Sunday, November 25, 2007

Sectors Still Look Poised for Outperformance

Back in August, right near the bottom of the mini-plunge, I suggested several sectors whose stocks looked poised for outperformance over the longer term, as well as a couple of groups to avoid.

The groups I liked included some of the bigger banks (although I warned that further declines of 10-20% also looked possible), whose yields were then in the 3.4% to 5.0% range or so.

They also included some of the large engineering firms, who I see as prime beneficiaries of the design and oversight work needed to build out the emerging markets infrastructure, and the work needed to replace the aging infrastructure of the western world.

It also included several emerging markets suggestions, and a later posting suggested that distressed credit buyers would have the opportunity to load up their balance sheets with cheap debt, which could fuel earnings for years to come.

Since those predictions, the S&P 500 has bounced up and then down, and is essentially flat over that period.

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The banks mentioned have generally declined, most by about 10-20%, but with Citigroup getting trashed. On the other hand, some have held up pretty well, considering the magnitude of write-offs announced since then. I still like them, and now most of the yields are now in the 5-7% range, making them even more attractive in the face of what I see as a weak market. Maybe it's just me and Warren Buffett who like the bank stocks at these prices.

Engineering firms still look good as a look term-prospect, but this may be somewhat tempered by the fact that most of those discussed have moved sharply upwards, by 10-50% since then.

The emerging markets suggestions have also moved up, by about 15-20% on average of the group discussed.

Finally, a later August 2007 suggestion of looking at some distressed credit buyers is essentially flat as a group.

I still like all of these groups, and think that current prices are likely to look good several years from now.


The Confused Capitalist


Deborah said...

We are obviously evaluating very different information in our decision making here.

I encouraged all of my friends I knew that I knew were in banking stocks to sell starting around last January when I started to understand what these irresponsible greedy ba$tard$ had done.

The world is in a credit bubble and in one in which credit standards have changed from a 12.5 to 1 leverage to a 30 to 1 leverage. Reducing interest rates was already grossly irresponsible and causes its own leverage. The CDOs further leveraged what the reduction in interest rates was doing. We have leverage up leverage up leverage here.

There is no foundation what-so-ever holding the system up.

The mortgage insurance they bought that they used to justify such risky and psychotic lending practices has only a 1% leverage for coverage meaning it is bankrupt should a mere 1% of the value of the mortgages be in default.

Well, right now about 1 in 150-200 homes is in foreclosure and the bulk of the high risk mortgages are yet to be reset in terms of the interest rate. The mortgage insurance will soon go bankrupt.

Some banks on your list are likely to go bankrupt and stockholders will not get a cent and people with more money in them then the government backed insurance allows will be in line with all other creditors to get what they can back.

The banks have tons of off balance sheet commitments that are toxic. The banks will be writing off hundreds of billions of dollars before this mess is finished playing out.

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