Robert C. Auer // Portfolio Manager // Auer Growth (AUERX)

Comments & Outlook

Over the next year, the market’s performance is going to hinge on the election. There could be a short-lived rally if Romney wins, because he’s perceived as being more pro-business. But our economic problems are much bigger than what any president can tackle in a year. So overall, I’m sanguine on the outlook for the market, though there are going to be some special- situation opportunities among smaller-cap stocks.

Recommended Strategies

I would be very careful about investing in US bonds, especially municipals. Many municipalities are very strapped for cash right now, and even Warren Buffett is backing away from an insurance bet on municipal bonds. He’s telegraphing that some cities and states are in very tough straits. I’m not saying there will be a rash of defaults, but defaults will start to become more common. I would lean more toward high-quality equity investments— companies with substantial cash, a lot more assets than liabilities, and solid book value—where you actually own a piece of a company that’s profitable rather than loaning money to an entity with a weak balance sheet.

What to Buy Now

C&J Energy Services (NYSE: CJES) is trading at a price-to-earnings (PE) ratio of just 5, despite having reported record quarterly earnings. The only real worry is that the Environmental Protection Agency is mulling over tighter regulations on hydraulic fracturing for oil and gas extraction. I think these concerns are overblown, and eventually the market will recognize the company’s true earnings power.

We’ve also recently bought into Hawaiian Holdings (NSDQ: HA), the holding company for Hawaiian Airlines, with a PE of about 5. Most airlines are selling their planes and leasing them back to raise cash. By contrast, Hawaiian broke the lease on 15 of its planes, and bought them back. Currently, Hawaiian has a stock-market value of $300 million, which is less than the amount of cash it has on hand—$400 million. That’s what we call undervalued.

Mark Oelschlager // Portfolio Manager // Pin Oak Equity (POGSX)

Comments & Outlook

The market seems to be anticipating an improving economy, driven by lower inflation as well as easing in the global monetary cycle.

Nevertheless, investors remain cautious, gravitating toward defensive sectors and income-oriented securities. But a shrewder bet is to focus on cyclicals. Contrarians are likely to find opportunities in financials, an unloved sector for quite some time that is priced far too cheaply.

Recommended Strategies

We survey macro-economic data to determine which sectors are most attractive. We then look for equities with long-term value in terms of both the share price and the underlying business. In regard to the latter, we focus on the sustainability of a company’s growth prospects.

Our typical stock is out of favor with the market, so we take a long-term perspective with the expectation that the market will eventually recognize its value.

We run a concentrated portfolio because it’s easier to find 30 good ideas than 100; and unlike most fund managers we’re not interested in simply hugging our benchmark.

What to Buy Now

The Charles Schwab Corp (NYSE: SCHW) is a “sleeping giant” because it hasn’t produced strong earnings, despite the fact that it manages billions in assets. Schwab’s earnings have suffered due to short-term interest rates; rates are so low now, that they have to waive the management fees on their money market funds in order to keep them from posting negative returns. Once short-term rates start to rise, though, Schwab’s bottom line will enjoy tremendous leverage.