- The Washington Times - Friday, April 23, 2010

ANALYSIS/OPINION:

Compared with the past few weeks, the earlier part of this week was rather quiet in terms of fresh economic data. Later in the week, we’ll get renewed views on the industrial economy and housing, but anecdotal evidence from companies that have reported their earnings suggests the former to be good while the latter may be tepid.

But I digress. As I started to say, there has been a lack of economic data and while the current earnings season has started to pick up steam, the slow news cycle early in the week focused attention on Goldman Sachs and what it may or may not have done regarding mortgage-related instruments.

Personally, I try to invest in industries and companies that I can understand, and candidly the financial industry is not one of them. I know, I know, it sounds strange thinking that a person in the financial world does not invest in financial companies, but what can I say.

I have never been a fan of deposits, credits, buybacks and book value, not to mention trying to figure out how to foresee what a bank can do on its proprietary trading or derivatives desk. I prefer data points that I can track, be they economic, demographic or some other. But again, that’s me. With financial companies making up roughly 20 percent of the S&P 500, there clearly is no shortage of investors for those companies and their corresponding securities.

What I can say is that the flare-up surrounding Goldman Sachs seems fairly well timed to coincide with the Obama administration’s efforts to reform the financial industry. Whether or not Goldman Sachs is guilty I have no idea, but more likely than not the civil charges filed against Goldman Sachs last week will lead to closer scrutiny of the way financial firms conduct their business. Transparency is good, in my view, as long as it does not interfere from a competitive perspective.

The question to be raised is who will watch the watchmen? Not so much the actual “who” per se but what kind of background should these overseers and regulator have? I mean, didn’t we have a cast of characters overseeing these institutions previously and how did that turn out?

Reregulating simply to do so is one thing, but it is quite another to have the foresight and understanding as to where the financial industry is going or needs to go in order to head off any new fiascoes. Will any reregulation be all-inclusive and prevent any further crisis from happening? Doubtful in my view. As my dad used to say, when you spend too much time watching the left hand, the right hand tends to get into trouble.

But let’s focus on “your money.” If the microscope lands on the financial industry, I would sooner look elsewhere to invest and with 80 percent of the S&P 500 left there is ample room. Well, that is not exactly true because not all industries are on the upswing right now. As I mentioned at the start of this column data points for the industrial economy continue to improve and we have heard from several transport companies that their businesses are getting better. Those companies tend to be early indicators in an improving economy.

Several weeks back I mentioned Pall Corp. and II-VI Inc., both of which are up nicely in the past month, as stocks sat poised to benefit from the improving industrial economy. Rather than talk more about those names, let’s consider Applied Materials, a company that has both cyclical and secular factors going for it.

Applied Materials is a semiconductor capital equipment company, whose customers include manufacturers of semiconductor wafers and chips, flat panel liquid crystal displays, solar photovoltaic cells and modules and other electronic devices. In 2009, worldwide capital spending on semiconductor-manufacturing equipment dropped 46 percent to $16.6 billion. Spending by major semiconductor companies picked up at the end of last year and that trend is expected to continue this year, with most of the money going to upgrade technology. Gartner is forecasting a 76 percent increase in semiconductor capital equipment spending in 2010 with continued growth through 2012.

Aside from the rising tide of an improving industry, Applied Materials improved its competitive position by increasing its worldwide market share to 15 percent last year from 13 percent in 2008. Moreover, Applied Materials is an indirect beneficiary of the New Middle Class given accelerating demand for consumer electronics in emerging markets worldwide. As we continue to migrate more toward a digital society with iPhones, iPads, Kindle, streaming movies and TV shows, and always on Facebook accounts, more and more chips will be consumed and Applied Materials will be there to help add capacity to meet that rising demand.

With a balance sheet characterized by a strong balance sheet, a modest dividend against a favorable industry backdrop, I am favorably inclined but as always I would suggest rolling up your sleeves and doing some more homework.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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