Category: Research Paper
Tobias George Smollett (1721-1771), Scottish novelist, was born in
Dalquhurn, Dumbarton County Scotland. Smollett was born beneath a plane
tree at Dalquharn House on the family estate of Bon hill in the Vale of Leven,
near the village of Renton, Dumbartonshire. At fourteen Smollett was
apprenticed to a Glasgow doctor. He studied medicine at Glasgow
University and moved to London in 1740. He was a ship’s surgeon in the
Carragena expedition against the Spanish in the West Indies, and lived in
Jamaica until 1744 when he returned to London and renewed his earlier
attempts to stage a play he had written The Regicide, but still met with no
success. He also failed to set up his own medical practice.
His first novel, the partly autobiographical Roderick Random
(1748), was an immediate success. His best novel, The Expedition of
Humphry Clinker (1771), has become a classic. It is a story, told in a series
of letters, about the travels of a family through England and Scotland.
Smollett was troubled by lack of money. He spent his last years in poor
health, and died in Livorno, Italy, on October 21, 1771. Two years
later, Johnson and Boswell stayed at Cameron House with Smollett’s cousin
James, who was preparing to erect a Tuscan column in Smollett’s memory at
Renton. Johnson helped compose the Latin obituary on the plinth, and the
column stood in what subsequently became the playground of a school.
Some of Tobias Smollett’s work consists of The Tears of Scotland
(1746). Poem on the defeat of the Scots at the Battle of Culloden. The
Adventures of Roderick Random ( 1748 ). Gil Blas. Translation of LeSage’s
novel. ( 1749 ). The Adventures of Peregrine Pickle ( 1751 ). The
Adventures of Ferdinand, Count Fathom ( 1753 ). Don Quixote.
Translation of Cervantes’ novel. ( 1755). The Adventures of Sir Lancelot
Greaves ( 1760 ). Travels through France and Italy ( 1766 ). The History
and Adventures of an Atom ( 1769 ). The Expedition of Humphrey
Some critics regard Tobias Smollet as more satirist meaning that
a work of literature or art that, by inspiring laughter, contempt, or horror,
seeks to correct the follies and abuses it uncovers. I don’t know what that
This is a paragraph from Tobias Smollett’s book The Adventures of
Roderick Random is the orphaned, unwanted grandson of a severe old
Scots magistrate, exposed by his grandfather?s known neglect to the malice of
the community. His principal enemies are the schoolmaster and the young
heir. It is not long before a deus ex machina appears in the form of a sailor
He was a strongly built man, somewhat bandy-legged, with a neck
like that of a bull, and a face which had withstood the most obstinate
assaults of the weather. His dress consisted of a soldier?s coat, altered for
him by the ship?s tailor, a striped flannel jacket, a pair of red breeches
japanned with pitch, clean grey worsted stockings, large silver buckles that
covered theree-fourths of his shoues, a silver laced hat whosecrown
overlooked the brim about an inch and a half, a black bob wig in buckle, a
check shirt, a silk hankerchief, a henger with a brass handle girded on his
thigh by a tarnished laced belt, and a good oak plant under his arm.
I picked this paragraph because here Smollett is describing the hero
of the story Roderick Random. I believe it is important to have a brief if not
full description of characters, so that you can imagine seeing them maybe
even being there, in your mind, while they are doing what is described in the
Yet another Wall Street strategist offered up a rosy stock-market target for the coming year.
Bloomberg Tobias Levkovich
Citi Research\’s Tobias Levkovich sees an S&P 500 Index of 1,900 and a Dow Jones Industrial Average of 17,100 by the end of 2014, based on earnings, price-to-earnings ratios, currency measures and consumer confidence.
One factor that seems to be missing, however, is investor sentiment, which remains neutral, the strategist said. While that may take away from the argument for a market rally in 2014, stocks do appear much better positioned than gold from a historical standpoint, he said.
Just don\’t expect it to be a straight shot. Markets are likely to be volatile over the next few months. While Levkovich also improved his 2013 year-end outlook, he only bumped it up to 1,650 from his previous forecast of 1,615.
