- The Washington Times - Friday, April 15, 2005

NEW YORK — Cement. Railroads. Trucking. Steel. These aren’t sexy businesses, but they have something that adds to their appeal in the current investing climate: pricing power.

Unloved for years, “old economy” industries have piqued the interest of value-minded investors who say there is a growing need for the goods and services they provide. Asia’s humming economic growth is the most obvious factor, but there is another point in their favor — their own troubled pasts. Hard times have left only a few survivors in these deeply cyclical industries, so there is not a lot of competition as business heats up. But there is not much buzz about their future, either.

“If you were to get 1,000 investors together today and say, ‘How many of you would like to hear about Burlington Northern Santa Fe?’ You wouldn’t have many takers because the image of the railroad industry is based on what it used to be,” said Don Hodges, president of Hodges Capital Management Inc. in Dallas. “But if they make money year to year to year, that image will improve.”

Flash back to the year 2000: Wall Street was bored with old economy stocks; growth and high-tech shares were an obsession. But as competition grew, pricing pressures developed, margins declined and it became more difficult for the new economy names to make money. The legacy of that time can be seen in the communications industry today, where many players are scrabbling for the same business, and it’s not clear which will survive. There’s almost no doubt some will fail.

Compare that with old-fashioned industries that for years had too much capacity. As these businesses flagged, their infrastructure declined and many companies went broke.

“It’s almost a self-correcting process,” Mr. Hodges said. “One day you wake up, and there’s a shortage of capacity, a shortage of plants and products that you need to service industry. So all of the sudden those companies that are left begin to have pricing power.”

It’s happening in cement, steel and transports, Mr. Hodges said. But it might be a while before you hear about it from your broker, because Wall Street just isn’t that excited about it yet.

“My contrarian antenna goes up when I see areas of the market where price action is strong, where earnings trends have been favorable and Wall Street hasn’t jumped on board,” said Bernie Schaeffer, chairman of Schaeffer’s Investment Research in Cincinnati. “Sometimes it takes a while between the time a beaten down industry starts to really regain its health and Wall Street reorients its thinking … and it’s in this environment that investors have opportunities for good returns.”

Wall Street hasn’t hurried to paste “buy” ratings on these stocks, in part because many analysts believe rising demand for basic materials, pricing power commanded by railways and tightness in the trucking industry are temporary conditions. Some also think the stocks are already overvalued — a point Mr. Hodges and others dispute. But given the pace of global growth, economists say business is likely to be strong for a while.

“I think these conditions will linger,” said Michael Gregory, senior economist at BMO Nesbitt Burns of Chicago. “While you could get a healthy correction … we’re in a multiyear period where these industries are going to do very well. They probably don’t get the respect they deserve.”

One thing that works in their favor: It’s likely to take much longer for competition to develop in these industries than it did among the high-tech concerns, because such a large infrastructure is required.

For example, Mr. Hodges said, it can take years to get a permit for a cement plant, then even longer to actually build one. That’s good news for cement and aggregate rock producers already in business, such as Texas Industries Inc., Eagle Materials Inc. and Vulcan Materials Co.

Mr. Hodges, who started out as a broker with Merrill Lynch in Oklahoma City in 1960, later opened his own firm, and last month won a performance award from Lipper Inc. for delivering consistent returns through his mutual fund, has an eye for undiscovered trends.

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