The stock market will continue to rally into the first half of 2002 in anticipation of an economic recovery later in the year, according to Jeff Van Harte, senior vice-president and head of equities for Transamerica Investment Management.
Consequently, Van Harte sees a number of opportunities for the growth strategy of investing he practices for Transamerica. Chief among them is the PC market, where he sees Microsoft and Intel benefiting from system upgrades and VeriSign profiting mainly from its control of dot-com registration names.
Among Van Harte's other top sectors is transaction processing for credit and debit cards, where he likes First Data and Concord EFS. He also points to cable TV and drugstore retailing as areas with good growth potential. In general retailing, he's high on RadioShack, a stock he has added to his fund since Sept. 22. Another of his favorites -- and his second-largest holding -- is Qualcomm, which he points out will wind up controlling the licensing rights for the world's wireless technologies.
Van Harte made these points in a chat presented Nov. 15 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Edited excerpts from the chat follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Do you think that the market will continue its upward movement if nothing else serious happens in the world situation?
A: Three negative years of equity returns would be unusual, so I believe that the market is poised for a much better 2002. A lot of companies have right-sized their business for significant earnings growth when the economy picks up, and I believe that will be in the second half of 2002. The stock market is already beginning to discount that and should continue to move up in the first half of 2002.
Q: Jeff, you're a growth investor, so in what areas are you seeing the biggest growth in earnings as the economy recovers next year?
A: I think that one of the areas poised for a rebound is the PC sector, which will be driven by a new Microsoft operating system, XP, and hardware that is beginning to become obsolete from Y2K purchases. Microsoft (MSFT) and Intel (INTC) are especially well positioned to benefit from the next upgrade cycle.
Another area of growth would be transaction processing. There, we particularly like credit-card and debit-card processors.... In particular, we like First Data (FDC) and Concord EFS (CEFT). First Data is the leading credit-card processor in the world (see BW, 11/26/01, "First Data: A Tech Stock with a Twist"), and Concord EFS is a leading processor of debit cards.
Q: What type of stocks do you think will have steady growth in the next few years?
A: One of the most interesting sectors is the cable-TV industry, which has very steady growth characteristics. The growth rate is picking up by 1% to 2%, as cable subscribers upgrade to digital TV and high-bandwidth Internet services. This should take their growth rate from 11% to about 13%.
Another very steady area is drugstore retailing. Comparable-store sales are running 8% to 10% up and are driven by strong pharmacy purchases and the aging demographics of the population.
Q: Which software companies are going to show the most growth? You've mentioned Microsoft.
A: In addition to MSFT, a company we own that has tremendous potential is VeriSign (VRSN). They control the standard for digital certificates and also the registry for dot-com names. We think that both of these areas are very fast-growth areas, and that the company can sustain 25% to 30% growth for the next five years.
Q: Which drugstore retailers do you prefer?
A: Companies that are improving their situations, such as Walgreen (WAG), and as a turnaround candidate, Rite Aid (RAD).
Q: What about QCOM
A: Qualcomm is my second-largest holding and my favorite tech stock. Whether Qualcomm's [wireless] standard, CDMA 2000, or WCDMA wins, Qualcomm will get paid either way. So ultimately, Qualcomm will control the licensing rights to all of the world's wireless technologies. We also believe that they will maintain a very high share of wireless base-band chip sets, which is even more profitable for them than their licensing and royalties -- in terms of absolute dollars.
Q: Besides Qualcomm, what are some of your other biggest holdings, Jeff?
A: My top five holdings are First Data, Qualcomm, Northern Trust (NTRS), Intel, and UPS
Q: Crude oil hit a new low -- would you be a buyer of oil companies at this time, such as Halliburton (HAL) or Schlumberger (SLB)?
A: We have never favored investing in commodity businesses. That said, buying oil companies or oil-field equipment companies could be an interesting speculation here. But we will not invest here because it's our discipline to invest in companies that can sustain competitive advantage and aren't affected by the violent commodity price cycles.
