LanczGlobal Past Research Highlights
Flash Crash Analysis - Live From N.Y.S.E.
June 1, 2010 - The Lancz Letter
It was exactly three years ago this week when we made a special trip to the N.Y.S.E. to discuss our latest strategic profit taking recommendation.
The last time we gave such advice was shortly after our warning on the technology sector back in December 1999 with "
What Ever Happened to Tech Wreck?
" You see many new subscribers that missed that warning told us they wish they had heard of us earlier,
so we made sure that the media took notice of our words of warning with the energy merchants two years later which was published by Barron's.
Unfortunately, in the mid-2000's we still heard that all too familiar "wish we had heard about you sooner," even after select pieces of our
research were picked up by the national media. So three years ago when it came to so many sectors around the globe being overvalued at a time
investors seemed to forget the word "risk," we felt compelled to make sure investors knew how we felt. After all, we did not want to hear that,
"if only we had heard your warnings"-before the collapse in tech, before the collapse in Enron and Calpine, and in 2007, before the collapse
of global equity values. That is why we made the added effort three years ago to actually spend time with the media while in New York City.
In regards to the current sell-off on April 27th, we wrote a piece called "Two Steps Back" that stated the following into new multi-year highs
in many global markets:
"After eight straight weeks of gains (the longest such stretch since 2004), how should investors position themselves now? First of all,
it is critical to lessen risk as valuations rise, which has been the basis of most of our tactical strategies over the past few weeks. After
the huge advances in our two favorites for 2009 (Goldman Sachs Group Inc. (NYSE:GS) and J.P. Morgan Chase & Co. (NYSE:JPM) ), we have
recommended taking full profits in Goldman Sachs and partial profits in J.P. Morgan. Just as important as taking profits, it is important
not to chase stocks as valuations rise and rather look for new, unrecognized bargains."
Now that equity valuations have plunged 10-15% in the U.S. and more in other areas, what should investors do?
First of all, the European contagion will be with us for quite a while as austerity programs must be implemented and their immediate term economic impact will be significant. Secondly, even before this contagion erupted we felt that the "V" shaped global economic recovery was an investor pipe-dream that could only end in disappointment for those investors chasing stocks. The good news is that the U.S. economic recovery is still on track although it will be more anemic than those past grandiose forecasts. It is obviously a lot easier to gradually buy quality into panic selling having recommended taking profits 5-6 weeks prior at substantially higher prices. Case in point, most investors were buying Google five weeks ago at over $580 a share, but we recommended at least partial profit taking. Having sold some at $580-600 a share allows us to use profit-taking proceeds to buy under $465 now. We would not have the resolve to buy had we just ridden it up over $600 (or worse yet bought at those lofty levels) only to watch it fall to below $465. We are not saying that this is the bottom in Google or that equity valuations are the incredible bargains we experienced 18 months ago. We do plan to take advantage of the panic selling by those unfortunate investors. We were grateful to buy Google under $300 and Apple under $90 a share less than 1½ years ago and will be ready to accumulate more income producing leaders this go-round.
Even globally hated Goldman Sachs, which we recommended selling in early April when the stock soared over $180 a share or 1.5x book value,
has found its way back onto our Current Top Buy list, as it opened below our $135 a share buy limit last week. Once again, we would not be
recommending initiating partial positions had we not taken profits at 40% higher levels not that long ago.
Global Rally Continues - Ride the Wave
April 17, 2009 - The Lancz Letter
The past two issues of The Lancz Letter
said it all in terms of our thoughts on the current surge in global equity valuations. In February, "Increasing Appetite for Risk
" (2/6/09) we discussed the fact that many higher risk areas and companies that we have avoided in the past 12-18 months are being sold (low expectations) to levels that are leading to exceptional risk-to-reward potential. This is the opposite of what investors experienced 18 months ago when expectations for emerging markets and commodity type investments were massive, as was their corresponding risk. On March 10, 2009, "The Herd Will Be Wrong Once Again
", we stated that all those investors raising cash at record low yields will be once again following the herd of emotional reactions rather than being a smart, proactive investor and doing exactly the opposite. This rally will eventually dissipate, but we intend to ride the wave and take profits as more and more investors get on the bandwagon late and chase equities higher. We have started to take profits in some of the financials that we added to our portfolio last November (Goldman Sachs, J.P. Morgan) and other lesser quality recommendations from last month (Wells Fargo, Bank of America). No one knows when the market will pull back, but just like in June of 2007 when we suggested some strategic profit taking, the higher the market rises the more we will rebuild our cash levels.