\”Issues such as a likely fight in Washington over the debt ceiling, aggressive 2014 bottom-up consensus estimates that need to be trimmed and Fed tapering could coalesce and restrain equity indices in the next few months,\” Levkovich said. \”Nonetheless, a shift toward growth stocks seems appropriate along with large cap names especially if foreign money moves into U.S. markets.\”
The forecast comes on a recent wave of bullishness following improved outlooks from Deutsche Bank\’s David Bianco and Morgan Stanley\’s Adam Parker .
Stocks on Monday closed higher. The S&P 500 rose 0.6% to 1,697.6, while the Dow Jones Industrial Average gained 0.8% to 15,494.8.
– Wallace Witkowski
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By Adam Shell, USA TODAY
NEW YORK Contrarians rejoice. Groupthink is back on Wall Street.
Ten out of 10 stock market gurus interviewed by USA TODAY say stocks will post gains for a fifth-consecutive year in 2007.
The expected gains range from 15% to 1%, and average out to 8.1%.
There wasn't a single bear. No real pessimists. No one calling for a loss.
Not a single prognosticator warning of an impending slump.
If bulls are right, investors who follow the herd will be rewarded.
But from a contrarian standpoint, that glass-is-half-full optimism could spell trouble.
As the Grateful Dead pointed out in its popular song, Uncle John's Band. "When life looks like Easy Street, there is danger at your door."
One person who sees potential danger due to the dearth of bearishness is the stock strategist with the least optimistic '07 forecast: JPMorgan Chase's Abhijit Chakrabortti.
"It does worry us," Chakrabortti says. "Everyone thinks the economy will be fine. Everyone thinks earnings will slow but still grow at a decent clip. Everyone thinks the Federal Reserve will either cut interest rates or hold rates steady. Nobody thinks the dollar will collapse or oil will spike again. That, to me, sounds dangerous."
It's not just Wall Street that's feeling confident after a surprisingly good year in which the Dow Jones industrial average blasted to 22 all-time highs since early October.
Individual investors are also feeling optimistic.
"Investor optimism remains buoyant as 2006 comes to a close," reads the press release touting the December UBS/Gallup Index of Investor Optimism.
Nearly two of three investors say, "Now is a good time to invest," up from 57% in November, the poll found.
And the CBOE volatility index, or VIX, a "fear index," is sitting near historic lows, a "sign of complacency," Ned Davis Research says.
But given that seven of the 10 forecasts call for ho-hum single-digit gains, Bernie Schaeffer, an expert on market sentiment and president of Schaeffer's Investment Research, has a different contrarian take: "This cautiousness is of even greater importance, given the flat-out bull market we've experienced in the second half of 2006. So a runaway bull market would be a major contrarian surprise."
Posted 1/2/2007 11:30 PM ET
Market sentiment has been damaged with the recent correction and will hardly improve in the short term, setting stocks up for a volatile September as international worries overshadow domestic ones.
Last week stocks took a blow with the Dow Jones Industrial Average dropping 3.3%, the S&P 500 index shedding 3.4%, and the Nasdaq Composite Index falling 3%.
Many analysts still believe the correction has enough room to go with one indicator showing that investor sentiment has fallen to “panic” levels.
Citi Research’s Tobias Levkovich said his Panic/Euphoria model, which brings together such indicators as short-interest ratios, margin debt, compiled bullishness data, and put/call ratios, broke into “panic” territory for the first time since late 2012.
Although it may not seem good in the short term, Levkovich said that historically stocks have gone up 96% of the time over the next 12 months when the gauge has achieved that level:
To Brad McMillan, chief investment officer at Commonwealth Financial, the international environment is feeding market volatility more than any other domestic factor.
Germany’s soft manufacturing orders report likely had more to do with Friday’s selloff than the jobs report’s effect on a September rate increase from the Federal Reserve, McMillan said.
A lingering market selloff is what could affect the FOMC's decision. McMillan said if investors come back from the Labor Day holiday and decide to take risk off the table, the S&P 500 could break down through 1,870 as low as 1,790.
If this occurs, then the likelihood for a September rate increase drops below 50%, in his view.
“We’ve got another month or so before confidence bounces back,” McMillan said. “A lot of damage has been done to sentiment.”
