September 1, 2004
Look At The Big Economic Picture
Ronald A. Johnson, chief strategist at Smith, Graham & Co. Investment Advisors L.P., says there’s more to selecting stocks than analyzing a company’s balance sheet. Johnson, who is responsible for establishing investment strategies for both fixed-income and equity portfolios at Smith, Graham, says that when his company analyzes the stocks that make up the S&P 500 and the Russell 1,000, it starts with macroeconomic indicators, such as interest rates and inflation. From this, Johnson and his team discuss the historical performance of sectors and companies, looking for patterns that indicate how the stocks performed during a recession, and during an economic expansion.
Smith, Graham then ranks the stocks to determine whether it will purchase a stock, how much of the stock it will buy, and at what price. The company currently manages $2.4 billion in fixed-income and equity assets for more than 40 institutional clients worldwide.
Johnson anticipates that, going forward, the stock market will operate within a limited trading range, which means that investors should diversify their portfolios. Johnson adds, “In an environment in which interest rates are rising, investment decisions should be made by selecting companies that have limited competition or that can beat the competition with products that have differentiating features.”
With that in mind, Johnson’s first stock selection is American Express Co. (NYSE: AXP), a global provider of travel-related services, financial advisory services, insurance, and international banking. He says that Amex’s focus on consumer behavior and product satisfaction gives it a market advantage. “In addition, their financial advisory division is taking a page from their travel-related services division by introducing premium products to a broad range of clients.”
Johnson also thinks that Boston Scientific Corp. (NYSE: BSX), which manufactures and markets medical devices, is in a battle to produce a better coronary stent -a small, wire mesh tube that’s used to open arteries after angioplasty. Johnson says that Boston Scientific has the edge over competitors Guidant Corp. and Medtronic Inc., which have delayed the launch of their coronary stent products, as well as Johnson & Johnson Corp., its primary rival. “We expect that Boston Scientific will wind up with about 60% of the market both abroad and in the U.S.,” says Johnson.
Johnson names two companies from the retail sector with business models that stand out. The first, CVS Corp. (NYSE: CVS), operates more than 4,000 retail drugstores and will acquire 1,260 Eckerd drugstores as well as Eckerd’s mail order and pharmacy benefits management business from J.C. Penney this year. “CVS runs a 5% margin while Eckerd runs a 1.2% margin, so improving the sales at Eckerd stores and bringing in CVS’ management system is going to produce considerable turnaround benefits for the firm,” explains Johnson.
The second company is Target Corp. (NYSE: TGT). Its merchandising business operates in the discount, middle market, and department store segments to attract more customers and is currently remodeling its stores. Target should benefit from selling its two other underperforming divisions, Mervyn’s and Marshall Field’s.
Finally, Johnson says Gentex Corp. (Nasdaq: GNTX), maker of rearview mirrors