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VERSACE: Methodical approach brings best investing results
The past several days have been ones to watch in my opinion because so much has occurred in a relatively short period of time. I suspect it will take a few days of sorting it all out to properly understand exactly what has transpired and what the impact will be on the economy, commerce and the stock market.
What has been going on you may ask?
The passage of a package of fixes to the health care bill, but only after senators took dozens of votes on potentially thorny issues. Companies, such as Caterpillar, Deere & Co., Medtronic Inc. and others, citing higher expenses and taxes to result from the passage of the health care bill. A renewed push on overhauling financial regulation following a 13-10 vote by the Senate banking committee earlier this week. The debut of the Federal Communications Commission's National Broadband Plan, which could make sweeping changes that would affect rural telecommunications and broadcasting companies should certain aspects be enacted. An updated view on Social Security, which now calls for the system to pay out more in benefits than it will receive in payroll taxes, a line it was not slated to cross until 2016 per the Congressional Budget Office (CBO).
Rising concerns over conducting business in China in the form of Google and findings from an American Chamber of Commerce in China survey that showed a growing number of U.S. companies feel unwelcome in China. Fitch Ratings downgraded Portugal's long-term credit rating to AA- from AA and said the outlook for Portugal's rating was negative due to significant budgetary underperformance in 2009.
The CBO released an updated deficit projection for 2010 that now stands at $1.5 trillion; increased expectations for budget debt held by the public to grow from $7.5 trillion (53 percent of the gross domestic product, or GDP, at the end of 2009) to $20.3 trillion (90 percent of GDP), at the end of 2020, which is a $5 trillion increase from prior forecasts; and revisions for revenue to be $1.4 trillion, or 4 percent, below CBO's baseline projections from 2011 to 2020. The negative revenue revision reflects the president's proposals to index the thresholds for the alternative minimum tax for inflation starting at their 2009 levels and to extend many of the tax cuts from 2001 and 2003 scheduled to expire at the end of the year.
While all of the above has transpired, we continue to get essentially mixed economic data. Good durable goods figures were offset by weak new home sales. Existing home sales are perking up but home prices continued to fall. Initial jobless claims have improved in the past few weeks but still remain well above the 400,000 level. Meanwhile local counties have announced plans to slash services to close budget gaps, which translates into incremental head count reductions in the near term. Retail sales have improved and we can point to Best Buy's results released Thursday, yet personal income growth continues to lag as productivity continues to climb without any meaningful increase in the average workweek.
All in all, quite a bit has happened in the past several days and this speaks nothing about all the pencil sharpening and number crunching associated with getting personal income taxes ready ahead of the April 15 deadline. As tends to be in our nature, the plethora of events and data I listed above tends to spur us to want to act or more correctly react. I sympathize and understand the temptation to do something as an investor when hit with so much information, but in my experience a more methodical and calculated approach generates more favorable investing results over time.
Simply, we are talking about investing, not "fast money" trading.
Sifting through the flood of data points, I find that we are seeing strength in the industrial side of the economy and given what are likely to be protracted levels of high unemployment, I would favor companies with a productivity bent that are poised to benefit from technology replacement and or some other mandate.
Two examples in my opinion include II-VI Inc. and Pall Corp. The former manufactures optics and related laser components used in industrial, military, medical and aerospace applications. Demand for those products is benefiting not only from improving durable goods orders but also from a continued shift toward laser-based manufacturing from cutting, stamping and the like.
II-IV also generates a nice portion of revenue and profits from aftermarket demand for its consumable products. Pall on the other hand serves the industrial and life sciences markets through its filtration and purification technologies. Pall's management team reported improving order patterns when the company reported its most recent quarterly earnings and affirmed its outlook for the current year earlier this week.
Are these the only two companies that serve these markets? Certainly not and, to be fair, there are other ways to play the improving industrial economy. One alternative would be iShares Dow Jones U.S. Industrial Sector Index Fund.
c 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.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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