Summer stocks:
Outtakes from Ted Parrish and Dan Ahrens
July 23, 2004
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Even if you go on a summer vacation, your investments don't have to take a break. Karen Gibbs recently talked to money managers Ted Parrish, of Henssler Equity Funds, and Dan Ahrens, of the Mutuals.com family of funds, about companies poised to profit during the hot months.
Excerpts of the conversation will appear on our July 23, 2004 broadcast. Meanwhile, here are some parts that didn't make it on the air:
GIBBS: Ted, give me a big picture of how this summer is shaping up compared to other summers. This is an election year, and of course we're still looking at the conflict in Iraq. Has that changed investors' perceptions of summer and summer rallies?
PARRISH: Yes, I think so, because any other summer without any really negative issues like Iraq and interest rates going up, you probably would have seen a stronger rally, because earnings were really solid in the first quarter and they're going to be real solid in the second quarter, you know, so far earnings have been pretty good in the second quarter.
So I think there's a bit of skittishness from investors this summer, and I think it all boils down to the election, are interest rates going to go up higher, and Iraq, how it's going to play out. I think what will get the market going again is a forecast for the third quarter of 2004 as well as a little further out in the fourth quarter as well as estimates for the first quarter of 2005. If we see some decent numbers from companies, some more upbeat forecasts, and a little more capital spending in technology, I think that the market will get moving again.
GIBBS: Your outlook, Dan?
AHRENS: Well, I agree with Ted, and also everybody knows that the market does not like uncertainty.
GIBBS: While what happens in Vegas stays in Vegas, I do want to talk about some things that are going on. Particularly in the gaming industry, we're having a lot of mergers: MGM-Mandalay announced, and then Harrah's-Caesars announced. I'm sure there's still going to be a lot of antitrust issues, but what are the implications about mergers here and Harrah's particularly?
AHRENS: Well, we've owned Harrah's for some time. We didn't like Caesars for various reasons, their balance sheet, their debt load. But Harrah's strongest point has been their regionality. There's venues within driving distance of many Americans.
Harrah's is not just about Vegas. It's about their regional venues. They have interest in gaining more of a foothold on the Vegas strip. And by acquiring Caesars, they'll do that in a very big way.
GIBBS: Going back to you, Ted, and the liquids that kind of fuel the summer rally and slake our thirst, you talked a little bit about PepsiCo.
PARRISH: I think that the company is going to continue to put up really good numbers because they are aggressive. They're more aggressive than Coca-Cola. And right now they're trading at a slight discount to Coca-Cola's share price, based on its P/E ratio. And I think for the foreseeable future the company is going to grow at about a mid-digit, in the mid-teens earnings.
So we think that Pepsi is a great company. We think that the international opportunity for Pepsi and Frito-Lay is really huge, because right now international operations account for about 20 percent of profits. And per capita consumption, snacks abroad is a whole lot less than it is in the U.S., and I think Frito-Lay has a great opportunity there.
GIBBS: What about the drag, though, of Tropicana orange juice? And of course this low-carb diet phase that has taken over everything is actually hurting orange juice because of its high carbohydrate level.
PARRISH: Well, yeah, that's the case, but I think Pepsi's doing a good job of mixing up Quaker Oats and Tropicana together, and I think it's more appealing to be sold that way. They actually took over Gatorade a few years back. Coca-Cola actually went after Gatorade but they gave up on the acquisition. Pepsi actually stepped in and actually took over the company and I think it's going to be a great acquisition. And they're going to try to cross market those two products, and it's going to do well I think. I mean, yeah, the most recent quarter was a bit slow for that segment of the company, but I don't think it's going to be a long-term trend. The company is, you're going to see the low-carb phase diets phase out a little bit. I don't think it's a permanent trend. I think it's a fad.
GIBBS: Dan, I see you nodding your head. Is it over the low-carb phase dying? Or is it because you think PepsiCo is also a good company?
AHRENS: Well, we have a very concentrated portfolio, so we don't invest in PepsiCo, but a number of the things that Ted is saying fits exactly into our thinking. And he owns PepsiCo for the same reasons that we own Anheuser-Busch, long-term, consistent performer.
When you raised the question about low carbs, it is rather funny that the alcohol companies are just all over the low-carb craze and are having fierce competition in that market.
