Take Microsoft, for example. Tasho purchased it near the $25 mark, a price that he says does not anticipate any surge in replacement of old PCs. "Microsoft has about 60% of the desktop market, their financials are pristine, they're using restricted stock (as an employee benefit) instead of options to enhance transparency, and they're spending a lot on R&D to come up with new products," Tasho says.
Telecom operators that generated free cash flow in the latest recession are emerging as very strong competitors in this upcycle, says Bernard Horn, manager of Polaris Global Value Fund. He touts Verizon Communications despite others' fears that hard-wired land lines could become obsolete. "It costs considerably more to make a mobile call than a fixed-line call. Businesses are not going to just give all their employees mobile phones," Horn says. Verizon's wireless network is good, he points out, and the company is upgrading its fixed-line network "to make that more efficient and competitive for the enterprise customer. Verizon is going for the triple play," Horn says, "where they (provide) your fixed-line business, your wireless business and potentially your broadband business."
Media stocks could get hot in a robust recovery. "As firms become more profitable, they begin spending to improve the top line, and the way they do that is through advertising," says D'Amico. "We think '04 could turn into a strong advertising environment." D'Amico's favorites are New York Times Company and Clear Channel Communications, which operates outdoor billboards and over one thousand radio stations. D'Amico also cites Viacom-owner of CBS, MTV, VH1 and other outlets-calling it "a very high-quality media and entertainment company." (Microsoft is in media, by the way. The former software monopoly owns about 7.5% of cable-television giant Comcast, Morningstar reports.)
Healthcare is another space to watch. As unemployment drops in a recovery, the rolls of insureds swell, and more people can afford health services. Polaris's Horn has been actively acquiring insurers and HMOs such as PacifiCare, Oxford Health Plans and Anthem Inc. In fact, Horn touted Anthem some time ago in the past, predicting that the growing collection of demutualized Blue Cross/Blue Shield plans could become the largest healthcare provider in the country. Recently Anthem announced plans to merge with WellPoint, another biggie. "That would clearly put them in the top ranks," Horn says.
Demand for the energy that literally fuels a booming economy can boost energy shares, says Tasho, who has been adding to positions. "The surprise could be that if there is a recovery globally, we'll see increased demand for natural resources. Their prices could stay higher than people realize." Consolidation has left the energy industry with favorable operating leverage going forward, he adds. In large-cap, Tasho covets BP. "We love what they're doing with their investments in Russia." A small-cap pick is National Oil Well, a parts-supplier that could benefit from increased drilling and exploration.
Energy also appeals to Bill Fries, a managing director and portfolio manager at Thornburg Investment Management Co. in Santa Fe, N.M., whose holdings include Marathon Oil and Amerada Hess. Fries, a favorite of many advisors, was recently named Morningstar's international manager of the year. In Thornburg International Value Fund, Fries owns CNOOC Ltd. (NYSE: CEO), the dominant producer of crude oil and natural gas offshore China. "CNOOC does things on a joint venture basis with the major oil companies, and that reduces the execution risk you might normally associate with an emerging market company," Fries says.
Railroads may not be as sexy in the computer age as when they linked ocean to ocean in 1869, but they still thrive when trade improves. "Autos move by rail. Merchandise goes by rail," Fries says. Imports and exports travel by train between the heartland and the coasts, too. Fries owns Union-Pacific, the nation's largest railroad concern.
To play the voracious consumer, Fries suggests electronics retailer (and turnaround situation) Circuit City Stores. The company recently sold its bankcard portfolio and now holds about $4 per share in cash, Fries said with the stock hovering around $10. He also likes Circuit City's stock price-to-sales ratio of 0.22. It's less than one-third of sector-leader Best Buy's 0.72. "You don't find disparities like that very often," Fries says. "Circuit City doesn't have to be as good as Best Buy to be a good stock."
Defending Fixed-Income Positions
If you haven't already, you should be taking steps to mitigate the damage an uptick in interest rates could wreak.
For clients with sufficient assets, it may help to own individual debt securities, rather than bond funds, says certified financial planner Marilyn Dimitroff, president of Capelli Financial Services in Bloomfield Hills, Mich. An individual bond that drops in market value can be held until maturity, at which time it returns the investor's principal (barring issuer bankruptcy). But pooled investments lack a repayment date, making permanent capital erosion a distinct possibility.