The RISE Conference at the University of Dayton
A National Student Investment Strategy Symposium and Portfolio Competition
February 21-22, 2002
A report by Robert Candella
As a Managing Director and Senior Institutional US Equity Strategist at Salomon Smith Barney, Tobias Levkovich had much to offer on the subject of Fundamental Stock Market Strategy. His presentation began with his view on the 4 fundamental considerations required to formulate a view on the market. These included:
Among the four fundamental considerations, this was easiest to gauge. This could be measured by Federal Reserve data, M2, M3 and interest rate policy.
Earnings typically lag liquidity. According to Tobias, earnings will turn in the next quarter or two.
Valuation of Markets
The market is not particularly overvalued. The market should not be viewed on the basis of the Capital Asset Pricing Model. Investors should instead look at where stock valuations should be given inflation. Don't consider Money Management surveys either because managers with over $100 million in assets do not fill out the surveys.
With regard to post September 11th, Tobias described investor sentiment as depressed. Since then, sentiment dramatically increased. It jumped ahead of fundamentals, but is now back in line.
In January, mutual fund assets increased by $3 billion, which is low for this time of year. $9 billion went into bond funds. If interest rates rise, these investors will lose money unless they reallocate--profit potential.
Retail sentiment usually chases performance. This will be among the strongest sectors for 4 reasons:
1. Investory overcapacities are being delt with
2. Defense speding bildup
3. Pent-up demand in advertising and travel
4. Accounting issues are causing concern. Also, operating earnings are the worst since the 1950's. However, only 3 companies in the S&P accounted for 30% of the write-offs. There is still considerably more disclosure in the U.S. than in any other market. Corporate earnings are down, but small business' are looking to increase production which is indicative of positive sentiment.
The Q&A session followed where Tobias talked about the healthcare and homebuilding sectors, equity valuation, hedging, market trends, things that trouble him in the market, and equity valuation considerations. With regard to each.
The healthcare sector will benefit as baby boomers age, except for pharmaceutical. Among the reasons are:
1. Weak new product pipeline
2. Generics competition
3. Hostile FDA
4. Patent expirations
Their is a relatively low supply of housing. Immigrants are increasingly a greater percentage of the U.S. population. They will be looking to buy housing in the coming years.
Their will be a greater interest in dividend-based equity valuations. In the 90's equities appreciated 10%--5.4% was stock appreciation. going forward, income will interest investors, not just appreciation.
In terms of positioning for the coming months, Tobias recommended being overweighted in industrials, consumer discretion and financials--all tend to be cyclical.
The best hedge for an equities portfolio tends to be energy. What's different this time than in the 1970's are energy prices. Consumer debt is high and savings is low and the mean household income in the U.S. is $40,000. Typically, $4,000 are spent on energy. Gas prices are declining and prices are falling out west. The typical household has realized between $1,000 and $1,500 in savings.
There is an inverse relationship between consumer discretionary and energies.
Some of the more important trends that Tobias noted were:
1. Economic trends have a much greater impact than will recent accounting issues
2. Individual investor's usually come in to the market late
3. S&P vs. Industrial Production for 30 years run in tandem
Counterparts not looking at cashflows and accounting for cashflows appropriately. The Enron debacle is good for the market.
Japan, the second largest economy, imploding.
Things that can't be measured like catastrophic events that may move the market.
Equity Valuation Considerations
When taking a neutral market position, you should be weighted 60% stocks, 30% bonds, and 10% cash. Currently, a weighting is 70% stocks, 25% bonds, and 5% cash. A year ago, small caps were a no brainer because they were tradinging at 10 times earnings where large were trading at 20 times earnings.
In terms of valuation models, don't believe in any one discipline. What market indicators you use to gauge market tops and bottoms depends on your perspective. Technical analysts pickup on trends. Fundamental analysts pickup on inflection points.
We will see the returns of the 90's, but not to the extreme extent. 5 standard deviations from the mean again will be unlikely.
When you're evaluating the market talk to institutional investors.
RALPH ACAMPORA - PRUDENTIAL SECURITIES
Ralph Acampora was among the most entertaining of the speakers. For a man whose comments are said to be able to move the markets, his style was suprisingly straightforward and practical. On the topic of technical analysis and the subsequent Q&A, Ralph talked about: the significance of behavioral finance, aspects of good research and stock picking, difficulties of technical analysis, his typical morning, and favorite indicators. On the topic of each.
