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Top-down fears about terrorism, the price of oil and the uncertainty of the election have certainly pulled the rug out from under the U.S. markets and other correlated asset classes. But what they've left us with are values unlike any we've seen in the past 15 months.
Consider what's out there in the large-cap space, where a number of household names are trading at sharply lower-than-average valuations while sporting higher-than-average dividend yields -- and none of these dividends are in danger of being cut anytime soon.
Examples include financial services giant
with a 3.7% dividend yield and price-to-earnings ratio of 14, and rivals
with a 3.7% dividend yield and P/E of 10, and
Bank of America
with a 4.3% dividend yield and P/E of 11.
Outside the financial realm,
sports a 3.4% dividend yield and a P/E of 14, while
has zero debt, a 3.2% dividend yield and a P/E of 12, which is more like 8 if you back out the cash.
Meanwhile, leveraged buyout (LBO) funds, funds that specialize in buying mid-cap companies using leverage, are sitting on over $100 billion in cash, so expect to see some companies go into play. Any screen showing companies with a low debt/EBITDA ratio, low enterprise value/EBITDA and steady increases in earnings is going to come up with many potential LBO candidates. For instance:
, a health insurance provider for the government (not a struggling industry), has a market cap of $2.8 billion. But if you back out the $2.5 billion in cash and add back the $800 million debt, you are left with an enterprise value of $1.1 billion on top of EBITDA of $545 million. Net earnings in the past four years have risen to $228 million in 2003 from $90 million in 2000.
Another possible LBO candidate is
, a major supplier to the automotive industry, which sports a $1.7 billion market cap, $500 million in EBITDA and $500 million in debt (so it can easily afford to borrow more in an LBO). In the last four years, American Axle's net income has risen to $197 million in 2003 from $129 million in 2000.
Point being, the market is not just about fears of terrorism, the uncertainty of the election and short-term fluctuations in oil prices -- although it certainly would be troublesome if crude remains a long-term problem. Rather, significant cash is on the sidelines, managers are desperate to put that cash to work, and value plays potentially offer substantially higher-than-average returns. Managers ranging from large-cap mutual funds to private-equity LBO shops are sitting on the most cash since March 2003. The market has fallen so quickly that these managers are only now looking at the carnage around them, and they won't wait for the market to reach new highs before looking for their opportunities.
The carnage has taken its toll across almost all asset classes -- not just equities. In stark contract to last year -- when bonds, commodities, stocks and hedge funds were all winners -- even investing strategies that attempt to claim an absolute return are getting hit.
Convertible arbitrage strategies, typically among the safest hedge fund strategies, are down 0.80% year to date as of July 1, according to the VAN US Hedge Fund Index. The merger arbitrage index was only up 1% as of July 1 -- and that's before the
and Leonard Green & Partners-
( HLYW) deals all got into trouble.
The managed futures category has been the hardest hit, down 2% on the year, but that number doesn't really reflect the shellacking of some of the biggest funds in the category:
Last five months for DUNN Capital, which is down 18% for 2004 through June: -6.2%, -7.6%, -4.9%, -15.45%, -0.68%.
Last five months for John Henry Dollar Program, which is down 30.5% through June: -4.8%, -11.6%, -2%, -14%, -5.8%.
Last five months for Eckhardt Trading, down 13% through June: -3.4%, -3.4%, -1%, -6%, -0.38%.
The Dow Jones Commodity Index and Goldman Sachs Commodity Indices are both up 8% to 10% on the year, but primarily because crude oil and energy are heavily weighted components. And who wants to make the bet now that oil goes up to $50? Your upside is about $5, and downside is as much as $15 or more, and I'm not sure your odds are greater than 50-50.
Right now you have much better odds with U.S. equities.
At the time of publication, Altucher and/or his fund was long Hollywood Entertainment, although positions may change at any time.
James Altucher is a managing partner at First Angel Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback and invites you to send it to
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