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Thursday, 7 February 2008

Look who's buying now

John Neff
Former Manager, Vanguard Windsor Fund

I don't see a recession. The decline of the dollar has made American industry quite competitive in the world, and ordinary manufacturing will help the economy. I've always been a low P/E investor, because low P/E gives you the benefit of a decent company's growth, plus the chance to move the P/E up. That's how I ran Windsor fund successfully for over 31 years.

In late January I started buying new stocks. I bought ConocoPhillips (COP), which I had sold at about $85 to $89, when it was suddenly below $70. I bought more shares of Seagate (STX), which I already owned. It got unduly pummeled, in part because it's a tech company, and it got down to seven times earnings. It's the only tech stock I've owned in the past 12 years, and I wouldn't buy it if it was 13 times earnings. I also bought a small-cap company, Georgia Gulf (GGC). It's a decent chemical company. It's overleveraged right now because it made an acquisition and used debt, and the stock got down to $3.50. So I bought in. The following week the stock was at $5.90. Not a bad percentage gain.

Leon Cooperman
Founder, Omega Advisors; former head of investment research at Goldman Sachs

Unequivocally the economy is slowing, but until we see some data to the contrary we think there's only a 50% chance of recession. And barring a very serious recession, many parts of the market are still attractively valued.

The market will go lower because there are legitimate issues facing the financial system, so if you're going to invest now keep cash reserves for dry powder. Stick with blue chip companies whose fundamentals you understand and that are trading inexpensively. Right now we like 3M (MMM), energy names like Anadarko (APC) and Apache (APA), and pipeline companies like Atlas Pipeline (APL). We think Merck (MRK) is an inexpensive good company, and it also pays a dividend. Dividends are important because, historically, they provide almost half of all stock market returns. And we also like Boeing (BA) because it is less sensitive to economic cycles and has a five-year order backlog.

Christopher Ailman
CIO, CalSTRS

We'd been underweight in U.S. securities since the summer, but with the recent sell-offs we decided there's a buying opportunity. As everybody else is selling off in these panic waves, we come in and buy. For individual investors, the key is not overreacting. Flip it around and think of it as the stock market is a bit on sale. The bull market we had through 2007 was getting very long in the tooth, so this is actually a healthy retrenchment.

International diversification, unfortunately, is dead. The risk-return tradeoff of U.S. versus international stocks is tighter than it's ever been. They're really just one asset class. If you're looking for that extra spice of risk in your 401(k) the place to put a little bit of money to work is emerging markets. The caveat is that they've been extremely strong. China is very overpriced in its own domestic market, for example, but there are opportunities like Brazil and Eastern European nations that look like they will have fairly decent GDPs no matter what the U.S. does.

Michael Steinhardt
Chairman of WisdomTree Investments

When I managed a hedge fund, I cared about one thing: Performance. I had an arsenal of tools that I could use to maximize performance, and I spent all of my time doing nothing but thinking about markets. Individual investors are at a disadvantage when they're up against professional investors, which is why I would recommend that they use index products like index mutual funds and ETFs. They get low costs, transparency, great liquidity, and wonderful tax treatment; and they can do as well as the market, after fees.

There are also ETFs that use strategies to maximize market returns by doing something as simple as weighting an index based on fundamentals like earnings and dividends, rather than market cap. This means that the index will be less likely to buy when stocks are cheap and sell when they are dear. It's instant value investing, which is a great idea when stock markets are falling.

Whitney Tilson
Founder T2 Partners

If you want to sleep well at night, you could put your entire portfolio in Berkshire Hathaway, not look at it for five years and likely beat the market, but during periods of panic you can make more money on beaten down, more volatile stocks. This is only a strategy for people who can withstand a lot of ups and downs.

As an example, we recently added to our position in Sears Holdings (SHLD), which we think the market misunderstands. We think intrinsic value is upwards of $250 per share versus the current price around $110. But it's hard to pick a bottom here. Our analysis hasn't changed since we first started buying late last year with the stock near $130 and we had to endure a drop below $85 only a few weeks ago -- which gave us an opportunity to buy more.

Jeff Mortimer CIO, Charles Schwab Investment Management

Bull and bear markets end with volatility, which is why you see 600-point stock market swings. This triggers a lot of emotional investing, even though underlying company fundamentals haven't changed all that much. You have to remember that 10% to 20% corrections are simply the price of admission for being a stock investor, and that your portfolio should always include defensive strategies for this reason. If your allocation forces you to sell in a down market, take a deep breath and look within because you've probably taken on too much risk.

If you're creating a defensive strategy, make sure you have exposure to healthcare stocks like Cigna (CI) and Aetna (AET), as well as consumer staples like Coca-Cola (KO). Also, IBM (IBM) hasn't disappointed anyone and the company pre-announced great earnings. Even so, it got caught in the downdraft. Now is a time to get this sort of solid performance at a discount.