GIBBS: Yes, they're also having fierce competition in this election year, Bud being the King of Beers. This is a democracy.
Dan, where does the management come in?
AHRENS: They (Anheuser-Busch executives) have done a great job of looking for opportunities also. They've been able to grow market share year over year when many people think it had already peaked by deals in Mexico, in China, in Europe, in Japan. They're really looking outside the U.S. borders because the U.S. only is only going to provide single-digit growth. Anheuser-Busch has been able to increase that market share, and that leads to their simple positive returns every year. Their stock has gone up every year for the last 11 years, and although it's rather boring growth, that 10-year record is phenomenal.
GIBBS: Of course Microsoft came out this week and decided to give everybody that holds Microsoft like a (cash dividend) windfall, almost equivalent to the tax cut that we saw. Do you see any other technology companies following Microsoft's lead?
PARRISH: Sure. I think that Intel and Cisco have really been resisting the temptation to pay out more of their cash, but I think they will, because there are a lack of opportunities that are valued at the level of cash that they have on the books, so they have to give some of that money back to shareholders.
Now, pinpointing a perfect level of dividend payout and stock repurchasing and a special dividend is something that you really have to go about in a very careful way, because you don't want to relinquish yourself of all of your cash, because you're going to need it. But I think that the Microsoft deal was a really good one for shareholders, and I don't think it affected the company in a way that's going to dampen long-term growth for the company.
GIBBS: Well, it's interesting because with the new tax laws giving dividends much more preferential treatment, or better treatment, let's say, you would have thought that investors would have started clamoring for dividends, similar as they did to the government surplus, like it's my money, give it back. How come we haven't seen that populist movement from investors?
PARRISH: Well, I think a lot of investors are still particularly interested in gaining capital appreciation out of their stocks. I know at the Henssler Equity Fund, we only buy companies that have a long-term earnings growth rate plus a dividend yield of 12 percent. It doesn't matter where it comes from, dividend yield or long-term earnings growth, because we believe that earnings move stock prices, so we want a total return of 12 percent, dividend yield or long-term earnings growth. And I think a lot of investors also follow that strategy.
GIBBS: Looking at the normal market average of return, isn't 12 percent a little high? Is it a little optimistic?
PARRISH: Well, I'm finding a lot of companies that actually meet that criteria. So I suspect that if you play your cards right and you actually do your homework, you can find companies that can give you 12 percent yield.
GIBBS: Can you share some of those names with us?
PARRISH: Well, we have a really big position in health care at this time. And it's definitely a contrarian play right now because the market's unfavorable on health care right now. We think that the long-term prospects are really great for health care. The growth profiles of most of the companies in health care are good. We focused on companies that have young product pipelines, like Pfizer and Eli Lilly as well. We also own medical products companies within health care that are actually going to grow faster this year than the pharmas.
One company I like in particular is Pfizer.
I think even with all of the scrutiny, with all the generic competition, the company still has the best pipeline on the planet. They have the financial resources to throw money after, in R&D, and I think they're going to do well over the next three to five years.
GIBBS: Health care could also be a baby boomer play. All of us are pushing that level right now. Tell me how that plays out. How do you look at health care?
AHRENS: Well, it has been out of favor slightly right now. A lot of health care depends on the elections we have coming up, and it may be divided right down the middle. If Kerry wins, it's going to be a boon for health care stocks. If Bush wins, it may take a little bit longer for the demographics to come around and affect those health care stocks positively, like Ted's waiting for.
PARRISH: Well, I think if Bush wins it's going to be positive. If Kerry wins, it will probably be negative short term.
AHRENS: For the health care.
PARRISH: For health care.
GIBBS: Tell me why.
PARRISH: Well, because I think that Kerry has all of the talk about actually having re-importation as well as price controls, which I don't think we're going to get. I think that in order to continue to receive innovative drugs, you're going to have to have, allow drug companies to actually get return on their investment. I mean I'm not saying that there's not going to be some form of decreases or Medicare cards or drug cards that are going to exist, but I don't think we're going to have controls on pricing. I think that, you know, you don't want to stop innovation. I mean we still don't have that cure for cancer, and that's going to give us a drive to continue to throw money into R&D to try to find that cure.
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