The portfolio managers convene on January 10th to discuss their top picks. The editors at Barron’s dispense these musing over three weeks. This edition continues previous themes around Gold and other commodities. This makes one wonder if the gold’s recent downdraft is just a pause that refreshes. Continue reading for a summary of the last of the three installments from this year’s roundtable.
Meryl Witmer – the recent run-up in the market has made it hard to find bargains. She and her team are looking for companies emerging from bankruptcy. Out of the blocks she surprisingly recommends a specialty chemicals company once owned by KKR and now trades for a free cash-flow multiple of 12. Returning to the original script, she recommends Tronox (TROXV), a manufacturer of titanium dioxide, which is emerging from bankruptcy. Next up is Six Flags (SIX) – more flags, more fun! She believes SIX, emerging from bankruptcy, is worth 12x earnings. Her last pick out of bankruptcy protection is Spansion (CODE), a flash memory producer which is trading at approximately 6.5x after tax cash flow.
Marc Faber – all paper currencies are doomed and WWIII has already started. His theme is LNG. As oil demand turned up and when we have war, prices will go up substantially. He notes that China and the US have little in common beyond commercial interests. As China is a supporter of North Korea and the Taliban, he wants to be hedged in case of complete disaster. His strategy is to buy commodities when supply is abundant (and cheap)…then wait. He is also likes physical gold but says you shouldn’t own it in America where the government could take it away. He likes a few gold miners and sees opportunities in water, fertilizer and potash. He believes Asia has run up, but you could still find a basket of shares yielding 5% and trading at 10x earnings. While he is bearish on currencies, he is not as bearish as some on the US Dollar. In an interesting twist, he recommends a basket of Swiss insurance stocks he thinks are trading at attractive valuations.
Mario Gabelli – looking for divestitures and break-ups (carrying on a theme I wrote about earlier). Gabelli likes a lot of stocks, I will only cover a few here. He starts with Genuine Parts (NYSE: GPC), with the average age of cars increasing the stock could see continued earnings growth. More on the natural gas theme, he likes Natural Fuel Gas (NYSE: NFG) as a way to play shale. On the break-up theme, he likes Fortune Brands (NYSE: FO) which announced it is splitting in three. He thinks the spirits business could go for 12x EBITDA. Another pick that is close to home (at least for me) is Madison Square Garden (NYSE: MSG). The company has a high value cable network and it is spending $800 million to renovate the Garden – in addition to owning the Knicks and Rangers. His play on the recovery of the industrial world is Thomas & Betts (NYSE: TNB) which is in the energy efficiency business. The stock trades at 6.5x projected EBITDA. Finally, he mentions a gold related stock – Brink’s (NYSE: BCO). BCO specializes in global logistics for the movement of precious metals and cash.
Oscar Schafer – seeking companies that have a catalyst. Schafer likes companies that have gone public post LBO because their management knows how to maintain costs, they tend to have low tax rates (due to the stepped up basis) and generate lots of free cash flow. First up is Sensata Technologies (NYSE: ST). Formerly part of Texas Instruments (NYSE: TI), the sensor and control maker went public in March. The company has significant exposure to the auto industry. As auto sales recover, this should be additive to the company. Schafer also sees growth in its China business as the country ratchets up its standards. Once again on the spin-off theme, he recommends NXP Semiconductors (NASDAQ: NXPI) which was spun out of Philips Electronics (NYSE: PHG) and taken private. NXPI, a maker of high-performance mixed-signal solutions and semi-conductors, went public in August. In December, Google (NASDAQ: GOOG) announced it was designing the NXP standard into its latest Android platform. NXPI trades at a single digit earnings multiple. Anyone who has rented a car is familiar with his next pick – Hertz Global Holdings (NYSE: HTZ). Taken private in 2005 and back public in 2006, he believes the company is poised to take advantage of the recovery in the rental car market. The stock also trades at a single digit earnings multiple. Schafer is calling for 50%-100% upside in Quantum (NYSE: QTM), a small cap company focused on enterprise computing software. A market leader with a single digit multiple, the QTM should benefit from dislocation in the market created by Oracle’s (NASDAQ: ORCL) acquisition of Sun Microsystems. His final pick is Mako Surgical (NASDAQ: MAKO). Schafer believes the aging demographic and competition among hospitals to increase patient volumes should drive growth. Short interest is 25% of the float – the shorts worry that the high upfront costs of the company’s robot will hinder sales and the stock trades at 7x REVENUE. Schafer isn’t concerned because revenues are growing north of 50%.