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VERSACE: On the defense in stagnant economy
Contrary to the news flow, it’s been a rather quiet week for me. One that reminds me of crickets, not so much because of the noise crickets make but the absence of other noise that lets you hear the crickets. With some slack in the schedule, I thought a nice change of pace would be to open the ol’ mailbag, or, in this case, the ol’ e-mailbag, and answer some readers’ questions.
Q: We’re hearing a lot about the national debt these days; what is a good way to keep track of the national debt?
A: There has been much in the media over economic growth expectations for the second half of 2010, particularly after the recent and steep negative revision to gross domestic product for the second quarter. It’s more than fair to be concerned, particularly because the 3 percent growth that the Congressional Budget Office is assuming for 2010 is less likely to happen.
One way to keep tabs on the U.S. national debt is to visit USDebtClock.org, which not only gives real-time updates but also parses the data into more relatable figures. For example, as I write this, the U.S. national debt is $13,396,856,187,113, which equates to debt per taxpayer of $120,700 and debt per citizen of $43,197. While there are ample metrics, including debt per family, interest by citizen and more, the most alarming data set is the “largest budget items.” In that group, interest on the national debt is fourth and follows Medicare/Medicaid, Social Security and defense/wars. With near-term growth slowing, which likely will negatively impact federal tax revenue, I suspect more concern will be voiced over additional stimulus should it be needed to goose the flailing economy.
Q: Other than Procter & Gamble, Clorox and the like, what are some other defensive companies/stocks?
A: The notion of defensible stocks has included precious metals, inelastic goods and services and other items that people will need regardless of the economic environment. Are things a little different this time around? Yep. While gold and related precious metals have been making positive moves of late, that is not necessarily the case for all inelastic goods makers. In recent weeks, both Kellogg Co. and Procter & Gamble Co. have shared that their businesses have been under attack as consumers have been trading down to private-label brands for cereals, personal goods and cleaning products.
Are there other companies to put under your investor microscope? Always. While there are a number of candidates to consider, two that I would take a closer gander at would be McCormick & Co. and Regis Corp.
McCormick is the spice, seasoning and flavors company that serves both the consumer market and industrial markets, where it counts McDonald’s, Yum! Brands, PepsiCo and others as customers. Not only does McCormick benefit as “cash-strapped consumers” eat at home more often or trade down when they eat out, but McCormick also supplies private-label products for food retailers and others. This is important as we head into the seasonally strong fourth quarter for McCormick; in a word — holidays. Management has rounded out the company’s portfolio in recent years via several acquisitions, including Lawry’s, Thai Kitchen and Simply Asia, among others. On top of all that, there is the dividend stream and recent share-repurchase program announcement.
Regis is a leading player in the hair care industry, in which it owns or franchises more than 12,700 locations, the vast majority of which are in North America. Supercuts, Sassoon Salon, Regis Salons, MasterCuts, SmartStyle, Cost Cutters and Cool Cuts 4 Kids are among the company’s offerings. While the consumer can put off buying clothes, appliances and the like for longer periods of time, the thought goes that it is far harder to push off personal grooming. This is particularly true as we head back to school and into the holiday season but also as the unemployed seek out what work is available.
Q: What are some of the themes you use as the Thematic Investor?
A: I have mentioned several here in past months, including “the cash-strapped consumer,” “powering the mobile consumer,” “scarce resources,” “the fountain of youth” and “economic shake-up.” There are close to a dozen more that cut across industries designed to identify winners and potential losers that I’ll be discussing in future columns. I’m also developing new themes, one of which deals with the increasing importance of patents and intellectual property; more on that one once it’s fully baked.
Q: What are some books you have read recently that help keep you sharp when it comes to investment themes and perspectives but also have opened your eyes to new possibilities?
A: I try to be a voracious reader — from magazines to books to several newspapers as well as company press releases and Securities and Exchange Commission filings — as well as an avid observer of human behavior and one of those chatty people you tend to meet in line at stores, restaurants and so on. Two recent books I have liked tremendously are “Googled” by Ken Auletta and “The Omnivore’s Dilemma” by Michael Pollan. Next in my queue is “Buyology: Truth and Lies About Why We Buy” by Martin Lindstrom.
• Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm located in the Washington, D.C., area. He can be reached at firstname.lastname@example.org. 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 ...
By Brahma Chellaney
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