Tony Crowell — Tue, 12 May 2009 23:22:13 +0000

Halfway through the second quarter, stocks resemble a glass half full rather than half empty. The Dow still lags below the level at which it began the year but our portfolios, which comprise stocks recommended here, are ahead for 2009. The media continue to babble about the direction of the overall market, a never-ending story that yields more heat than light.
Bill Tilden, the leading tennis player for over 30 years, said, “Never change a winning game; always change a losing one.” That’s good advice for almost any situation, including the stock market. The financial upheavals of the last year forced a massive reset of the entire global economy. Recovery is underway, supported by various stimulus legislation by every industrial nation.
While recovery is certain, its scope and pace are not. Some business sectors like banks and housing will probably never again see their days of lazy profits. This happened here before on a much smaller scale when half the 3,200 savings and loans operating in 1965 were out of business ten years later. Their bout of reckless real estate lending led to the 1990-1991 recession. That taxpayer-funded government bailout also may have encouraged the survivors to make similar high-risk loans, leading to the 2008 subprime mortgage crisis.
The government bailout of the savings and loans led to a quasi nationalization of that sector. In a similar manner but much grander scale, the current bailouts of the mortgage and much of the banking sector have changed that once free wheeling sector into something more like a public utility. Necessity, not chosen political philosophies, has brought on these seismic changes. With government forced to become an unwilling partner, I think other sectors offer more predictable futures.
Bank stocks rallied recently from their abysmal lows on “news’ that the staggering sums the government predicted they would need for survival were less than Wall Street feared. As the government is now a stakeholder in these still troubled institutions, it would be natural for it to err on the side of optimism. Sounder earnings prospects lie in other channels.
These include sectors like industrial, materials, energy and infrastructure. In the latter group, a new buy is AECOM Technology (ACM-$30), a Los Angeles-based provider of construction management and planning services for transportation, facilities and environmental improvement. Newer projects include New York’s Second Avenue Subway, and two massive urban regeneration projects, one for London’s 2012 Olympics and the other for the government of Libya.
The company went public in 2007 and its reasonable valuation probably reflects a lack of public awareness. Earnings this year will be around $1.67, up 19%, and 2010 forecasts are for $2.00 per share. March 2009 earnings were up 14% in a difficult economy, thus its future looks promising.
Jacobs Engineering (JEC-$38), KBR (KBR-$17) and Flowserve (FLS-$70) are all building momentum as confidence rebuilds. I anticipate increasing funding for companies that build useful projects rather than play games with other people’s money.
Finance is not all bad; in fact, some insurance companies are capably handling their traditional strong cash flows. ACE, Ltd. (ACE-$43), the Swiss-based property and casualty insurer, forecast 2009 earnings in a range of $7.25-$8.25). That’s an absurdly low P/E ratio of 6, yielding 2.4%.
In materials, Freeport Copper (FCX-$49) is shining again. Energy has many candidates with Brazil’s Petrobras (PBR-$39) almost an essential holding. Earnings will be down to around $2.00 in 2009 on lower oil prices. Disputes will continue with the Brazilian government over royalties from its vast oil discoveries but production will be increasing as the global recovery brings oil prices back. Unlike some large companies in its North American neighbor, it’s not looking for government handouts.
Economic resets seem to happen every fifty years or so. They are painful and destroy myths like the California concept that real estate will always be worth more than its cost. They also create opportunities for real gains for those looking beyond headlines and sound bites.

Crowell Roberts Investment Blog » A fifty year reset