"Market Monitor"-John Hughes, President of Quantum Capital Management of New Jersey
Friday, June 19, 2009PAUL KANGAS: My guest "Market Monitor" this week is John Hughes, president of Quantum Capital Management of New Jersey. Welcome back to NIGHTLY BUSINESS REPORT John. Good to see you.
JOHN HUGHES, PRESIDENT, QUANTUM CAPITAL MANAGEMENT: It's always good to be with you.
KANGAS: Wall Street's three-month rally seems to be running into considerable resistance here. Do you think this is a major top or is there more on the upside?
HUGHES: Well, we have no opinion on the direction of the markets, but we do have a view on the valuation and we believe that markets are fairly valued. That being said, whether they're expensive or whether they're cheap, we believe that we have to -- it's critical to invest in companies that generate cash flows that are a high percentage of their operating income and those companies that have the ability to reinvest those cash flows in an effective manner.
KANGAS: So you're very particular about what you buy in the way of securities.
HUGHES: Always, always.
KANGAS: And they have to meet high-quality standards.
HUGHES: They have to have ironclad balance sheets and durable business models and certainly the ability to redeploy cash flow in an accretive manner, yes.
KANGAS: Let's go for the broader picture. What do you think of this economy? Is it going to do well or falter? What do you think?
HUGHES: Well, blame the monetary system Paul. I mean this monetary system of ours, despite its longevity, despite its arguable efficacy, it has one fatal flaw and that is that a small group of people preside over the creation and the price setting of the money supply and we think that results in a capital structure which includes a high degree of debt, so large that the cash flows that emanate from the asset side of the ledger may not be sufficient to support it.
KANGAS: So you're a bit critical.
HUGHES: I think it's deflationary if the Fed will let is be deflationary. But we think one of the outcomes, one of the potential outcomes of it ultimately will be inflation.
KANGAS: Inflation?
HUGHES: Yes.
KANGAS: Which means you like the gold.
HUGHES: We look at gold as a hedge against inflation.
KANGAS: You would buy it in this range?
HUGHES: I would and I do, yes.
KANGAS: How do you see oil, the price of oil going?
HUGHES: I have no view on the price of oil.
KANGAS: You don't follow it closely.
HUGHES: We do not.
KANGAS: Now on your last visit with us in late January, you gave our viewers five "buy" recommendations. Let's see how they performed since then, John. Autodesk (ADSK) has been one of your favorites for some time and it really got a move on this time around, up 26 percent. And Copart (CPRT), that's an auto-type stock. They take junk autos, do they?
HUGHES: They are the largest processor of total loss vehicles for the insurance industry in the U.S. and the UK.
KANGAS: It's certainly not a junk stock, I'll tell you that, up 39 percent. Congratulations. Are you still with both of those?
HUGHES: I'm still with both of them, have been and will be for a long time.
KANGAS: So you'd buy them in this range.
HUGHES: I do and I recommend them, yes.
KANGAS: OK. How about some more of your previous recommendations. We have the Spider, the gold shares (GLD), up 3.8 percent. Not a runaway, but still on the plus side.
HUGHES: It's insurance, Paul; it's insurance.
KANGAS: And Microsoft (MSFT) finally came alive in the period since January, up almost 40 percent. Are you still with it?
HUGHES: I'm still with it. I wouldn't say that it's loved more, but it's certainly despised less. So we think its earnings power is two dollars.
KANGAS: And you had one other.
HUGHES: We have a recommendation.
KANGAS: The iShares didn't do much (LOD) but you were collecting 6 percent yield all along, right?
HUGHES: We were. In the interest of time we won't recommend it but we will recommend something else.
KANGAS: We just have a minute left. Do you have any new recommendations?
HUGHES: Yes, Progressive Company (PGR). It's the largest auto insurer, one of the largest auto insurers in the country.
KANGAS: PGR on the big board.
HUGHES: That's right. That's right. And the insurer is largely a manager of risk and a manager of assets. And they are competent at both. At 10 times earnings, we own them and we think its -- they are worthy of some of our capital.
KANGAS: Very good. John, do you personally own any of these securities yourself?
HUGHES: We own them all.
KANGAS: You own them all.
HUGHES: You bet.
KANGAS: That's a good sign, indeed.
HUGHES: Yes, yes.
KANGAS: You only gave us one new recommendation. Are you having a tough time finding new ones?
HUGHES: Well, we like what we own.
KANGAS: You like the way it is. OK. Thanks very much for being with us. Our time has run out, unfortunately. Great to see you.
HUGHES: Great to be here, Paul, thank you.
KANGAS: My guest, John Hughes, president of Quantum Capital Management.
