Investors like to look to history to divine what might happen next in the financial markets. But across the nation, from the smallest stock market dabbler to the largest institution, investors are facing an adversity unlike any experienced before. Even stock market veterans who survived the bear market of 1974 say that comparisons to that painful period are of no help.
There are investors who specialize in analyzing industries under stress and identifying companies with the best shot at a comeback. One of the most able and experienced of these investors is Martin Whitman, manager of Third Avenue Funds, three mutual funds that invest in companies whose stocks are cheap despite having solid balance sheets and good earnings potential down the road. His experience may give investors some guidance for what lies ahead.
Whitman's performance has been enviable. For the three-year period ended Aug. 31, the average annual return in his largest fund, Third Avenue Value, was 19 percent. The fund has lost 12 percent of its value this year, but one of his other funds, Third Avenue Real Estate, is up 6.4 percent for the year, while Third Avenue Small Cap is down just 1.6 percent.
Where Whitman can provide value to all investors is in his perspective on the current investment scene. His prognostications are not the sugarcoated version of what may transpire -- like some of those emanating from big Wall Street firms.
His macro view is simple and dark. "I don't think we ought to be worried about the recession," he said.
A far greater concern is what he calls permanent impairment, an accounting term that refers to an asset that has been so damaged that it will never return to its previous value. He argues that some industries have been permanently impaired by the events of Sept. 11.
"We will never again go back to the way things were in the airline industry, hotels, in small property and casualty reinsurers, maybe computer box manufacturers," he said, though the computer problem predated the terrorist attacks. "And things may stay bad for an indefinite period."
But that is not to say that Whitman is all doom and gloom. In fact, he says the stock market holds exceedingly compelling bargains now, companies that have solid financial positions and good potential for earnings rebounds. Yet these companies are selling at price-to-earnings ratios that are well below 10 times the profits that Whitman expects from them in a recovery. Some are trading at discounts to their readily ascertainable net asset values.
Here are some companies Whitman has been buying in recent days: The Brascan Corp has operations in real estate and base metals, electric power generation and financial services. Its stock, which closed at US$15.82 on Friday, is trading at around 11 times future earnings.
Forest City Enterprises is a builder and a manager of commercial and residential real estate, including shopping centers, industrial parks and apartment houses. Its shares are at US$50.70, up about 25 percent this year.
Paccar Inc makes Peterbilt and Kenilworth trucks and industrial parts, and has a "big, big balance sheet," Whitman said. Its stock fetched US$44.86 last week and has a dividend yield of 2.7 percent.
Trinity Industries makes transportation, construction and industrial products, Whitman said. The stock, now at US$21, has a dividend yield of 3.4 percent.
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