"Market Monitor"-James Stack, President, Stack Financial Management
Friday, March 27, 2009PAUL KANGAS: My guest "Market Monitor" this week is James Stack, president of the Stack Financial Management and publisher of the Investech Research market letter. Jim, welcome back to NBR.
JAMES STACK, PRESIDENT, STACK FINANCIAL MANAGEMENT: It's great to talk to you again Paul.
KANGAS: In August of 2005, you warned our viewers of an impending real estate bubble. In January of 2007, you told us a bear market was in the offing and then last July you warned of the financials and the home builders still had plenty of downside risk. Great calls, Jim, I compliment you.
STACK: Thank you, Paul.
KANGAS: So what do you think is going to happen next?
STACK: Well, if we break it down by segment, I think real estate won't hit a bottom until 2010, but the economy, we could see the recession end by the third or fourth quarter of this year. And fundamentally speaking, that means it's not too early to look for a stock market bottom today and I've seen more encouraging signs since the lows that we've seen in the market three weeks ago.
KANGAS: The technicals have improved, have they?
STACK: Both from a breadth standpoint and leadership. We're seeing a sharp contraction in downside leadership, a number of stocks hitting new lows. I think fundamentally speaking, we have to look for an improvement in consumer confidence. This was a mortgage crisis. Now it's a confidence crisis.
KANGAS: What about the Fed strategy? Can they do anything more or do you expect them to do something different?
STACK: Both the Federal Reserve and Treasury have followed the textbook example of a bailout to prevent a 1930-style scenario. Unfortunately, everyone was asleep at the switch from preventing it in the first place. But looking ahead at this point, I think if we see -- if we see the stabilization in the banking system -- there are going to be more failures, of course -- but if we don't have any more Lehman Brothers or Bank of America, Citigroup, those big type of potential failures, then we'll see the - then we'll see them have stability that resumes the confidence that we have to see both on the consumer and the investor side.
KANGAS: That would make you completely bullish, would it?
STACK: That along with ongoing improvement in our technical indicators. Right now I would say my confidence is about 60 percent that the bottom is in place. I would like to see that 70 or 80 percent over the next month or two before we increase position.
KANGAS: So what is your investment strategy right now, Jim?
STACK: We're still walking softly and carrying a big cash reserve. We have a 40 percent cash reserve. But we are doing a lot of bargain hunting or looking for those potential buys. We're seeing valuations out there based on earnings, based on cash flow that we haven't seen in two decades. So we are selectively adding those positions.
KANGAS: OK, your last July recommendations as we know, hard hit, even though the bluest of the blue chips. We'll have a look at some of those results. Microsoft (MSFT), Charles Schwab (SCHW) down over 30 percent each. Are you still with them?
STACK: We are. They're very good companies as is the third one, Stryker Corp (SYK). The important thing to keep in mind, two of those three are down less than the market since my appearance. But looking forward those will be three market leaders coming out of the bottom and they certainly have since the recent lows.
KANGAS: OK. How about new recommendations?
STACK: From a fundamental valuation standpoint, all three of these are great buys today. We have Abbott Labs (ABT). It's growing right through this recession. It's confirmed double-digit earnings growth this year and its P/E is at the lowest level in 20 years. A second stock.
KANGAS: ABT on the big aboard, right, Jim?
STACK: That's right.
KANGAS: Number two.
STACK: VF Corp (VFC) manufactures North Face, Lee, Wrangler. Revenues are holding up surprisingly well for an apparel company and it's paying over a 4 percent dividend yield, very attractive yield in a sub-1 percent interest rate climate.
KANGAS: VFC on the big aboard. And the third choice?
STACK: Third one is Walgreen's, symbol WAG also on the big aboard. They have revenues that are growing right through this recession. It has a gold-plated balance sheet with very little debt and its price to cash flow level is at a valuation that we haven't seen since the early 1980s.
KANGAS: Jim, do you personally own any of these securities or have other disclosure to make?
STACK: Yes Paul, we own all three of them in our managed accounts at this time.
KANGAS: Unfortunately, our time has run out but I want to thank you once again for sharing your views with us.
STACK: My pleasure, Paul.
KANGAS: My guest, Jim Stack, of Stack Financial Management and Investech Research.