In the current market an investor should be considering that the country is at war, we are in recession, unemployment is high, and management integrity is in question.
Aspects of Good Research
Good research is like a four-legged stool that factors in:
2. Fundamental Analysis
3. Quantitative Anlaysis
4. Technical Analysis
With regard to technical analysis, Ralph did note that no one valuation model should be relied on. Instead, if 4 models indicate that a stock is a value and the fifth does not, then more than the stock more than likely has buying potential. Additionally, if a stock bottoms and insiders are buying, than buy.
When you establish a view based on your research, Ralph recommended using the following to pick stocks:
The best measures that he finds as to the state of the economy are:
1. State of Merrill Lynch
2. Interest Rates
3. Fannie Mae & Freddie Mac
The best sectors to invest in right now are cyclicals, retailers, and defense stocks. Cyclicals include: paper, chemical, forest products, and P&G. Some of the good retailers include: Home Depot, Walgreens, and Texas Instruments.
In trending, investors should be indexed. Consider that the flow into mutual funds is a 10-year low, which presents potential investment opportunity.
Technical Analysis Difficulties
Some of the danger signs in technical analysis are insider selling at tops and buying at bottoms. The most difficult things about technical analysis include:
1. Information overload
2. Being unsubjective
3. Not having emotion
On the typical morning, Ralph said that he has in his mind exactly what his view for the day is. He then, says hello to the doorman, picks up his paper, runs into a few people on the elevator, says hello to his secretary and is totally confused by the time he gets into his office. On a more serious note, he uses follows these steps when viewing the market:
1. Evaluate the market
2. Identify groups and sectors with positive performance potential
3. Identify stocks in the given sector with positive potential
Ralph again injected his wit into the dialog. When a student asked, "What are your favorite indicates?" He responded, "Everything." Having said that, he recommended buying buying the dips and identifying them with respect to the stocks moving average. Also, don't rely on any one tool. Instead, the tools that you use to evaluate your stocks should be dictated by the environment you're in. To this end, he made mention of McDonalds.
LEAH MODIGLIANI - MORGAN STANLEY
The discussion with Ms. Modigliani focused on Asset Allocation an Portfolio Strategy. Her review of the topics was particularly technical and, inclusive of the Q&A session covered: the goal of asset allocation, measures and techniques, trends, and strategy.
Goal of Asset Allocation
Marrying academic research with practical application to manage risk. Further to this point, Ms. Modigliani defined risk as, "The probability of losing money and how much," emphasizing the downside risk more than upside (she joked that no one minds the benefits of risk).
Measures and Techniques
With regard to the measures and techniques used to measure and manage risk, Leah highlighted Wall St. does not use risk adjusted returns to manage risk. The only publication that she's observed that does so is Morningstar. To this end, she prefers to measure risk in terms of the return per unit of risk. This provides a better basis for evaluation. One of the measures that she recommended was the Sharp ratio, calculated as follows:
(Return of Portfolio - Best Measure of Portfolio Return - Risk Free Rate) divided by Standard Deviation of Portfolio
She cited an example where given an investor's risk tolerance, an emerging market stock would be a better investment in terms of the potential return per unit of risk.
On the topic of techniques, Ms. Modigliani talked about one technique in particular that Morgan Stanley uses to manage equities risk, which specifically involves buying and selling Treasury Inflation Protected Securities (TIPS) to increase or reduce a risk and return potential.
3 trends that trends that Ms. Modigliani anticipates in the market included:
1. Better disclosure / more clarity
2. Greater emphasis on valuation as a determinant for evaluating stocks
3. More emphasis on corporate de-leveraging (companies dropping debt)
In response to a student question, Ms. Modigliani said that she was most worried about the surplus being gone and social security being threatened.
