"Market Monitor"- John Hughes, President of Quantum Capital Management
Friday, December 07, 2007JEFF YASTINE: Our "Market Monitor" guest tonight says this is potentially one of the best times to be an investor since 2002, if you're looking for good companies trading at good values. He's John Hughes, president of Quantum Capital Management. John, welcome back to NIGHTLY BUSINESS REPORT.
JOHN J. HUGHES, PRESIDENT, QUANTUM CAPITAL MANAGEMENT: Hi, Jeff, it's good to be here.
YASTINE: So let's ask that first question, is this a good time yet to be a value investor in this current market?
HUGHES: You selected the most optimistic line off of a nine-page essay. We like to end on an optimistic note, but yes, be protected your capital we think with the increased volatility, if you looked at the price value equation that you could certainly find values in this volatile market.
YASTINE: Define for us what you think is happening in this economy. We have this thing going on with the credit market. The banking sector, the Feds cutting rates and yet the stock market itself only down four or five percent from the all-time highs.
HUGHES: We have long argued that this rising debt to GDP ratio portends inflation. It's a structural problem that has been -- it has been developing for 20 years. We currently generate $6 worth of debt for $1 of GDP growth. That's unsustainable in our view. This imbalance has to clear at some point. And algebraically the only way it can clear is if there is a debt contraction or a rise in output. The Federal government seems to be predisposed to supporting debt levels currently. We haven't made the types of investments in productive assets to generate above trend GDP growth. So we believe that our above trend GDP growth which is what we think are going to have in the next 10 years, will be inflation driven. It is highly inflationary and it's also one of the reasons why we own gold.
YASTINE: So inflation continues to be the theme here. Tell us first, you were last on the program back in April of this year. You talked with Paul at that time and you gave us two picks. One of them was 3M (MMM) and we'll bring that chart up on the screen, 3M and then Legg Mason (LM). 3M would that be still one that you would own?
HUGHES: We are buying it. In fact I think we bought it today, literally. We like 3M. They've been in business since 1902. They have compounded capital at a high rate. They have doubled their retained earnings in the last three years. The stock price hasn't moved that much. They have recently been downgraded because of some pricing pressures in the optical business. We think they have been innovating for a long time. We think they will innovate their way through this.
YASTINE: And briefly, we have Legg Mason up there. It's down about 23 percent from when you were on the program.
HUGHES: Legg Mason we rode it up. We rode it back down. Typically we would be buying at this point but we own two financial stocks, neither of them banks. When the sub-prime meltdown started we felt that we couldn't adequately quantify -- we couldn't quantify the risks so we had to step aside. But notwithstanding the sub-prime risk, we may buy it in the future.
YASTINE: All right. Let's move on to your new picks. What would you be recommending an investor to be buying in this current marketplace?
HUGHES: Well, we think Copart (CPRT), Copart is one of our largest holdings. We have recommended it a number of times on the program.
YASTINE: That symbol is CPRT.
HUGHES: CPRT. They are a technology company that masquerades as an auto salvage dealer but what they do best, they actually have a business model that is unique in that as their service becomes more ubiquitous, all of the stakeholders in the value chain enjoy more value. They have been compounding capital for more than 15 years at a high teens clip. We see no reason why they can't do it in the future.
YASTINE: What would be your second one?
HUGHES: My second pick would be Epicor (EPIC). It's a mid market software service provider. They fly under the radar of Oracle and SAP.
YASTINE: Stock symbol EPIC.
HUGHES: EPIC. They have a cash earnings yield of around 7 percent. We think in a normalized market, they can grow earnings at about a 6 to 10 percent clip. If they do some things right, it could be a 20 percent grower over the next few years.
YASTINE: And your last one is gold, the GLD ETF.
HUGHES: The StreetTRACKS gold shares for the reasons that we talked about earlier in the interview. I think everyone should own gold in their portfolio. It's a great hedge against a decline in the dollar that is less than orderly.
YASTINE: And do you have any disclosures for us on these particular stocks?
HUGHES: We own everything that we recommend on the show. And 100 percent of our assets are invested in the Quantum funds.
YASTINE: John, thank you very much for coming back on the program.
HUGHES: Well, thank you Jeff.
YASTINE: Our guest, John Hughes, president of Quantum Capital Management.