Q: What about medical-device companies? It seems they will profit from the aging of America.
A: Medical-device companies tend to be subject to very fierce price competition because their customers -- hospitals -- are generally under profit pressures. Some companies, like Medtronic (MDT), have proprietary patents that allow them to escape commodity price pressures. So I would focus on that kind of company. That said, I don't own any at this time.
Q: Any thoughts on the cellular tower industry? American Tower (AMT), in particular?
A: That's a very interesting industry that has been knocked down quite a bit. I would suggest at this time looking at the high-yield debt, where returns of 14% to 15% are available. Both American Tower and Crown Castle (CCI) are in significant negative cash-flow positions. However, they are in the process of rationalizing their asset base, and given the growth in the wireless industry, they may come out O.K. in the next economic upturn. For the time being, I would stay with the high-yield debt, and perhaps own a small amount of the equity, and watch it closely.
Q: What about telecom stocks more generally? Any good bets for a revival there?
A: As a general statement, the U.S. telecommunications industry might be the equivalent of where the oil industry was in the late 1980s -- huge amounts of excess capacity, which will take years to rationalize. As you might have guessed, an area of the telecom sector that I like in particular is the wireless segment. It's a bit risky, but Sprint PCS (PCS) may be poised to show dramatic earnings growth over the next five years, because its migration path to new wireless technologies is the cleanest in the industry.
[Pfizer] has not moved. What do you foresee?
A: The reason that Pfizer hasn't done much in the recent rally is that the market is rotating away from companies that are perceived to be defensive investments. I have never looked at Pfizer as a defensive investment. I believe that the company has the best product portfolio and pipeline in the entire industry and is a solid investment here.
Q: How about the Nasdaq? Do you feel it will rally into yearend or fail and retest the lows?
A: I don't think that the Nasdaq is going to retest its lows. I think that its recent rally is good enough for this year, and it will probably finish close to where it is now by the end of the year. In 2002, the Nasdaq could move up as much as 15% to 20%.
Q: Do you like any gaming stocks?
A: In the Transamerica Premier Value Fund, we own MGM Mirage (MGG). The company should benefit over the years from significant deleveraging of its balance sheet and a resumption of visits to Las Vegas. Earnings growth should be excellent when the economy recovers. That's our favorite gaming company.
Q: What changes do you plan to make with your Premier Equity Fund?
A: We made changes after September 11, so we think that our portfolio is in pretty good shape. Names that we added after September 11 were RadioShack (RSH), Expeditors International (EXPD), PayChex (PAYX), and Walgreen. So these new ideas should keep the portfolio fresh as we move into 2002.
Q: You like some drug retailers -- what about others in retail?
A: In the retail area, RadioShack is one of my favorite companies. The company's footprint of 7,000 stores allows it to function as the equivalent of what Walgreen is to the drugstore industry. The company is positioned to benefit from the next consumer digital product cycle, as well as the revenues it receives from signing up wireless customers (from Sprint PCS and Verizon).... The stock's decline from $70 to its current $30 makes for an attractive entry point.
Q: Into biotech here -- what's your long-term view of Celera Genomics (CRA)?
A: So far, cracking the human genome has proven easier than making money. We would rather own companies with real products in the pipeline. Amgen (AMGN) and Genentech (DNA) would be better investments.
Q:Do you like any stocks in the small-cap area?
A: In the Transamerica Premier Equity Fund, we focus on mid- to large-cap companies. In the Transamerica Premier Small Company Fund, one of the top holdings in is Investment Technology Group (ITG). The company owns the POSIT system that allows for electronic institutional trading. And they are taking an increasing share of the institutional trading business. That's our best idea in the Small Company Fund.
Q: Do you see any growth opportunities in European stocks? Or other foreign names?
A: I still believe that the U.S. is the best place to invest. We own every major technological platform in the world, and U.S. companies will grow overseas as well as domestically. So your best plays for international growth are U.S. companies.