I believe the crisis between Israel and Lebanon is providing an excuse for our market to sell off. The crisis is real, and hopefully will be contained, but this is just what part of the market wanted to justify a selloff. The market has been in a funk over Federal Reserve chairman Ben Benanke's lack of vague verbal skills -- the kind that Alan Greenspan mastered. More importantly, the market was worried that Mr. Bernanke would repeat 1991, when Greenspan tightened monetary policy too much and took the country into a recession. Remember though, that a recession is a decline in GDP for at least two consecutive quarters, not a deceleration from 5.6% growth to somewhere in the 2% to 3% range. A GDP growth rate of 2% to 3% still means that economy is expanding, just at a slower pace. What is being forecast by many is a recession and a bear market. I believe this has created a disconnect between valuations and stock prices. How else do you explain that homebuilders are priced virtually at liquidation levels? The
first time I wrote this the homebuilders were at 52-week lows, yet they have continued to fall. I, along with several smart people I know, have taken a bath on stocks like Toll Brothers ( TOL), Standard Pacific ( SPF) and Hovnanian ( HOV). I still hold to my belief that buying now will make you very happy long term. How else would you explain the brokers trading at such a huge discount to its historic multiples, even though the companies see better deal pipelines in the future? Lehman ( LEH), which I own, and Goldman Sachs ( GS) are trading with forward price-to-earnings ratios of less-than 9. These are steals. How else would you explain Applied Materials ( AMAT), which I also own, trading at a forward price-to-earnings ratio of 12.5 and a stock price of less than $15? Applied Materials trades at this low even though the consensus is for long-term earnings growth of 15%, the company has more than $2 a share in cash and there's very little debt on the balance sheet. To view John Layfield's video take of this column, click here .
How else would you describe MEMC Electronic Materials ( WFR), the best in breed of polysilicon makers, trading more than 40% off its 52-week high, even though polysilicon prices are going through the roof with no real ease in capacity in the next two to three years? How else would you explain why oil and gas drillers are not approaching highs instead of continually sinking? The land drillers are priced at ridiculously low levels, even though demand is outstripping supply. I continue to own Patterson-UTI ( PTEN) and Bronco Drilling ( BRNC) because of these valuations. However, the market continues to discount these stocks. In my opinion, the offshore drillers are another disconnect between value and stock price, as I wrote
last week. I simply cannot believe that these stocks have not taken off, what with drillers leaving the Gulf for better day rates elsewhere, utilization and day rates increasing monthly and oil and gas prices going higher. I still recommend the stocks I profiled last week: Global Santa Fe ( GSF), Transocean Offshore ( RIG) and Ensco International ( ESV). The new stock I would add to this is Oceaneering International ( OII). With oil prices increasing, you would think these stocks would be seeing new highs. A receding tide, however, lowers all ships. Oceaneering reported first-quarter earnings that were more than double the previous year's first quarter. It also upped its 2006 earnings guidance to $3.60 to $3.90 a share, from $2.90 to $3.10 a share previously. Analysts had been projecting full-year earnings of $3.11 a share. Oceaneering is expected to post second-quarter earnings of 50 cents a share on Aug. 2, up from 28 cents the prior year. Even so, the stock is still trading more than 15% off of its 52-week highs. Oceaneering is the world leader in remote-operated vehicles (ROV). With oil getting harder to find, you need these ROV units to help with exploration in deep waters. Oceaneering's ROV units are achieving higher day rates in the same vein as the drillers.
Oceaneering achieved its record results due to its ROV units and its Subsea projects and Subsea operating profits. Subsea Products' backlog was $222 million at the end of March, and it's benefiting from recent hurricane activity, which has increased demand for its damage-assessment and repair services. While there's a crisis brewing in the Middle East, it hopefully will be resolved or, at worst, contained. I believe that this is a buying opportunity. After 9/11, if you had bought stocks that tanked due to the unbelievable unrest created by these terrorists, you would have done unbelievably well. I believe we have a very similar opportunity now to do the same. Remember, being poor is bad, staying that way is stupid.