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Get Four
|  | DECEMBER 23, 2003
Basic Materials for Basic Investing Sarat Sethi of Douglas C. Lane & Associates likes paper, chemicals, steel, and such, partly because of the declining dollar Despite worries over a weakening dollar, it does make U.S. exports cheaper, and that's one reason to like basic materials stocks. That's the opinion of Sarat Sethi, analyst and portfolio manager for investment firm Douglas C. Lane & Associates, who points to companies in paper, steel, chemicals, and gold, among others. Companies in this area also offer high yields, with dividends averaging about 3%, vs. 1.6% for the S&P 500 as a whole. Names he mentions in basic materials include Dow Chemical (DOW ), International Paper (IP ), and Eastman Chemical (EMN ). Dow is also one of the core stocks for his firm, which holds 50 to 60 stocks and likes to keep them three to five years. Others include Exxon Mobil (XOM ), Coca-Cola (K ), and Cisco (CSCO ). On the market outlook in general, Sethi expects 2004 gains not to exceed the single digits and stresses that the way to make money is to focus on specific sectors and stocks. These were a few of the points Sethi made in an investing chat presented Dec. 18 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and Karyn McCormack. Edited excerpts follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk. Q: Sarat, are you running along with the bulls? Someone in the audience comments: "I believe we will see the Dow to 11,000 in January." Are you that optimistic? A: I think we've reached a pretty fair value. Next year we'll probably see some additional volatility, but we don't expect more than mid-single-digit returns on the indexes. We do think there are ways to make money, but that's in playing specific sectors, and within those sectors, specific stocks. Q: So it seems you're concerned about valuations? Is there anything else providing a headwind to the market? A: I think, basically, we've reached a stage where many of the companies are getting to be pretty fairly valued, and in terms of catalysts, we need to see continued earnings growth, as well as a steady decline of the dollar, without any major strength in selling. One of our forecasts is that interest rates will start backing up, and that could provide a headwind. Q: Can you be specific about some of the specific sectors and stocks on which you can make money, as you said? A: When you look at the stock market, and you look at the specific sectors, 3% of the S&P is in basic materials, and what I mean is paper, steel, chemicals, gold, etc. Having said that, when you look at the steady decline of the dollar (over 20% in a year), and you see the strength in our economy -- as well as economies overseas, such as China -- you have a few things happening all at the same time. You see that there's increased demand here in our country, and with the dollar weaker it makes imports more expensive, and our exports a whole lot cheaper. The basic materials companies have higher-than-average dividend yields, with the S&P yielding about 1.6% and most basic materials around 3%. In a taxable portfolio, the advantages of holding these types of dividend stocks are greater. And with our belief that 2004 will not see huge returns on the indexes, having stocks that provide you a good yield as well as potential for capital appreciation we think provides a good holding for the future. Q: What do you think of technology? It's certainly the future, but if you could choose, would you pick biotech? A: We think technology is an important part of any portfolio, but we're not going to go back to the late '90s in terms of valuations or opportunity. You need to pick your spots carefully in technology and look for companies that provide a longer-term competitive advantage. Following that thought, stay away from hardware companies, companies that have a saturated market, and those that have lower barriers to entry. Biotech as well is an important part of any portfolio, but it's extremely speculative and volatile, so it shouldn't be a big part of any portfolio unless you're willing to take the risks that come along with the rewards, which could be quite high. The key to being invested here is to also be invested in other [sectors] in a diversified manner, in order to create long-term gains. Q: Among the tech stocks, opinion on JDS Uniphase (JDSU )? A: Sure. We like JDS Uniphase. The stock has come off quite a bit from its highs, but the long-term future of bandwidth is huge, and their opportunities in that area are big. Our portfolios have about a 1% position in them. Again, it's a stock that's a good holding but will benefit only once we start using up the capacity out there. Q: You recommended looking at dividend stocks -- please name a few of these high-yielding stocks. A: We [make the] caveat that a good dividend doesn't mean it's a good company, so you still must look at the fundamentals of the company. If the company has covered the dividend, or grown it, that's a good sign. Having said that, in the basic-materials section, Dow Chemical (DOW ) is a good one. International Paper (IP ) is another. A company we like, and we think the dividend is secure, is Eastman Chemical (EMN ). On the utilities side, Dominion Resources (D ) is good. Verizon (VZ ) is great -- we like them in part because of the wireless piece. So those are some examples of good companies with high dividends. Q: What is your opinion on pharmaceuticals? Pfizer (PFE )? A: We think there's a great opportunity in the pharma sector. There are still many molecules to be found, but you need to be wary of companies that are getting too big. They may be very well run, but you need to separate these from their long-term potential. Pfizer has a great pipeline -- a great company, and we own it, but we're scaling it back. Pfizer is a $200 billion market-cap company -- they would take a tremendous amount of growth to keep earnings growth in the long run. A better bet might be a value play, like Schering Plough (SGP ), which has a new CEO and might get turned around. The other area in health care that we like is medical technology -- we think the potential there is unlimited. We like Medtronics (MDT ) in that area. Q: What are for your views on Cisco (CSCO ), Sarat? A: Cisco's a core holding of ours, and we like them. I think the company is very well positioned for growth. It has a fantastic balance sheet, no debt, close to $20 billion in cash, and many products that have the potential for multibillion-dollar sales. I think it should be part of everyone's portfolio, but with the caution that you should still be diversified and not overexpose yourself.
BW MALL
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