Many sectors are looking positive, but watch interest rates and oil prices
The Cambiar Aggressive Value fund excelled in 2010 in part by making the best of a very bad situation: the Gulf ofMexico oil spill. FundmanagerBrian Barish says thefundtook a “ brick to the forehead” fromits large stake in BP at the time of the Deepwater Horizon explosion. Barish unloaded all of its quickly plummetingBPposition byMayandcompensated by taking advantage of ripe opportunities elsewhere in the energy sector. Thefundendedthe yearup39percent, outpacing the Standard& Poor’s500-stock index by 24 percent and other large-value funds by 25 percent, according to Morningstar. The key to success, Barish says, is finding stocks that are unfairly inexpensive and concentrating money there. Washington Post: Can you tell us a bit about your strategy of investing in stocks that are inexpensive because of temporary negative issues?
After the gulf oil spill, the whole sector sold off— integrated oil companies, exploration and production companies, offshore drillers — which also created situations that worked for us.
Why is oil [around $90] a barrel today? There is an inexorable demand coming mostly from Asia. We’re not finding giant oil fields to drill, and they’re complicated to get to. Have any of these facts changed because BP had a terrible accident? Not in the slightest. In fact, the fact that we’re being more restrictive about drilling will tighten up global oil supply. We put on several energy positions that sold off rather badly in thesummer, andthose have been very profitable: Apache, Repsol, Devon Energy and Halliburton. They’re clearly undervalued in terms of reserves they have versus long-term price expectations for oil and gas.
WP: What market and economic trends do you think will shape the investment story in the year to come? What are people not talking about yet but will be in December 2011?
For most of the last 18 months, financial media have been dominated by negative chatter about why this economic recovery is going to be below par. There are a lot of structural issues in the U.S., but they mostly pertain to creditandthe stuff credit attaches itself to, like housing and commercial real estate. We had a bubble, we massively overbuilt, andthat excess inventory will take years to clear off.
Butthere arealot of positive stories thatwerenot part of this credit bubble. Oil and gas, technology and industrial America are doing really well and are positive sector stories going into 2011.
The consensus going into 2011 is underestimating the strength of the recovery.
I’mnot an economist, but I think you could have GDPgrowthof 3.5 to 4.2 percent, drivenbybusiness investment. One of the items that got thrown into the Bush tax-cut extension was accelerated depreciation for businesses, where they can expense 100 percent of capital expenditures in 2011 and 50 percent in 2012. Let’s say you’re a company that wants to do a full information technology upgrade. You’d have to have your head examined not to do it in 2011. You’re going to see very aggressive business capital spending. WP: Given those trends, how will your sector allocations shift from 2010 to 2011?
We were fairly heavily weighted in tech and consumer discretionary stocks going into 2010. We arenowparing back on those. It will be challenging to get return out of old-line, blue-chip tech companies like Microsoft, Intel and Dell because you have a paradigm shift. PCs are in the eighth or ninth inning of their life span, so that’s not a fertile place to be investing when devices like tablets are just emerging.
Consumer discretionary was the bestperforming sector in 2010, so we’ve moved on from a lot of names there. With rising gas and cotton prices, it’s hard not to see things being more difficult in 2011. WP: If tech and consumer discretionary are out, what stocks are compelling going forward?
We’ve been buying Archer Daniels Midland, an agricultural processing and transportation powerhouse. It’s done nothing in 2010 and is very cheap by any conventional metric. Their biggest driver of growth is agricultural services, the transport and handling of commodities. Around the world you’re having all kinds of supply dislocations. We have a tight supply outlook for cotton. Wheat hit a multiyear high because you’ve had terrible harvests in the former Soviet Union and Australia. ADM takes grain sourced in the U.S. and moves it to East Asia or the Black Sea. A farmer can’t do that.
Also, multiples [for energy stocks] are still very low based on a $90 price per barrel for oil in 2011. I continue to think the global energy situation will show tightness in 2011. The price of oil is telling you that already. WP: Any other favored sectors?
In tech, while I’m not optimistic about the longer-term outlook for PCs, I am optimistic about smartphonesandtablets. We’regoing tohavedevice proliferation in terms of tablets, smartphones, and TVs with integrated computer-like capabilities. We spent 2010 worrying about a double-dip recession, and you don’t want to own these companies in a recession, so these stocks haven’t done much. We like Corning, which makes the flat glass used in TVs and iPads and its clones. Another name we have a big position in is Flextronics, a contract manufacturer that makes BlackBerrys and Xboxes and services and telecom switches.
We seek to take advantage of material mispricings, and we tend to do a lot better when there has been some kind of market stress which leads to financial dislocation. The financial dislocation of 2008 and 2009 was so thorough and catastrophic that there continues to be a great many stocks materially mispriced some 21 months after the market low. I mentioned a few names already that remain well below pre-Lehman prices and look poised to return to pre-Lehman valuations, if not higher, [and] there aremanymore where that came from. WP: What could be some negatives for the market in 2011?
Interest rate spikes and oil-price spikes would be the main risks. I don’t think a 3.5 to 4 percent GDP number is baked into the consensus, and it’s not baked intoTreasury prices, either. With that kind of a growth rate in 2011, current Treasury yields are deficient. You might get yield pressure that could hold thingsdown. Similarly with oil I’dbe surprised if we didn’t have a spike over $100 a barrel. You don’t know how far that could go. Oil prices got out of hand in 2008 and were a contributing factor in making the recession that was already underway worse.
Finally, while the mood onWall Street was really bearish in the summer of 2010, it got quite optimistic during the fourth quarter, particularly after the election. We’re coming into the market in 2011 a little overbought, andthat could resolve itself through a correction or the market going sideways for a while.