Some managers who don't run hedge funds are still able to replicate the absolute-return model. That's the case with Scott Rothbort, founder of LakeView Asset Management, a registered investment adviser based in Millburn, N.J. Rothbort offers customized, individually managed accounts though long/short proprietary index strategies. He is also a professor of finance at the Stillman School of Business at Seton Hall University and a contributor to
Street Insight, a subscription sister site of TheStreet.com. In a conversation, Rothbort talked about his investment style and best picks. As always, positions can change at any time without notice. TheStreet.com: Are you upbeat about the market? Scott Rothbort: I am upbeat. My target for the Standard & Poor's 500 for this year that I set in the beginning of the year is 1400. I can see that target being bumped up a little bit if the Fed pauses and stops its tightening program. And I think it's going to happen. I think it's probably going to be the case sometime this year. I don't think the Fed is going to want to continue tightening going into the hurricane season and the holiday season this year. What sectors do you favor? If there are certain sectors that I know better than others, it would be financial services, including broker dealers, retail, restaurants. In those industries I think I have a unique leg up on other people. While we have tech, I don't necessarily consider myself tech-heavy. We own Google ( GOOG) and Apple Computer ( AAPL). And we've owned them for a while. We have some Texas Instruments ( TXN). Google vs. Yahoo! (YHOO): Any preference? We don't own Yahoo!. I think Google is taking market share from Yahoo!. The issue there is that Google is investing and developing in other technologies, which is going to allow them to further diversify away from paid-ad search. Yahoo! needs to be scared of Google. I am not talking down Yahoo! -- I think it's a great company and we have traded it from time to time -- but if Google begins to develop content and paid content like Yahoo! has, then Yahoo! would be more concerned of Google than Google of Yahoo!.
What are your top holdings? Google, McDonald's ( MCD), Merrill Lynch ( MER), Sears Holdings ( SHLD) and Apple. Tell us about McDonald's and tell us about the role played by hedge fund activist Pershing Square. McDonald's is a fabulous story. Here is a company that continues to generate higher sales, margin expansion and is growing and will grow, especially over the Far East and China. It has been successful at menu innovation; it also has a solid management team in place. This company has weathered the death of two CEOs within the last three years. Regarding Pershing Square's action, it's over now. I think it was a David and Goliath issue. They got their message across and McDonald's heard them, but clearly, McDonald's was not going to make the dramatic changes that Pershing Square requested of them. McDonald's didn't need to revamp itself as much as Wendy's ( WEN) had to. The core of Wendy's business is not Wendy's. It's Tim Hortons ( THI). That's the value there. And Wendy's just hasn't captured the diner in the quick-service category. McDonald's has. Let's talk about Merrill Lynch. Merrill Lynch is probably the largest broker dealer, one of the top broker dealers in the country and investment banks. They have perhaps the best diversity of businesses
of any other company in the sector. They're very strong in equities. They have a good presence in fixed income and a growing presence in commodities. They're probably the top asset management company, especially now that they have merged with BlackRock, and they are also obviously very strong in retail brokerage. You don't think that higher interest rates may pose a problem? No. Interest rates are going up. But they are going up in a controlled way. They are going up back to a level that is still quite sustainable for growth in the business. I lived back at a time where you had double-digit inflation, double-digit interest rates. We're not going there. It may have some impact on the margin. But once interest rates do stop going up, it will benefit these companies even more. But that's not really of major concern. Right now, the investment banking, the merger and acquisition business, the equity business, the commodities business, the asset advisory business -- these are all clicking on all their cylinders. A slight increase in interest rates is not really a concern. If we got over 6%, I'd start getting a little concerned. But we're not there.
What about Sears Holdings? Sears Holdings is a company that is in transition. And you have at the helm a very, very strong business manager: Eddie Lampert. Within Sears there are many assets beyond just real estate that Eddie Lampert is going to be able to transform or liquidate for the benefit of shareholders. The company is making money. They are increasing margins. They are getting rid of losing lines of business. They hired a home-merchandising team which will just focus on the merchandising of the business and allow Eddie Lampert to focus on the corporate aspect of the business. It looks like the deal to purchase Sears Canada is coming closer to fruition. Can we talk about some of your shorts? We don't have that many shorts right now. We took a lot of them off. We go in and out of Research In Motion ( RIMM). I think RIM is getting a little too expensive. We shorted RIM a few months ago. I am looking to get short again. I put a very small short on H&R Block ( HRB), after the announcement
of a probe by Eliot Spitzer. I think that stock is going to be in trouble. That announcement came just at the wrong time. During tax season, for this news to come out is not good. We recently moved out of our short in Martha Stewart ( MSO). It may be time to get long Martha Stewart. I think the company is turning around, especially in the publishing area. We're not long yet. We have some risk arbitrage on. We're long Guidant ( GDT) and short Boston Scientific ( BSX). I'll wait for the deal to close. Wendy's looks like it may be a good short after the Tim Horton's IPO. Do you have a preference between small-caps and large-caps? No. I don't have any preference. I am not real big into the mega-cap stocks though: the Pfizers ( PFE) and Wal-Mart Stores ( WMT). I don't see much opportunity in those things. There is nothing compelling for me to want to own them. I don't like the big-cap pharmaceuticals; I prefer the pharmaceuticals that are going to be looking for the next cure to the disease that we need to cure. Years ago, when you bought a Merck ( MRK) or a Pfizer, you used to buy a pipeline of pharmaceuticals. Now you buy a pipeline of lawsuits and a pipeline of drugs coming off patents. I want to look for the company that is going to provide solutions for cancer, diabetes, Alzheimer's disease. Amylin Pharmaceuticals ( AMLN) is a stock that we've owned for a while. I wrote extensively about it. We still like it.