How good a stock picker is Quintano Downes? The 13-year Wall Street veteran equities trader did such a stellar job for clients in his three years running Haven Financial Services’ equity and fixed income trading desk, that he was able to purchase a majority stake in the firm’s parent company, APB Financial Group, in 2009.
But don’t let his lofty title fool you. Although Downes runs Haven Financial Services’ day-to-day operations as president and CEO, he still finds time to roll up his sleeves and help guide the firm’s investment strategy. Downes doesn’t like being labeled. He shuns the typical monikers–such as “valueâ€ or “growth investorâ€–that many other finance professionals use to classify themselves. “I’m a contrarian, always looking for opportunities outside of the normal beat of the market,â€ he explains. “Anyone can read a report and see that Goldman Sachs is recommending this or that. I tend to look for things outside of that. I’m always seeking undervalued or underfollowed ideas, and it doesn’t matter where they come from.â€ black enterprise recently picked Downes’s brain for a few unconventional, but relatively safe, investments.
So, what’s your forecast for the economy and markets in 2010?
I’m reading a book called The Panic of 1907: Lessons Learned from the Market’s Perfect Storm by Robert F. Bruner and Sean D. Carr. What I started to notice were similarities to our situation today. History may not repeat, but it rhymes. Right now, everyone is saying ‘the recession is over and the economy has recovered.’ It takes, traditionally, three to five years to get back to normal after a recession. And we haven’t been normal since the 1990s–before dot-com. Everyone is trying to figure out the new normal. We’re telling our clients to be cautious. Participate, but be cautious. We think the market [as it stands in mid-November 2009] is overvalued. As soon as the government takes its foot off the pedal we don’t think the economy can live on its own. We’re saying that we continue to be in a recession that is protected by government spending. Consumers will continue to lick their wounds. The average individual is still in recession. In order for the economy to really grow, we’re going to need those people to come back to the table and start to consume. So, we’re looking for stocks that are industrial in nature. Other sectors we like are “individual household goods,â€ anything the consumer needs to replace on a regular basis in their home.
What’s a specific stock play that capitalizes on that idea?
We like Clorox (CLX) because the company has strong brands, a strong operating model, and is a traditionally defensive investment that will benefit from the H1N1 flu season. The company’s brands such as Clorox Wipes, Clorox Bleach, Brita, Armor All/STP, and Kingsford Charcoal are market share leaders in their respective categories and we expect this to continue throughout what we believe will be a stagnant U.S. recovery. Clorox has put in place a strategy that will allow it to right size its operating model and take advantage of the market when the recovery really takes hold. Recent improvements in gross margin and continued cost cutting and restructuring of underperforming brands will maintain the company’s profitability and price appreciation to shareholders. The company is devoted to reducing debt on its balance sheet and returning cash flow to shareholders in the form of a 4% (or $2 per share) dividend. Income-oriented investors will be pleased to see that Clorox has increased its annual dividend by 13% per year since the 2004 fiscal year. We think a $2 per share dividend during a market plateau is very attractive. The current H1N1 flu scare is an opportunity for Clorox to capitalize on a global epidemic by leveraging its market leading disinfectants and cleaning brands to promote health and wellness. We believe that the swine flu epidemic will increase Clorox revenues and act as the catalyst that will propel the company to above-average returns during the next 12 to 18 months. Even though Clorox is trading near its 52-week high (of $62 in November), we believe it has some room toward the upside. We expect earnings growth to be above company forecasts for fiscal year 2010. As a result, our 12-month price forecast for Clorox is $69.
Are there any other trends that investors might capitalize on in this environment?
Over the past 10 years, the price of gold has increased by 300%, while the S&P 500 has returned a total of -10%, according to the S&P 500 Total Return Index. The reasons for investing in gold include a hedge against inflation and as protection against a decline in the U.S. dollar. While the dollar has continued to decline, the price of gold has rallied strongly. We believe that the dollar is likely to further weaken as the Federal Reserve keeps interest rates low, the government continues its borrowing, and U.S. economic activity relative to the rest of the world remains muted. The easiest way for an individual to invest in gold bullion is through the SPDR Gold ETF (GLD). The shares are meant to track the performance of gold futures–minus a management fee. Other options include another gold bullion ETF (IAU), a silver ETF (SLV), and an ETF that holds gold and silver mining companies (GDX). We would also consider other precious metal and industrial metal ETFs, which would also increase in price with manufacturing demand. In general, demand for gold as currency is increasing among nations and individuals.Â As a result, we see gold increasing from around $1,100 an ounce (in mid-November) to approximately the $1,250 to $1,275 range by the end of 2010. This would put GLD at about $123 to $125 per share.
These investment ideas seem ripped right from the headlines–very timely. Are there any global trends that make for good specific stock picks?
China Yuchai International Limited (CYD) is China’s largest diesel engine manufacturer. This company is a direct beneficiary of the more than half-a-trillion-dollar Chinese stimulus program. The majority of China’s stimulus dollars are being spent on highway, airport, and railway projects. The companies that take on these construction jobs will be the end users for China Yuchai’s diesel engines. China Yuchai’s shipments are up more than 12% in the past year, and the expectation is that shipments of their medium heavy-duty diesel engines will be up north of 30% over the next 12 to 18 months. The company’s Chinese engine subsidiary has a 25% market share, mainly used in buses, trucks etc. They are also cash flow positive, and should hit $130 million plus this year with no debt. While the company’s dividend payout has been somewhat erratic, we expect that to stabilize, thus adding another attractive reason to own the stock. This stock is an ideal candidate for the investor who wants a direct play in Chinese infrastructure. Although the stock had about a 60% run-up last fall, we still see significant upside and expect the stock to trade in the low to mid $20s in the next 12 to 18 months.
This article originally appeared in the January 2010 issue of Black Enterprise magazine.