2007 - The Year of the Owner - The Week Ahead & The Week Past

Last week, the stock market suffered its worst week in over 4 years. Everything was hit hard last week - and not just here in the USA, but overseas as well. The biggest loser was the Chinese stock market, losing 9% in a single day. European markets took big hits - this was especially noted by NBG declining 11%+ from its recent $11.25 high to close the week at a little over $10.00 per share.

Honestly, in short, I have not seen anything like this in years, or maybe ever. Sure, it has happened before, and long term, this will be yet another blip on the stock market's radar (knock on wood), but just about everything was down. Typically, you see general market weakness, but maybe a particular sector or industry shows strength. For instance, technology may be down, but energy or natural resources may be up. Not this time - everything was down - energy, materials, transportation, financial services, technology, etc. Greenspan coming out of the weeds to comment about a possible recessions by the end of the year did not help the cause of stocks.

Here is my take on it, for what it is worth. I think that last week's action was very health in terms of a correction. Although it would be nice if it could, the stock market cannot go up in a straight line forever. Even with last week's loss, the markets are still up 10% from a year go. If you take a look at my Marketocracy fund, even after last week's debacle, my fund is still up 0.9% YTD and while the NASDAQ, Dow Jones, and S&P 500 have not been as fortunate (down 2%, 2.8%, and 1.9% respectively). All I am saying, is that this is not the end of the world.
I think that the U.S. economic outlook does look good for 2007 as does the outlook for the entire global economy. I think that we will see growth in the stock market, but there will be an even increasingly strong focus on fundamentally sound and cash generating companies. I think this is so because even amidst last weeks problems, Merck (NYSE: MRK) and AIG (NYSE: AIG) both performed well as both reported very positive outlooks and results and MRK even got an upgrade. Simply put, the market is ready to reward companies that produce strong financial results, but those that are lagging will be susceptible to correction.

There is still a lot of value out there - even after the big run up, the stocks I am in still look cheap from a long term standpoint, especially NBG, PFE, MRK, SEB, and ASHG. I will be looking to add to all of these positions. Of course, I am in the automatic investing plans with PFE and MRK, so those are forgone conclusions. I added 15% to my NBG position last week and will look to increase some more, perhaps in the Spring, post dividend (assuming there is one), as that is when, at least historically, NBG trades a little weaker. If NBG can stick to their projections outlined in their 2007-2009 presentation, this one is worth $24-$28 in the next 2-3 years.

For 2007, I would like to increase my position in ASHG by 50%-100%, especially considering their recent stock activity, raising their dividend by 5%, and I expect strong financial improvements from this company to hit in 2008-2009 as their huge capital expenditures (e.g., Nevada plant development and Arkansas plant expansion) come online. Although it has not been a huge factor yet, I still believe that ASHG being the largest American owned Cement producer in the USA will be a very strong factor for this company - perhaps even a geo-political one. We'll see.

Seaboard Corp (AMEX: SEB) still looks very cheap from a long term perspective and I am very tempted to add more to my position at this time, but will wait until after they report their financial results (due out this week, I think, as they keep a tight lid on it). SEB still is a cash producing machine and are a very diverse entity - they still also appear to be undervalued from a fundamental standpoint - especially after being down 13% from their recent all-time high of $2,300, which just happened 2 weeks ago. SEB is still trading at less than 1x sales, less than 10x earnings, and about 6.4x Enterprise Value/EBITDA. Also, keep in mind that these ratios are based off of the trailing 12 months (ttm) financial results, and I expect when SEB posts their financial results, we will see an increase in sales, a stronger balance sheet, stronger EBITDA, stronger EPS, and stronger free cash flow. The joys about SEB is that because of lack of analyst coverage, the stock is not as subject to 'analyst estimates' and you can focus more on the financials and cash produced by SEB rather than market hype. Short-term, this fact may also prevent SEB from reaching its full-term value, but long term, this is good. It enables you to add more to your position cheaply and long term, companies with this tight share structure and strong financials tend, at least over the long-haul, tend to become 'overvalued', which is a great place to be if you are an owner.

Ok - that is my sales pitch for those stocks, but it is a perfect transition into my thoughts about Greenspan's comments. I do think that the economy is strong and that the environment is good for companies in terms of being able to produce cash flow. I do, however, that we will see some recession-type effects here in the US. I am unsure of how broad they will impact the country or the stock markets, but the impact of American's not saving, high foreclosure rates, getting in over their heads via credit cards, etc. will take a toll. I am no expert economist, but I just don't know how people live the lifestyles they do now-a-days in terms of what they make, what they have, etc. For private individuals, the behavior is not sustainable and I think we will see some fall out of that in the coming months, which will likely impact financial results of companies in late 2007 and early 2008. The impact will be especially true with businesses that serve the individual consumer, especially in businesses that serve the "middle class." Banks will do fine - businesses that service other businesses will do fine - companies that produce cash and shareholder's equity, and reward owners via dividends and stock buy backs, at good clips will be fine.

Simplistically, 2007 is the year for the owner - not the investor. Granted, there are some years where being an 'investor' would serve you better than acting as an owner - where you looked for aggressive capital appreciation based on market dynamics, momentum, etc. Of course, there will be opportunities along those lines this year, as they always are, but I don't see a broad technology rally or sector rally where you can just ride the wave.

Look for opportunities where being an owner makes sense - where you feel you are getting some value for your investment/purchase - where if you were actually going to 'own' the company (which you do, but you know what I mean), you would feel good about forking over the money to get in on it because you know you are getting a good deal. Buy backs, dividends, cash flow, shareholders equity - those are the things to look for and I believe the stock market will reward shareholders appropriately for such (e.g., higher price per share).

To quote Gordon Gekko:

"The richest one percent of this country owns half our country's wealth, five trillion dollars...You got ninety percent of the American public out there with little or no net worth. I create nothing. I own."