At the start of the year, we expected 20-30% swings in both directions for equities and the year started with a 26% plunge in values through March 6th. The subsequent six weeks the S & P 500 has risen almost 30% and is nearly even for the year. These types of swings will continue, so investors must remain disciplined and take advantage of panic selling to buy quality (Apple at $85, Google under $300 and Suncor in the upper teens) but also have the resolve to lock-in partial gains into those times that all those investors look at the glass half full. Being in the right areas is critical just as it was in 2007-2008 when we warned about the financials - now it is essential to be selective to maximize performance while controlling risk. It is hard to control risk in ETFs and index funds because
you are buying a basket of stocks. Investors that concentrated in high quality, well managed companies with little debt and a lot of cash have significantly outperformed. This will continue to be the case as global markets move up here - investors must focus on risk management on a progressively greater scale as global valuations rise
The best example we can give you of the importance of selectivity is after recommending avoiding financials since the summer of 2007, we finally got back in with our featured recommendation for 2009, Goldman Sachs at $52.62 last November. When you look at what Goldman Sachs has done YTD (up over 50% for the year, 70% since 11/21/08) and compare it to the Vanguard Financial ETF which is still down 12.9% for the year, it is not hard to see the importance of being in the right areas. When you add the fact that investors can much more easily control their risk with such disciplined selectivity, it only makes our research efforts so much more rewarding.
Wall Street Turmoil - Are Your Investments Safe?
Over the past eight years, investors have experienced at least three major bubbles, which are now culminating into one of the most challenging credit crises in many decades. Legendary investor Sir John Templeton warned us 15 years ago that investors would live through an "information overload" period in which volatility and extreme global swings would be much more commonplace and regular investment cycles would fade into a distant memory. The volatility of the past eight years has once again proved the late great Sir John to have been right on target. In true fashion to his proactive style, many experts warned about the overvalued financial and real estate sectors up to 1 1/2 years ago. For those investors who underestimated the effects of subprime loans last summer, there were many other warning signs that should have not been ignored. On July 31, 2007, two Bear Stearns funds that invested in mortgage securities filed for bankruptcy. One week later, French bank BNP Paribas froze three funds with U.S. mortgage exposure as a presage to what was to come for investors worldwide. Even if you did not understand the ripple effects of how subprime loans would create a delirious influence on the entire U.S. financial system, there was plenty of time with these subsequent events to be proactive and lessen one's exposure in these high risk/low return areas. Click here to read entire research update
Merger Mania Part II
The year 2007 has started the way 2006 both started and finished with our members benefiting from takeover activity. During the first week of 2007, Motorola closed on its acquisition of Symbol Technologies for $15 a share in cash. This works out to be a 48% premium from our original recommendation at $10.13 a share in seven months prior. One of our favorite foreign companies, Suez, also hit new highs the first week of 2007 on talk of a potential new bidder coming in considering the delays in its merger attempt with Gaz de France S.A. Suez stock has now nearly doubled from our original recommendation in September 2005 at $27.55 and is becoming fairly valued. We finished 2006 with an old favorite Biomet receiving a $44 a share takeover offer in late December. The takeover price represents a nearly 50% premium from Biomet's lows in July 2006 and a full ten fold (yes a ten bagger) from our original purchases in 1993. Biomet's announcement marked our eleventh recommendation that had benefited from such takeover activity in 2006. This handily beats 2005's impressive total of eight, particularly (as we stated in last year's year end report) considering that we do not seek out takeovers. Rather it is just one potential byproduct of our research in finding undervalued companies. 2006 marked one of our best years in our 26 year history in terms of the absolute quantity of companies benefiting from M/A. While we take great pride in our research, in fairness a good part of this success has been created by the excess liquidity (cash) available throughout the world. We expect this trend to continue throughout most of 2007 albeit at quite possibly a moderately lesser pace.
Our clients continue to benefit from merger activity as Wall Street concurs with our research by initiating substantial premium takeover bids on many of our recent recommendations. Through the first half of 2005, no fewer than six of our holdings have benefited from takeover activity. In the third quarter, two more of our holdings attracted premium takeover offers - both of which from foreign companies. Ivax Corp (IVX) received a takeover offer from Teva Pharmaceutical, resulting in a huge percentage gain in Ivax since our recommendation in November 2004. Such foreign takeovers of U.S. companies have increased four fold in 2004 over 2003 and we expect the upward trend to continue. Also, in June 2005, we started accumulating Endesa SA which has recently received a premium takeover offer from Spain's Gas Natural SDG SA. Our goal is not to buy investments that will necessarily be acquired by another party at a premium, but we do like catalysts that can propel valuations upward that are not yet factored in by Wall Street. This is one of the many ways we reduce risk within our portfolios. Our eight holdings benefiting from takeover activity is only one potential catalyst that we look for, yet has become a large part of our overall research process that has helped us outperform.
