Many sec­tors are look­ing pos­i­tive, but watch in­ter­est rates and oil prices

The Washington Post Sunday - - BUSINESS - IN­TER­VIEWS BY ERIN SCHULTE

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.

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