I am looking for advantaged companies with excellent long-term prospects trading at an attractive price. Doesn’t everyone? I believe there are certain assets with “excellent long-term prospects”, despite the feeling in the market today. I am expecting the current global slowdown to go well into 2010, but the opportunities will open themselves before the turnaround. Private industry is in a period of mass-deleveraging which is driving down the prices of almost all asset classes. This deleveraging period will cause a deep recession in the United States throughout 2009 (at least) and the Fed will leverage up their own balance sheet and dump massive amounts of money into the system to try to get banks lending and businesses/consumers spending again. But the deleveraging process will take a long time to work itself out. Investors fearing a sustained period of deflation have flocked to US Treasuries in what is being characterized as a “flight to safety” causing a rally in the USD. This reflation and fear in the markets has made the US Treasuries the next investment bubble. Expect the US and other trade deficit countries in Europe to impose some type of trade restrictions in 2009 to increase the price of imports and devalue their currency to increase their exports. The trade relationship between China and the US make these two countries intimately linked and the severe recession in the United States may cause a full depression in China. China has a problem of over-capacity by producing greater than domestic demand and exporting the rest out of the country. If Chinese consumption does not expand, then production contraction will have to make up for the entire shortfall which will wreak havoc in China soon. The age of the US consumer driving the global economy is dead, and the next engine of consumption will eventually be the rising middle class of emerging economies, in particular China, but this will be a long transition that will play out over decades. In the short-term this global contraction will hurt China more than the United States. However, currency debasing and trade protectionism will hurt the United States in the long-term. It will be a painful transition, but expect China to come out of this contraction better than the United States with a stronger currency and an expanding middle-class. At some point, money will stop flooding into the United States government and Treasuries will be the next bubble to burst. The Fed and Treasury policy to reflate our way out of this problem will be too excessive which will result in inflation once the velocity of money returns to more historical levels. Instead of trying to time this perfectly by buying dollars, I will look to buy assets attractively priced in the long-term. I expect commodities such as oil and fertilizer to benefit once the deleveraging process slows. I will therefore look for opportunities in the near future to be long on oil and fertilizer, and short on US Treasuries.
Advantaged companies possess competitive advantages that are not easily replicated. Ideally I look for a large (potential) installed customer base in which the company sells a recurring, rapidly depleted product/service leading to significant free cash flow while competitors can't enter due either to high customer switching costs, (geographical) monopoly, government regulations, patents, or superior brand image. The more protected this advantage is for the company, obviously more appealing the company will be viewed.
An attractive priced company will determined based on multiple factors including conservative capital structure, high returns on capital, and earnings power to arrive at an intrinsic value for the company. If this intrinsic value is estimated to be significantly higher than the current share price (at least 2x), then the stock will be considered attactively priced.
This blog will seek to find these offerings and will focus on the underfollowed and generally distrusted Over-The Counter market, to find the opportunities no one is looking at right now or just too afraid to go near in today's market conditions.