When he topic of Strategy came up, Ms. Modigliani touched on the Capital Asset Pricing Model and followed with her market predication. On the CAPM, she said that there is an equity risk premium of about 4%--that's to say the inherent return. Moreover, be sure to compare volatility at each up point [on the securities market line] against the risk premium. Prompted by a student question, Leah began her sector allocation strategy-market prediction-by first reviewing current market conditions, namely:
1. S&P earnings are currently down 30%
2. Earnings expectations are currently up 8%
3. The Economy is improving
4. The Market is fairly valued
With this in mind, she offered the following with regard to each sector:
1. Technology - under weight
2. Financials - under weight
3. Consumer Cyclicals - over weight, specifically retail, media, and advertising
4. Energy - over weight - sector is cyclical and earnings are transparent
MARIA BARTIROMO - CNBC
Perhaps the most surprising of interviews on the day was with Maria Bartiromo. Maria participated in the conference via live satellite from Fort Lee, NJ. Maria must have been unaware that the satellite linked up to the screen when she sat down for the interview because she had a sour look on her face as if she were annoyed that we were interrupting her day. The audience had a good laugh when it became apparent that she became aware of the fact that she was live at which point her demeanor changed dramatically. Being a fan-favorite among armchair investors, Maria quickly overcame the amusement with her charming smile, cheerful disposition, and profound and well thought out commentary, which consisted of numerous iterations of, "My message to you is to DO THE RIGHT THING!" Aside from what I thought was a rather ridiculous message for an auditorium full of aspiring portfolio strategists, Maria offered following on the subject of The Role of Media in Investing:
3 Keys to Success - in order of importance
1. Do the right thing
2. Work hard at it
3. Love what you do
After talking a few minutes on each of the above points, Dr. Froehlich, the moderator, presented Maria with questions gathered from the audience on index cards. Pace University dominated this segment by having 2 of the 4 questions in an audience of over 300 selected. The first questioned asked of Maria was from Oren who asked how the media determines what events are noteworthy. Maria's response was:
1. Won't report rumors that are having no material impact on the stock
2. Will only report such rumors if the company is willing to comment
The next question presented asked why the media was so focused on Enron and hardly mentioned the bankruptcy of Global Crossing? In response to this question, Maria commented that Enron had a much far-reaching impact on the investment community. She elaborated on the impact citing banks, power companies, and 401k Retirement Accounts.
The third question the moderator asked of Maria was what she believed that the media's objectives should be. Her response was threefold:
2. To Educate
3. Characterize the impact of a noteworthy event
The final question presented to Maria was from myself. Dr. Froehlich asked, "What was the most defining moment in your career?" Maria's response was beig the first person in 1995 to broadcast from the trading floor.
Apparently, Maria at one time put Dr. Froelich, an occasional CNBC guest, on the spot by asking him with whom his favorite interview was while she was interviewing him because he asked the question of her too. She joked with Dr. Froehlich and 3 interviews and why she was impressed:
1. Among CEO's, Jack Welsh - his humility and candor struck her
2. NYSE Chairman Dick Grasso - also humble
3. President and King of Jordan - Interviewed him 2 weeks ago and was impressed by his humility and ability to speak clearly and simply. He was also topical and interesting and well spoken on the topic of the middle east.
GERALD D. COHEN - MERRILL LYNCH
I was fortunate to have had the opportunity to not only observe the conversation and Q&A session with Gerald Cohen, but also sit on the student panel selected to prepare the initial round of questions. I was asked to prepare 4 questions, but knew I would probably only be able to ask 1 before the audience would chime in. So, I spent a lot of time thinking the 1 question through, bounced it off Oren and Howard, ran it by Professor P.V. and felt well prepared for my fellow Merrill Lynch employee. Apparently though I was too prepared because when I asked the question, "What geo-political events do you anticipate in the comings months as a result of the U.S. war on terrorism and what effect will they have on the U.S. economy?", Gerald blushed a bit and in good spirits asked me who my boss was. I was happy to see that Pace was again well represented. On the topic of Economic and Fixed Income Strategy Gerald offered the following:
1. Since WWII, in the first year of every Republican administration there's been a recession. The cause is a shift in policy and the growth/inflation struggle between Democrats and Republicans.
2. 2nd mildest recovery on record
3. The operative phrase when conducting a macroeconomic evaluation is opportunity cost. Citing growth figures, Gerald pointed out that this will likely be the mildest recession on record.)