Nouriel Roubini
Economics professor at New York University and chairman of RGE Monitor.com

The debate is no longer about a soft vs. a hard landing, but how hard will the hard landing be. The recession train left the station in December. The recession will be severe because the U.S. consumer - whose spending makes up 70% of our GDP - is shopped-out, saving-less, and debt-burdened.

There is a rising risk of a systemic financial crisis. Avoid risky assets like equities, which could suffer a sudden market crash. You want to buy protection against this by buying options on the CBOE volatility index, known as the VIX, or on the S&P 500. Be careful with money market funds. Some could have meaningful exposure to securities backed by risky mortgages, or even auto loans or credit card loans, which are also high risk.

Finally, do not buy a home. The housing recession is not near the bottom and prices could fall by another 20% over another year and a half. If you buy now, you'll have a massive capital loss.

Bill Stone
Chief Investment Strategist, PNC Wealth Management

We talk about psychology a lot with clients. Studies show that the pain of loss is felt more than twice as much as the joy of gains. So it is important to not be shaken out of the market by fear when things are going down. Typically, if you sold into or after a market decline you probably lost money. Doing something as simple as increasing your 401(k) deduction will allow you to take advantage of this sale on stocks, and the money disappears from your paycheck, which makes it easier to invest in a down market. It also means that you're thinking long-term, which is good.

Right not we like healthcare companies like Baxter (BAX) and Pfizer (PFE), which pay dividends, and Gilead (GILD), which has a great HIV franchise. A defensive stock we like that is in the industrial space is Lockheed Martin (LMT), since defense spending will be robust.

Bob Rodriguez
CEO, First Pacific Capital and portfolio manager, FPA Capital and New Income Funds

I have 43% in cash. I'm looking to see what other shoes start to fall. The credit crisis is still unfolding, and all we've had are tactical, not strategic solutions. High interest rates didn't cause this credit crisis, so why should interest rate cuts solve it? Congress is hoping the stimulus will help kick start the economy, but single-event tax cuts have been shown to be highly ineffectual.

Several retailers with strong balance sheets have gotten hit pretty hard. Foot Locker (FL) is down in the $10 range, and Jo-Ann Stores (JAS) got down to $9 from about $25. Under normal circumstances, they'd be buys. But I don't believe we're in a normal environment. I want to see more pain and suffering before I think it's safe to start buying in a big way.

Ron Muhlenkamp
Founder and President, Muhlenkamp & Co., portfolio manager, Muhlenkamp Fund

Our holdings reflect the change in market leadership. We have decreased our holdings in homebuilders, financials, and consumer cyclicals, and have increased our holdings in capital goods and technology. For instance, we bought Cisco ( CSCO) and Oracle (ORCL). It's been a long time since you could buy these stocks so cheap. We do a seminar twice a year, and people had been asking us, "When do you think technology will come back?" The answer we gave them was, "Not until you quit asking." April 2007 was the first time nobody asked.

Will we have a recession? From an investment standpoint, we won't know until it's too late to do anything about it. And from an investment standpoint, it probably doesn't matter. There's going to be a long-term workout of these credit instruments, measured in months or quarters. If we're right that the investment climate is good and the business cycle continues, we are now once again at the beginning of a business-investment cycle, giving us opportunities we haven't seen in six, seven years.

Ken Heebner
Co-founder, Capital Growth Management and portfolio manager, CGM Realty Fund

It's time to be positive. While the American economy is a little weaker than I thought it was going to be, I don't think a recession is going to happen. Whatever degree of weakness we experience, the global economy is going to continue to move ahead. Agricultural and industrial commodities will continue to show strength. The Fed has shown that they are going to take aggressive action to minimize the impact of the mortgage problem on the U.S. economy, and if there is any side effect, it will weaken the dollar and stimulate commodities prices.

If you look at the fundamental underpinnings for the contraction of economies in developing countries, those factors are no longer present. Until recently, they were dependent on imports of capital to provide for investment into their economies. At the same time they tended to have significant current account deficits. When they had current account deficits it was the inflow of capital that provided the stimulus for growth. Today, they have large current account surpluses, and they don't need an influx of capital to cause their economies to grow. In terms of stocks, I think the long-term potential for Petroleo Brasileiro (PBR) continues intact. The company recently discovered the Jupiter field of natural gas--a major discovery off Brazil. So the pattern of favorable news continues.

Mustafa Sagun
Chief investment officer, Principal Global Investors

Have discipline when you construct your portfolio, and stick with it when the market swings up and down. Right now we like healthcare stocks like Express Scripts (ESRX) and Medco (MHS), which manage prescriptions benefits. It's a play on the aging population and it's defensive because drug demand stays fairly steady even when consumer discretionary spending falls.

We like to look for global trends because that is a defensive strategy. This is why we like companies that produce potash, which goes into fertilizer. There is a real supply constraint here and growing demand because food demand is increasing and ethanol demand means more agricultural production. We like Mosaic (MOS), Potash Corp (POT), and Agrium (AGU). In these times of high volatility, stock exchanges will benefit. Their business is soaring. Those stocks include Deutsche Bourse, the Hong Kong Stock Exchange, and the Nasdaq.

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