Pulte Homes ( PHM) is another oldie but goodie. The shares have corrected strongly, closing Thursday at $35.93 as the sector has done every year. At 6 times profits, it's simply too cheap not to own. Now I know many will scream that the housing bust is coming. "Many" have been wrong for quite a while. If the economy holds together and the housing sector just fades, the shares should appreciate meaningfully. In a flat housing market, the stock could trade up 50%. Pulte's serious competitive advantage is its exposure to the "active adult" market, with its Del Webb division. This is simply the best demographic story in the housing market today, bar none. If there is a real estate bust of epic proportions, homebuilders and market indices have equal downside due to valuation discrepancies. Cinram, which trades on the Toronto Exchange, and which closed Thursday at $22.82, is my final reiteration. This leading-market-share provider and distributor of media products, such as CDs and DVDs, operates in global duopoly and generates huge free cash flow. I expect excellent earnings from Cinram as the DVD business reaccelerates and the high-definition upgrade starts next year. At 7 times cash earnings and with a free cash flow yield approaching 20%, the shares have significant upside. Should investors continue to ignore this fine story, the company probably will convert its structure to an income trust and spew cash to its owners. Under the proper conditions, this stock could double. Terex ( TEX) is a new name to the portfolio. This leading maker of specialty construction equipment is just beginning a significant restructuring and turnaround process. Currently, the shares trade for 8.5 times my estimate for 2006. Strong and improving conditions exist for its major product lines, including aerial work platforms, cranes, mining shovels, cherry pickers and road-building equipment. Massive hurricane reconstruction efforts for the next few years shouldn't hurt either. When the company hits its stated operating margin target of 10%, profits should be 100% higher than in 2005. The shares, which closed at $50.25 Thursday, should be a lot higher too.
Eastman Chemical ( EMN) is another new idea. Shares in this leading maker of specialty chemicals, plastics and fibers have been hit on the basis of spiking raw-material costs, closing Thursday at $49.40. I believe the company will negotiate rising input costs without a major hit to profits. And should energy prices ever sink, the stock would become very appealing conceptually. At 9 times 2006 estimates and yielding 3.5%, the stock is materially undervalued. The shares traded north of $70 in 1996. We would not be surprised to see new highs in the stock next year. Finally, Home Depot ( HD) registers as a new long position in the portfolio. What needs to be said about this category-killing home-improvement retailer? The company continues to grind out double-digit revenue and profit growth, while generating copious amounts of free cash and repurchasing shares. At 13.5 times 2006 estimates, this is hardly the cheapest name in the portfolio. However, on a fundamental basis, Home Depot is probably one of the best in the book. Shares closed at $39.39 Thursday. As you can tell from the names, companies with economic sensitivity have high exposure to the "down and cheap" list. I think that's a good thing. The economy will muddle along, aided by strong growth abroad. The Fed will stop raising interest rates soon. I hear the current jawboning and believe it's a smokescreen. The Fed is simply talking up risk premiums before it eases up on the rate hikes. Can't have things get out of hand after that language in the press release, can we? It's funny how
Easy Al and I see things so differently. Eighteen months ago he saw deflation risk, and I saw inflation. Today, the Fed rambles on incessantly about inflation risks, and I see the end of the pricing power stage. It's not quite here yet, but enough capacity is coming on line in enough areas of the economy to temper rising prices. When the Fed acknowledges that and issues its "pause" statement, I expect stocks, especially economically sensitive ones, to rally nicely. So I am taking my chips off the poker table and reinvesting my cash into that big casino on Wall Street, as some would say. Only I believe that investing is not a game of chance but one of skill and discipline. And now, that discipline says to buy deep value stocks. Carefully, but buy nonetheless.