4. Worst earnings recession on record
Economic Recovery Considerations
1. President advocating a tax cut
2. Companies are cutting payrolls
3. Depreciation of inventories
Commentary on Federal Reserve
1. Goal of the Fed is to manage inflation
2. Responded appropriately to Sep. 11th by assuring liquidity in market
3. Overreacted to "irrational exuberance"
Some Significant Global Economic Observations
1. China is experiencing 3% growth. Their growth rate is expected to be 5% in 30 years, which will exceed the U.S. growth rate.
2. Unemployment in Europe is 9%. Until sentiment changes, it will remain strong.
Good Economic Indicators
2. Technology capital investments
3. 10 year vs. 3 mo. Treasury spread
4. Jobs - unemployment 5.5% (smallest on record in recession)
5. Oil prices - 1 cent price change affects consumers by +/- $1 billion
7. Commodity Prices - indicative of probably production changes
1. Now is the time to buy junk bonds
2. 3% growth consensus on Wall St.
3. As far as interest rates, expects 2.5% rates
1. Economic forecasts are basd on implied assumptions
2. Consumer savings will reverse current trend
3. Concerns if Argentina economic situation ripples into Brazil and rest of South America
4. Japan in 3rd recession in a decade
5. Impact of the 30yr treasury not being auctioned - portfolio managers will basket securities for 30 years
ROBERT J. FROEHLICH, Ph.D. - SCUDDER INVESTMENTS
Dr. Robert Froehlich concluded the interviews with a conversation on Global Market Strategy. As with the other speakers, a student member of the symposium organization team introduced the speaker. In this case it was the symposium team's student president and graduating senior. After introducing Dr. Froehlich, the student turned over the stage to the Dr. who talked about the U.S. economy, Europe issues, global trends, Asia issues, suggested allocation and London issues. These were his comments:
1. The biggest and most important economy in the world
2. Collapsing interest rates
3. Up-tick in government spending
4. Collapse of oil
5. Tax cuts
6. Increased retirement savings
7. Inventory buildup
"The 'R' word last year was recession. This year the 'R; word is recovery." The reovery in Europe is extremely difficult to evaluate. One must look at the U.S. to do do-Europe typically lags by 6 months.
1. 177 interest rate changes worldwide
2. Continued restructuring of corporations. European companies have been buying U.S. companies. Taking into account that the U.S. is among the leading exporters of CEOs and CFOs, Europe will likely continue to benefit from more liberal labor pratices (like people won't be guaranteed lifetime employment, which causes high unemployment) and increased efficiencies.
3. TMT-Telecommunications, Media, and Technology all did well in Europe and will experience an up-tick
4. Launch of Euro will result in price transparency over the long-run and provide an alternative store of value
With regard to Asia (excluding Japan), Dr. Froehlich commented that this market was beaten beyond fundamentals. Corporate balance in terms of debt/equity ratios were 84% in 1997. They were 50% in the U.S. at the time (many U.S. companies bought back shares since then). Today, Japan's debt/equity ratios are around 60%. They finally understood the significance of proper public policy.
As the Euro becomes a better store of value, Dr. Froehlich expects a sell-off in London (approx. 18 months). Investors will then recognize value in London and reinvest. The will occur over 4-year period.
1. There is a 9-month lag in interest rate changes between US and Europe
2. The U.S. cannot have a global economy by selectively regulating industries (e.g. Steel)
3. Country specific regional banks and retail sectors have good buys
The second day of the conference was structured differently. 1-hour sessions were offered in the business school classrooms from 8:45am to 9:45am, and from 10:20am to 11:30am. Guest speakers presented to attendants in each session on the following topics:
1. Growth Style Portfolio Management (limited seating)
2. Blend Style Portfolio Management (limited seating)
3. Career Trends in the Financial Services Industry
4. Equity Research Analysts
5. Regulation Fair Disclosure
6. International and Emerging Markets
7. Value Style Portfolio Management (limited seating)
I thought I could bring back some good information for the class regarding various investment styles-growth, blends and value portfolio management, but seating had been filled before the conference. The next best alternative was the presentation on Equity Research Analysts moderated by David Legeay, CFA and Managing Director of Victory Capital Management. He introduced 3 speakers who offered the following commentary:
Senior Investment Analyst and Co-Manager One Group Technology Fund
(Banc One Investment Advisors, Banc One Investments, Columbus, Ohio)
Steven introduced himself and outlined the topics that he would be covering during his presentation. These included:
Why buy a stock
Current Sector State
What to look for / What's on his radar screen
JON FISHER, CFA
Equity Analyst, Fifth Third Bank Investment Advisors
(Fifth Third Bank, Cincinnati, Ohio)
Jon's presentation covered the healthcare sector. He elaborated on the following aspects:
How to look at a stock
How to pick a stock
This was followed by his view on each of these component healthcare parts:
How to look at a stock
When evaluating the healthcare sector, one must ask 2 key questions:
