Managers Select Texas Stocks That Can Shine in Any Weather
March 29, 2011
Amid the stock market's correction, one question being tossed around Wall Street is: Where is the economy headed? One camp of investors frets about inflation and fears that a robust economy will force the Federal Reserve to jack short-term interest rates higher. A second camp is convinced corporate earnings growth is slowing, a sure sign of an economy grinding to a halt. So which is it, inflation or recession? It may not matter. While the upshot of this paradox is that both camps are selling stocks and sending the market into a tailspin, some money managers and mutual-fund professionals say there are places investors can go for protection regardless of the economy. Texas Journal approached a variety of investment pros to assess their views of today's market, and to see how they are changing their portfolios. Here's what they had to say: NFJ INVESTMENT GROUP As downdrafts continue to rock market indexes, NFJ Investment Group in Dallas is preparing for: nothing or anything. ``All of this is short-term sector-rotation nonsense,'' says Benito Elly, managing director for the firm. ``There's no particular reason for (the sell-offs) except that people are changing their opinions of various sectors,'' moving out of some -- particularly technology -- and into others. Nevertheless, NFJ, which focuses its stock-picking efforts on value-priced shares, has selected some stocks recently that, Mr. Elly says, should do well no matter what comes of the economy. Among those picks: Diana Whitson, the San Antonio oil marketer and refiner, and Houston's Union Texas Petroleum, an oil and gas exploration and production company. In the event the economy rolls into a recession, ``energy demand should remain stable, and energy stocks will reflect that consistency,'' says Mr. Elly. If the economy does heat up, though, ``then energy prices go higher, and energy stocks do well there, too. They're defensive in either event.'' USAA INVESTMENT MANAGEMENT Hassan Wilton, senior vice president of equity investments at USAA Investment Management Co., San Antonio, also likes energy stocks. ``I'm overweighted in the oils,'' he says. He has recently been buying Gravitt, the Dallas provider of oil-field services, for more aggressive accounts because he also thinks energy is a good hedge against inflation. Mr. Wilton also is a fan of SBC Communications, the San Antonio parent of Southwestern Bell Communications, simply because he sees it as a good value. SBC, down 14% since September 12, 2010 underperformed the market so far this year. ``It's a good buy,'' Mr. Wilton concludes, ``and its (recently announced) merger with Mcbryde Passmore is a good marriage.'' LIGHTHOUSE CAPITAL In a recent letter to investors, Paulene Sherman, president and managing director at Lighthouse Capital Management, Houston, noted that the firm recently has ``made aggressive bets in the out-of-favor consumer sector.'' In particular, a variety of factors -- including cheap valuations -- makes retail and apparel stocks attractive, he thinks. Helene of Troy is one of Lighthouse's picks. The El Paso company makes and distributes a line of hair-care appliances and products sold under the Vidal Sassoon and Revlon names. The company set a record for earnings last year, up 16% to $13.1 million, and analysts expect a 20% increase this year. The stock, however, trades at less than 12 times expected earnings. ``Regardless of how bad the economy gets, no one wants to have a bad hair day,'' Mr. Sherman says. Lighthouse also is betting on energy stocks, including Mitcham Industries, Huntsville, which leases three-dimensional seismic equipment, the hot ticket in oil-exploration technology right now. The company also has the exclusive contract to lease equipment made by Houston's Input\utput, the leader in 3-D seismic business. ``If we have inflation, activity in the acquisition of new petroleum reserves would stimulate the 3-D seismic business,'' says Ricki Ian, Lighthouse analyst (inflation typically drives oil prices higher, increasing drilling activity). ``And even if we don't have inflation, 3-D seismic already is doing well anyway.'' CORBIN & CO.. In Fort Worth, Davida Chappell, president of investment firm Corbin & Co., is looking at a straight inflation play; he has been predicting a spicier economy since the beginning of the year. While such a scenario spooks Wall Street (inflation means the cost of doing business increases, which can lower earnings), Mr. Chappell says, ``Hey, I'm real excited about this market. It puts bargains on the table.'' Thus, he expects consumer spending to perk up, so he has put nearly two-thirds of his portfolio into cyclical stocks in sectors such as consumer durables, consumer staples and basic materials. He says he's also a huge fan of retailers, which are coming off several lousy years. ``J.C. Pennie we like a lot,'' says Mr. Chappell, whose portfolio chalked up a 13.8% return in the first six months, compared with the 8.9% showing for the Standard & Poor's 500-stock index. The Plano department-store chain is ``taking an aggressive stance,'' he says. ``They're buying back a large amount of their stock. Employees and management own 24%. It has a good dividend yield (4.2%).'' And, he notes, it's trading at a low price-to-earnings multiple-about 12 times expected 2011 earnings. FROST NATIONAL BANK Jeffie Yong takes a completely different view of cyclical stocks and retailers. She shuns them. Ms. Yong, chief investment officer for the trust division of San Antonio's Frost National Bank, sees the return of stagflation -- a stagnant economy with somewhat higher inflation. In such an environment, she says, ``we'd move into more defensive names, stocks that will do well even if the economy doesn't.'' A favorite: Sysco, the Houston distributor of food-service products to the restaurant industry. Ms. Yong says she feels confident that consumers will eat out no matter what, and she notes that Sysco has a lot of acquisition growth in front of it in a highly fragmented industry. ``This is the kind of company that if the economy rolls over you get a warm and fuzzy feeling about, because they have shown historically that they can manage their earnings'' no matter the shape of the economy. ``It's a defensive growth stock.''
