Comments & Outlook

I think there is some pent up demand from people pulling in their horns that will ultimately drive spending and will shock people. There’s something like $9 trillion in cash in banks and money market funds that’s earning literally nothing because people are afraid. People will do that for a while, but they aren’t going to earn nothing for very long.

Eventually, people will start poking their heads out of the bomb shelter and some of that cash will go to work somewhere. I think it will flow back into companies that have clean books and are prepared to weather the storm. I think you’ll see it go into the companies that don’t have balance sheet issues and provide a service everyone needs, whether it’s an oil driller or a fertilizer company.

Recommend Strategy

The rubber band is being stretched incredibly tightly, where you’ve got these terrific companies with price-to-earnings (P/E) ratios in the single digits. I don’t know where P/Es bottomed in 1974 off the top of my head, but at single digit P/Es even Benjamin Graham would be sitting there licking his chops today.

I would suggest taking a value bent while looking for companies with some growth potential.

What to Buy Now

One that we own and have been buying is Mosaic (NYSE: MOS). Last year’s earnings were up a record 30 percent, and this year will probably be another record, with a P/E of less than 6.

Now, maybe nobody trusts the earnings, but the fact of the matter is people are still going to eat.

True Religion (NSDQ: TRLG) makes $200 jeans that truly nobody needs, but sales last year were up 25 percent with record earnings, and it should have record earnings again this year. Again, it has a PE of five and no debt.

People don’t need $200 jeans, but, when confidence is back, they might not take a trip to Disneyworld, but they might say let’s go shopping and splurge a little bit.

Energy services like Diamond Offshore Drilling (NYSE: DO) have just been beaten to a pulp but revenues were up 25 percent with record earnings last year, all with a PE of 6.

Keith Walter Portfolio Manager, Artio Global Equity Fund

Comments & Outlook

We’re fairly pessimistic on the economy’s prospects over the next year or so. We have been very bearish on the markets; however, given the price action over the last month or so we’ve reduced our cash position to take advantage of attractive valuations in select areas.

We favor companies and industries with a high degree of visibility. For that reason, we’ve assiduously avoided the financial sector. In short, a v-shaped recovery is unlikely, but valuations are approaching fair value.

Recommended Strategy

Today we recommend that individuals focus on sound companies with little to no debt and sufficient free cash flow to meet any obligations. In addition, we’re focusing on dividends again. If you look back over the past 50 years, two-thirds of all returns came from dividends; it’s only in the last 20 years that people have focused more on capital gains.

We think there will be a secular change in how people invest; they’ll focus a lot more on quality and dividend yield–stocks that evince the qualities of the so-called “Nifty Fifty” that thrived during the 1960s and ’70s will return to vogue.

What to Buy Now

Nestle (OTC: NSRGY) and Johnson & Johnson (NYSE: JNJ) are great examples of that type of company. Both specialize in consumer staples, which tend to be countercyclical and stable in a recession, and have very strong balance sheets.

In this environment, it’s easy to find things to sell because every day we learn about new problems, even at companies you would think are immune. We haven’t found a lot of things that we can just say we’d absolutely buy, but these are two of our favorites.