1. Who are the customers? Specifically, who controls the customers?
2. What do the customers want?
The answers to those questions are:
1. The customers in the healthcare sector are the doctors because they ultimately prescribe the medications, use the devises, suggest the services, and drive research. For this reason, your focus should be on companies who deal directly with the Drs.
2. Customers want long life expectancy and a high quality of life.
PRODUCTS + PIPELINE = PROFIT
Gross margins in the healthcare sector are about 80%. Operating margins are about 30%.
How to pick a stock
Picking a stock involves first establishing your fundamental criteria. This process should incorporate:
1. Build an earnings model 5 years out and examine:
a. Discounted earnings
b. Discounted cashflows
c. P/E ratios
d. P/Sales ratios
2. Evaluate the product pipeline
3. Categorize the stocks:
a. High Value - Dominant Product / Great Pipeline
b. Fair Value - Operating Normally
c. Low Value - Current Product Slowing / Pipeline Potential
Consider also exogenous factors and risks. Some of these include:
1. Time to market - the full product development lifecycle is 10 years
2. Probable success rate - 95% of new discoveries fail. If you get into Phase I trials, the success rate is low. Phase II has a greater probability of success. This is where companies get credit for their pipeline.
3. Government trying to regulate price and industry. The FDA scrutinizing Bristol-Meyers Squibb is an example.
4. Generic competition from patent expirations
The key issues in the healthcare sector are products, valuations, margin, revenue and research and development.
Jon provided his view on the major component parts of healthcare. These were:
Wrapping up his discussion on Healthcare, Jon commented that the future of the sector is promising. The pipeline is strong '03 - '05. Valuations are also strong. The industry will benefit from the same growth drivers and he expects good performance. Pfizer was among his top picks. He advised against investing in generics because products are differentiated on a price-basis only.
Senior Securities Analyst, Commercial Services and Supplies, Household Durables (State Teachers Retirement Fund of Ohio, Columbus Ohio)
The last presenation of the first session focused on Household Durables. A great deal of information was presented, hence the scattered notes. Here's what was said:
State Teachers Retirement Fund of Ohio Funds
Gary outlined 3 funds that were managed by State Teachers Retirement Fund of Ohio. Among them were, a Select Fund and Growth and Value Funds. What differentiates them is the purchasing process. Analysts who buy and sell at will manage the Select Fund. The Growth and Value Funds are managed by portfolio mangers who receive recommendations from analysts.
Household Durables Characteristics
Concerning Household Durables, it represents a small portion of the S&P 500 index - about .5%. Among the companies that represent this sector are Homebuilders and Appliance and Furniture retailers.
Companies in the sector are characterized as:
2. Experiencing slow top-line growth
3. Having thin operating margins
5. Interest Rate sensitive
Current Performance Drivers
Some of the sector's current performance drivers include:
1. Consumer spending fueled by low interest rates
2. Health consumer
a. Unemployment low
b. Tax Refunds
c. Refinancings put cash in consumer pockets
d. Energy savings of $90 - $100 billion
Why Sector will continue to Perform
1. New home sales rising
2. Appliance shipments up
3. Massive company restructuring - production moved overseas
4. Home Depot and Lowes both ahead of plan
A Technical review of the sector demonstrates an almost direct correlation between interest rates and the performance of the sector. When interest rates rise, durables fall. Likewise, when interest fall, durables rise.
What has hurt the Sector
Customer concentration has hurt the sector. Namely, the meteoric rise of Loews, Home Depot, and Wal-Mart. Management from the companies demand supplier price concessions, require low inventories, and introduce into the market brutal foreign competition.
