], so investors should be very cautious about acting quickly in these thinly traded, volatile, news-driven stocks. But definitely keep them on your radar, and wait for the right moment.
Q: So what is your scenario for the economy?
A: I think the hopes for a swift end to the recently declared recession are too optimistic. I think that we are dealing with a unique situation in which we are trying to recover from a busted boom at the same time as we are dealing with unprecedented shocks, thanks to September 11. We should be very thankful that the government has at least avoided making the worst mistakes that could have plunged the world into war, and the economy into a black hole.
But again, stabilization, or even a little recovery, is not the same as a new growth phase. I see no catalysts that will get the U.S. or the world, out of this synchronized global recession.
Q: What are your technology stock picks, given that economic forecast?
A: Now is the time when you want to invest in the dominant No. 1 player in every technology market -- the one poised to benefit most from a recovery and be hurt the least in a prolonged downturn. Downturns can actually be good for market leaders -- they're like an acid bath that scours away the competition. Dominant companies like Intel (INTC), Oracle (ORCL), and Dell (DELL) could emerge stronger than ever.
Over the last month, we have seen subdominant technology stocks perform spectacularly well. That's because six weeks ago, most investors thought those companies wouldn't even survive. Now, though they are doomed to mediocrity, at least they will survive long enough to be mediocre.
Q: Since you aren't that bullish about the market, where would you put money now?
A: Sectors: defense and security. Stocks of companies that are leaders in their category. But I would put an important caveat on that. Be sure to avoid stocks of companies with large debt loads and large interest expense. If the recession continues much longer, they will find it increasingly difficult to meet their debt obligations or to refinance. One of the worst sinners in this category would be General Motors (GM).
Also, beware of companies that have large pension obligations. The stock market decline will cause these companies to have to make large contributions to their pension plans for the first time in 20 years. That will be the end of the free ride for many old-line industrial companies, like GM, Deere (DE), etc. But it will be a great advantage for companies like Microsoft (MSFT) that have zero debt and zero pension obligations.
If you want to place a single bet based on the idea that there will be a sharp economic recovery, you should buy junk bonds. They will return as much as stocks, with a fraction of the risk [if you are right].
Q: Opinion on Cisco (CSCO), please?
A: Cisco is a troubling situation to me. They are one of those ``No. 1'' companies, those market leaders that I've been talking about, but the problem is they don't act like one. They could have used this downturn to get into a pricing war that would have wiped out Juniper Networks (JNPR) and Extreme Networks (EXTR) and dozens of lesser competitors, but they didn't have the guts to do it. Therefore, I don't see Cisco as being an especially superior play to any number of other companies in their product category.
Q: What do you think about media companies like AOL (AOL)?
A: Media companies are extremely cyclical, and that is an issue as we struggle through this recession. That said, I see AOL as a unique and very valuable experiment in combining old media and new media, and in merging technology and content. There is simply nothing like it, and I believe in retrospect the merger between AOL and Time Warner was a master stroke.
Q: Are there any possible bets on the future of the Net to recommend?
A: The problem is what it has always been with the Internet: You can't invest in the ``Internet'' per se any more than you can invest in the English language. It's a public utility, a concept rather than a reality. And all you can invest in are companies that have something to do with that concept, and at this point [that's almost every company].
_______________________________________
Go to www.businessweek.com to see all of our latest stories. |
