Fantasy Baseball's Lessons for Investors
This column was originally published on RealMoney on Apr. 1, 2008 at 11:59 a.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
I confess to being something of a baseball junkie. In addition to watching or listening to just about every Orioles game, I check in with the Cubs scores most days and generally watch whatever games ESPN has on.
In addition, I am hooked on fantasy baseball. This year I cut myself back to just one league for time reasons, but I still check lineups and stats every day. I have used several strategies over the years, including various forms of Sabermetrics, the statistical approach to selecting ballplayers inspired by Billy Beane and Bill James. As with many investing approaches, the more people became aware of it, the less I won using this approach.
This year I have gone back to my
contrarian roots and devised a new approach. I stacked my lineup with the best players on bad teams. I have on my team two Orioles, Brian Roberts and Nick Markakis; Josh Hamilton from the Texas Rangers; and Billy Butler, the budding Kansas City Royals slugger. My theory is simple. Although they are all good to great players, their teams are awful. They will not be pitched around as often, or held as closely on base as the players on good teams. As a result, these good players on bad teams should get more hitting, scoring and base-stealing chances than others whose teams are stacked with talent. This method runs counter to baseball's conventional wisdom, but statistics bear it out as a winning strategy for the fantasy game.
I know what you are saying. "That's great, Tim, but what does your baseball addiction have to do with making money in the stock market?" It occurs to me that quite possibly it has the potential to have
a lot
to do with making money in the market. Using the same thought process, it occurred to me that looking at the best companies in the worst industries might have the potential to deliver long-term gains.
Industry groups come in and out of favor on Wall Street as quickly as fashion in Beverly Hills, and economic cycles always change over time. The best companies -- the ones that more than hold their own in difficult times -- are the ones who lead the way when business conditions and Wall Street expectations begin to turn.
I turned to the Value Investment survey to find the best companies in some of the worst-performing industry groups in the current environment. I looked for the companies with the best rankings and outlooks in the worst industry groups. My search turned up some interesting names that should be on your watch list even if they are not immediate buys.
Building Materials
The building materials industry has been horrible. In fact, it is among the very worst of all the groups
Value Line covers. Difficulties in the residential construction business have been well covered in the financial press and here on
. The commercial business is showing some signs of slowing as the economy continues to weaken.
For much of the group,
revenues are down and
margins are squeezed as builders demand better pricing in the weak environment. The best company in the group right now is
Ameron International
(AMN) - Get Report
. The company operates in several segments of the building materials marketplace. It makes lighting poles, construction products and fiberglass composite pipe for the petroleum and marine shipping industry. The pipe group in particular has been strong in recent years as demand for the corrosion-resistant pipe has grown in the offshore drilling and oceangoing tankers market. The company recently reported sales that were ahead of estimates, jumping more than 24% for the quarter, but earnings were short of expectations as margins contracted in the quarter.
There are several indications that bode well for the company and its stock price going forward. First, the Board of Directors just announced a 20% increase the
dividend. Second, and perhaps most important, it is the market leader for steel and water pipes in the western part of the U.S. The parched Western half of the country will be spending billions to update and expand water infrastructure for decades to come, and Ameron is well positioned to benefit. The company also recently entered the wind tower market and will benefit from increasing demand for clean energy.
Spending in Ameron's markets will continue to be stagnant until the economy recovers, but when it does, this company is perfectly positioned. The company has a rock-solid
balance sheet that will allow it to survive the hard times and be a market leader when the cycle changes.
Property Management
Another beleaguered group and one of the Value Line universe's worst-performing sectors is the property management group. This industry has been hit by an economic perfect storm. The subprime meltdown and ensuing credit crunch have caused the group to lose more than 20% of its market value this year as investors fled the real estate stocks.
One stock that has held up very well and has bright prospects going forward, though, is
WP Carey
(WPC) - Get Report
.
Earnings were actually up slightly in 2007 while its competitors lost money. The company has good access to credit and commercial financing even in the current difficult climate because of its solid operations.
Earnings expectations and estimates are increasing for WP Carey as well. Value Line estimates that they will grow earnings at a solid 10% rate for the next five years. The company increased
assets under management by better than 15%, and occupancy rates remain high.
The company has a strong balance sheet that will ensure it makes it through this cycle in the property market and remains an industry leader. The company pays a healthy dividend with a
yield in excess of 6.5% and is expected to increase it by 7% annually.
It remains to be seen how this approach works for The Vultures fantasy baseball team. It has been, however, a very good way to find stocks that can be industry and stock market leaders when the economic cycle changes, turning their industry groups into darlings of Wall Street instead of dogs.
This column was originally published on
RealMoney
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RealMoney,
please click here.
At the time of publication, Melvin had no positions in the stocks mentioned, although positions may change at any time.
Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback;
to send him an email.