The following were observation deemed noteworthy concerning the technical performance of the sector:
1. Relative to the S&P, sector is currently .75 times forward EPS vs. 15 year median of .95 times.
2. Relative to 15 year median, currently 14 times forward EPS are in-line historically
3. EPS are suspect given Enron situation
a. Big writeoffs, Pension Fund gains being considered as Investment Earnings
b. Rsk of estimates being too high if consumers hit pricing wall
c. PEG ratios don't work
d. Prefer free cash flows in valuation models
During the Q&A a question was specifically asked about Homebuilders. Gary's answer included these comments:
1. Homebuilders are among the deepest cyclicals and most interest rate sensistive
2. Whether to buy or sell is on debate
3. Valuation is not too stretched
4. Top performing industry in the past 2 years
Before the session concluded, each analyst was asked to present their top picks in their sector for the coming year. Their choices were:
Technology - Steven Salopek
2. Synaguard Data
Healthcare - Jon Fisher
1. Forest Labs
Household Durables - Gary Clark
1. Fortune Brands
Tobias George Smollett Essay, Research Paper Tobias George Smollett (1721-1771), Scottish novelist, was born in Dalquhurn, Dumbarton County Scotland. Smollett was born beneath a plane tree at Dalquharn House on the family estate of Bon hill in the Vale of Leven, near the village of Renton, Dumbartonshire. At fourteen Smollett was apprenticed to a Glasgow doctor. He studied medicine at Glasgow University and moved to London in 1740. He was a ship’s surgeon in the Carragena expedition against the Spanish in the West Indies, and lived in Jamaica until 1744 when he returned to London and renewed his earlier attempts to stage a play he had written The Regicide, but still met with no success. He also failed to set up his own medical practice. His first novel, the partly
autobiographical Roderick Random (1748), was an immediate success. His best novel, The Expedition of Humphry Clinker (1771), has become a classic. It is a story, told in a series of letters, about the travels of a family through England and Scotland. Smollett was troubled by lack of money. He spent his last years in poor health, and died in Livorno, Italy, on October 21, 1771. Two years later, Johnson and Boswell stayed at Cameron House with Smollett’s cousin James, who was preparing to erect a Tuscan column in Smollett’s memory at Renton. Johnson helped compose the Latin obituary on the plinth, and the column stood in what subsequently became the playground of a school. Some of Tobias Smollett’s work consists of The Tears of Scotland (1746). Poem on the defeat of the Scots
at the Battle of Culloden. The Adventures of Roderick Random ( 1748 ). Gil Blas. Translation of LeSage’s novel. ( 1749 ). The Adventures of Peregrine Pickle ( 1751 ). The Adventures of Ferdinand, Count Fathom ( 1753 ). Don Quixote. Translation of Cervantes’ novel. ( 1755). The Adventures of Sir Lancelot Greaves ( 1760 ). Travels through France and Italy ( 1766 ). The History and Adventures of an Atom ( 1769 ). The Expedition of Humphrey Clinker ( 1771 ). Some critics regard Tobias Smollet as more satirist meaning that a work of literature or art that, by inspiring laughter, contempt, or horror, seeks to correct the follies and abuses it uncovers. I don’t know what that means though. This is a paragraph from Tobias Smollett’s book The Adventures of Roderick Random.
Roderick Random is the orphaned, unwanted grandson of a severe old Scots magistrate, exposed by his grandfather?s known neglect to the malice of the community. His principal enemies are the schoolmaster and the young heir. It is not long before a deus ex machina appears in the form of a sailor uncle: He was a strongly built man, somewhat bandy-legged, with a neck like that of a bull, and a face which had withstood the most obstinate assaults of the weather. His dress consisted of a soldier?s coat, altered for him by the ship?s tailor, a striped flannel jacket, a pair of red breeches japanned with pitch, clean grey worsted stockings, large silver buckles that covered theree-fourths of his shoues, a silver laced hat whosecrown overlooked the brim about an inch and a half, a black
bob wig in buckle, a check shirt, a silk hankerchief, a henger with a brass handle girded on his thigh by a tarnished laced belt, and a good oak plant under his arm. I picked this paragraph because here Smollett is describing the hero of the story Roderick Random. I believe it is important to have a brief if not full description of characters, so that you can imagine seeing them maybe even being there, in your mind, while they are doing what is described in the book.