Gearing Up For Generics
It is common knowledge that we like to buy when prices/valuations are down and expectations are low. From a sector standpoint, we had made strategic moves in buying energy several years ago before that sector became all the rage and taking advantage of the pharmaceutical plunge with the Hillary scare ten years ago. Lately, several sectors have experienced significant sell-offs and we have decided to emphasize two companies that have been hitting new lows over this past week. Investors may be thinking we will focus on the insurance industry or large pharma after their recent plunge in valuation, but we would rather focus on the generic drug sector. Now that the utility stocks we favored early this year have appreciated well beyond our buy limits, select generics offers the best risk-to-reward for new monies. It is also reassuring that like with some of our medical device favorites, the generics offer a solid long term outlook making current depressed valuations even more appealing. Teva Pharmaceutical , whose ADR's trade on the NASDAQ under the symbol TEVA, is based in Israel and has become the worldwide industry leader. Their ADR's plunged to new lows last week below $23 a share down over 34% from valuations established 4-5 months ago. IVAX Corp. (ASE: IVX) has taken an even more dramatic 42% plunge after reporting earnings last week that disappointed Wall Street. While IVAX is definitely the more speculative of the two (note our safety rating), we do feel that Wall Street not only over reacted in selling these companies, but also missed the point regarding their earnings. Both companies are doing well showing strong revenue and earnings growth and when you combine this with their excellent long term prospects, their sell-offs give the patient investor an extremely enticing opportunity. Investors should buy both stocks up to their respective buy limits of approximately $27 a share for TEVA and $15 for IVAX. Potential returns of 20% or more annually are feasible from current depressed levels once Wall Street awakens from these overly dismal expectations.
Barron's: Energy Merchants
Reprint From: May 15, 2001 Issue of The Lancz Letter
Just as the Internet was the catalyst that started the mania for technology stocks, California's energy woes seem to be the catalyst for stocks like Calpine. Calpine is seemingly on everyone's favorites list despite the fact that the stock has already soared from around $3 a share a little over two years ago to unprecedented levels of nearly $60 a share today. We are not saying it will plunge anytime soon, but at some point investors will realize that current growth rates cannot continue and at that time the stock will be very susceptible to a nasty fall. California's energy problems will eventually be resolved. In fact, within two years California will be a net exporter of energy.
What Ever Happened to Tech Wreck
Reprint From: November 8, 1999 Member's Only Sector Spotlight
The euphoria around technology stocks is growing to levels that should be a cause of concern to most investors. We have discovered from experience that when investors favor a sector so much that it falls under the "must have at any price scenario," then it is a good time to take some profits. Nearly twice the mutual fund dollars are going into technology funds this week than the first week of October. It seems to be a given now to get growth you have to buy technology related stocks, particularly with the growth prospects of the internet. Many novice investors feel that this outperformance of technology is commonplace, but just three years ago technology companies traded at a 19% discount to non-technology peers. Currently with shares in higher and higher demand such an occurrence (of trading at a discount) seems unthinkable. We are advocates of technology and feel technology will continue to be a vital catalyst for global economic growth. But some of the extreme valuations force us to take some profits and be extremely selective with any new purchases here.
The internet craze reminds us of the early tech craze of 1982-1983, when a host of PC companies went public... of which Apple Computer was the only one that survived. To put it simply tech stocks do go down and we would rather take some profits now when prices are hitting new highs than try to get out the door when everyone else decides that tech prices are too high. Last Friday's Microsoft ruling is taken as a "nonevent" by Wall Street and this confirms our thoughts that investors are looking at everything in tech through rose colored glasses. Last week we met with several fellow money managers in San Francisco and one conversation perfectly illustrates the IPO internet craze. The firm manages $11B institutionally and has recently established retail mutual funds for the general public. They were bragging about their emerging growth fund being up 50% last month alone.
It turns out that this new fund with only $8M in assets was the beneficiary of many of the "hot" IPO's of late causing such a small fund to soar in price. Even though this was not an IPO fund, this institution discovered the best way to get a bang for their IPO dollar, was to put a good part of the firm's allocation into this new fund. This is definitely a sign of the beginning of a craze. How all this will shake out is not known but the high quality leaders should continue to do well. The vast majority of the internet IPO's will probably experience the same fate as Atari and Commodore of the early 1980's. The early sign of this is that the first internet grocery IPO, Peapod, Inc., has recently announced that it may not have enough money to continue operations through next year. If internet euphoria begins to dry up so will the cash that is funding all of these speculative deals. That will lead to only one possible outcome for many speculative internet IPO's at today's excessive valuations.