"Market Monitor"-Vince Farrell, managing director of Scotsman Capital Management
Friday, March 09, 2007SUSIE GHARIB: Our "market monitor" guest tonight says the market correction isn't over yet, but he's still upbeat about investing in stocks. Joining us now, Vince Farrell, managing director of Scotsman Capital Management. Hi, Vince, nice to have you back.
VINCENT FARRELL, MANAGING DIRECTOR, SCOTSMAN CAPITAL MANAGEMENT: Thanks, Susie.
GHARIB: What is your sense of how much more selling until this correction is over with?
FARRELL: The corrections, Susie, never end in a couple of days. It takes a couple of weeks to a couple of months. It's nice to see a bottom has been put in place. The Dow went from 12,800 to 12,000 and it is not unusual for half of that decline to be retraced, but I think at a minimum, you're going to have to go back and test that low. So I do expect that to happen in the next couple of weeks and if we don't do it now, we'll do it later. Lows are always tested. I would rather get it out of the way now than have to wonder when it's going to happen in the next couple of months.
GHARIB: Vince, these last couple of weeks have been so painful for investors and yet you're still pretty upbeat about the market outlook. Why the optimism?
FARRELL: Painful -- the market now is only off about 4 or 5 percent from its high. So keep in mind how painful it is. But I'm optimistic because the economy looks pretty good. It is a slower growth trajectory but it's still pretty good. I heard the Lehman economist earlier in the show worried about unit labor costs and that is the fly in the ointment and that is an inflationary worry, but it is not at hand yet and I'm not sure that it will be. So right now inflation is contained, and even though interest rates have up ticked, interest rates are still worldwide very, very low. So the economy's pretty good. Interest rates are contained and corporate profits, while slower than they have been, are still very strong.
GHARIB: Let's go over your list of stock recommendations that you have for us tonight. At the top of your list you have AIG, the insurance company. Why do you like it?
FARRELL: AIG had an analyst meeting last week in which they reported a very good quarter. And keep in mind, half their business is life insurance. We think of it as property casualty, but it is life insurance as well. They announced an $8 billion share repurchase and said under normal circumstances they would increase the dividend 20 percent a year. That is an extraordinary statement by management that it is very optimistic about the outlook for the next couple of years.
GHARIB: Bank of America is another one of your stock picks. What is the attraction?
FARRELL: They had an analyst meeting within the past week and the chairman said they'll be able to grow earnings organically, meaning from the businesses they have, no acquisitions, 10 percent a year and the stock trades at only 10 times earnings. The market is at 15 times earnings and the dividend yield on Bank America is almost 4.5 percent and the yield on the 10-year Treasury is just above 4.5, so you get a Treasury bond yield and the opportunity for growth at the same time.
GHARIB: Tell us about Transocean, the oil driller.
FARRELL: Transocean is a more volatile stock, but they dominate the deep water drilling. They have ships that can drill in 12,000 feet of water and drill 25,000 feet down. Their free cash flow in the next three years is going to be about $7.5 billion because they're starting astronomical contracts. Keep in mind that total market cap for this company now, the number of shares out times the price is the market cap. The total market cap is about $21 billion and they're going to generate one-third of that in free cash flow in the next three years.
GHARIB: And you have General Electric also on your list, which has been doing rather well recently.
FARRELL: I've liked General Electric for a while. It has been a little bit of a disappointment, but the market is at 15 times. General Electric is about 15 times this year's earnings. But General Electric is going to grow much faster than the average stock and it also has a 2.5 percent dividend yield which is much above the average dividend yield in the market today. And I think they're going to raise that dividend at double-digit percentage growth for the next few years. So I think that's a very good opportunity.
GHARIB: We have 30 seconds. I want to wrap up with your last one, ExxonMobil, which also had an analyst meeting this week that was very upbeat.
FARRELL: They have $33 billion in cash on the balance sheet, will generate $25 billion in free cash flow this year. They're buying stock back at the rate of $7 billion a quarter and trading far below the normal multiple that it achieves. It usually trades about a market multiple and it is only 11 times earnings.
GHARIB: And in terms of disclosure, do you own any of these stocks?
FARRELL: I own them all, Susie, myself and clients.
GHARIB: Thank you so much for coming and our program, a lot of interesting information.
FARRELL: Nice to be with you.
GHARIB: We've been speaking with Vince Farrell, managing director of Scotsman Capital Management.
