Favorites in an "Extreme" Market

John Licata of BrokerageAmerica lays out the case for gold, trucking, and even a few telecom outfits

It's a volatile stock-picker's market, but chances are good that it will be up 10% by the end of the year, believes John Licata, senior market strategist for BrokerageAmerica. Among the sectors he thinks have good buys are telecom, tech, gold, and trucking. These were some of the points Licata made in an investing chat presented Feb. 6 by BusinessWeek Online on America Online, in replying to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from that chat. A complete transcript is available from BusinessWeek Online on AOL, keyword: BW Talk.

Q: What's your opinion on holding AOL Time Warner (AOL ) long term?

A:

I think it's a good idea to start accumulating shares at current levels. I believe shares of Time Warner alone are worth $13, and for patient long-term investors, AOL could be a winner in any portfolio.

Q: What do you think about buy-and-hold investing in this market?

A:

I believe we've moved from buy and hold to an extreme stock-picker's market. This has become a market driven by trends, and investors should look to book profits where they can.

Q: What about the battle between the Baby Bells and companies like AT&T (T )?

A:

You're going to continue to see competitive price wars, which will be good for consumers. However, I think the greatest challenge for companies like AT&T will be from companies that solely provide voice-over-the-Internet capabilities, such as ITXC Corp. (ITXC ), Net2Phone (NTOP ), and deltathree (DDDC ), because they are cheaper, and the markets for them overseas have been growing at a much quicker pace than companies like AT&T can handle. International phone calls over the Internet stand now at 10% and look likely to grow.

Q: A bunch of big tech stocks here -- what are your thoughts on Network Appliance (NTAP ), Hewlett-Packard (HPQ ), and Cisco (CSCO )?

A:

I believe Network Appliance, currently trading at a p-e of nearly 60, is due for a correction. The firm operates in a space that is still challenged. Storage is a space that has a tremendous glut after the run-up in the late 1990s. I would rather look to a company like EMC (EMC ) than NTAP.

As a disclosure, I do own Cisco personally. I like Cisco, obviously, very much. I believe [CEO John] Chambers is one of the premier managers in the world. The fact that the company is able to increase profitability during a period of economic weakness speaks volumes for both management and execution. On Hewlett-Packard, Carly Fiorina has done a tremendous job of bringing two very different corporate lifestyles under one roof. I believe the company has the ability to increase its share price with hefty momentum and quality execution. At less than 19 times p-e, Hewlett-Packard can be very attractive to investors. The company has done very well both domestically and internationally, and that only looks to continue.

Q: Have any buys for us, John?

A:

I do like gold-related stocks right now. My favorite is a company called Harmony Gold (HMY ). I believe the company can capitalize on the tremendous upside I see in gold, because they are unhedged against the market -- they benefit from the upward swings in the price of gold.

Another company that I really like is Best Buy (BBY ). It trades at 15 times earnings, and as consumer spending picks up, Best Buy will be able to sell more goods at a discount vs. its rivals. Another company that I feel strongly about on the plus is Sun Microsystems (SUNW ). I believe Sun will win a court ruling vs. Microsoft (MSFT ) regarding the use of Java in Microsoft's Windows programs.

Mesa Air Group (MESA ) is my favorite name in airlines. I think the company will do much better than its competitors because of the shorter routes and less jet fuel required to make everyday trips. I also think Mesa is very well positioned to capitalize on some recent bankruptcies -- and potential bankruptcies -- in the entire sector.

Q: General Electric (GE ) -- can it get any cheaper? What's a good entry price?

A:

GE is a solid firm that needs to get its credit division in order. However, at current levels the stock is beginning to look very attractive. At only 15 times earnings, I believe GE has great upside potential, and in the post-Jack Welch era, it's adjusting nicely with [Jeff] Immelt. I would start to accumulate shares of GE on any further weakness, as it's a great long-term addition to any value-oriented investor.

Q: Do you see the markets bouncing back in 2003 -- or are we in for a fourth consecutive down year?

A:

While many skeptics believe 2003 will be another down year, I'm optimistic that a late fourth-quarter rally might take the averages to the upside...a quick and decisive victory with any military strike is one possible scenario for a potential recovery. The other possibility, which looks promising, is corporate earnings increasing from the levels of the last 12 months. All in all, I believe the Dow and S&P have the potential to rise 10% [each] by yearend.

Q: What are your thoughts on the AIDS vaccine that VaxGen (VXGN ) is trying to develop?

A:

I believe the firm is well on its way to getting major approvals from both the medical community as well as investors. The company has limited competitors in this field, and its partnership with Genentech (DNA ) could be very profitable. VaxGen does not only have an AIDS vaccine, it may also capitalize on an anthrax vaccine. And in today's crazy world of terrorism, the latter may be more deadly.

Q: How about your favorite sectors?

A:

I'm a big fan of the trucking sector -- Roadway (ROAD ), J.B. Hunt (JBHT ), Knight Transportation (KNGT ), and Yellow (YELL ). Other than that, I like the defense sector -- Invision Technologies (INVN ) and Boeing (BA ). Another area that I like is financial services, but in that space regional banks may outperform the broader market. The stock that I like the best in the group is Roslyn Bancorporation (RSLN ).

The sector that I believe has the most potential upside for patient investors is foreign Internet portals. If you remember, back in the late '90s, domestic firms like Infoseek, Excite, and Lycos, as well as Yahoo! (YHOO ), were high-fliers. Now, companies overseas that look poised to capitalize on the growth of communications via the Internet and wireless devices in countries located in Asia, Europe, and South America include Netease.com (NTES ), Sohu.com (SOHU ), Chinadotcom (CHINA ), and Rediff.comIndia (REDF ). I would particularly look at Internet Gold (IGLD ), which has a partnership with Microsoft and currently operates MSN Israel.

Q: Do you like any of the large drug companies?

A:

Pfizer (PFE ) is a name that's a very good play for both short-term and long-term investors. The company pays a quarterly dividend and trades at under 20 times earnings. Pfizer may capitalize on some of its peers going by the wayside, and it may use some of its cash to purchase a competitor.

Q: What investment advice would you leave for our audience?

A:

I believe the geopolitical front that encompasses the financial markets will cause investors to be more momentum-driven, as opposed to the buy-and-hold strategy that we talked about earlier. With a potential war on two fronts, my advice to investors would be to look at firms in the utility, energy, and gold spaces. Keep in mind, volatility will be the norm, and expect that over the foreseeable future.

Edited by Jack Dierdorff

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