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Market Update 08-24-10

BHP Billiton’s (BHP) bid to take over Canadian fertilizer producer Potash Corporation of Saskatchewan (POT) has officially been rejected as being too low. But the buzz created by the takeover attempt isn’t dying. First, there was speculation that one of the Chinese state-owned enterprises would step in and shell out the cash for Potash—if anyone has ample cash for the acquisition, the Chinese do. Today, there’s new speculation that BHP’s Australian rival, Rio Tinto (RTP), may partner with a Chinese company and submit its own bid for Potash. Rumors are also circulating that fellow fertilizer producer Mosaic (MOS) may partner with other agricultural companies to acquire Potash.
 
The high level of interest in Potash highlights the bullish case for fertilizers, essential for growing crops. In the long run, population growth and improving standards of living in developing countries should lead to continual demand for fertilizer to increase food supply. In the nearer term, the rally of crop prices due to adverse weather conditions (for example, Russia’s drought and wild fires) reducing supply should lead to an extra demand jolt for fertilizers as farmers scramble to take advantage of more favorable pricing.
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Updating the Best from the Brainiest

All the stocks in FundFinds remain buys

 
FundFinds is a stock portfolio with a difference. We don’t look just for stocks we like—we first look for funds we like and then seek out the newest, or biggest, or most unusual of their holdings. Next we evaluate those holdings using our own stringent criteria. If they make the grade, they join FundFinds.
 
Using this approach, which lets us benefit from the expertise of top fund managers, we’ve accumulated a diversified group of 16 stocks. They all remain buys.
 
Our first picks, from Sequoia fund, were giant pharmaceutical chain Walgreen and rug maker Mohawk Industries.
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The Tricky Art of Buying Tech

As tech products come down in price, investors need to get a lot pickier

 
The chart below graphically presents the dilemma you face when it comes to investing in tech. Depicting the role information technology has played in the economy over the past eight years, it has two separate lines. As you can see, one line is virtually flat—in fact, it is down a bit from its high point in 2000. The second line, though, rises steeply.
 
The flat line shows the dollar value of tech in the economy. The uptrended line reflects the actual physical presence of tech in the economy—for instance, the number of semiconductors in use. The explanation for why the two lines don’t look the same is simple: we’re using more tech, but prices have been coming down.
 
This, in a nutshell, is why the technology arena is both compelling and tricky for investors. The rising demand for tech products creates an indisputable opportunity.
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Breaking New Ground

Homebuilders are shedding their cyclical qualities and becoming growth plays

 
Sometimes Wall Street is slow on the uptake. And that’s good for quick-witted investors, who can scoop up undervalued sectors under the radar.
 
Case in point: homebuilders. Wall Street persists in viewing homebuilders as debt-heavy, cyclical companies subject to frequent booms and busts. But recently homebuilders have taken giant steps to insulate themselves from the downturns that used to plague them. With the Street still valuing them as cyclical companies, many—despite average share prices that have more than doubled during the past year—remain bargains.
 
Homebuilders have become increasingly sophisticated in anticipating demand and building to meet customers’ requirements.
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The Joy of Games: Scoring with Electronic Arts

Plus plaudits to our portfolio last quarter and sales of Cardinal Health and Intuit

 
If you’ve been following our Growth Portfolio recommendations, we don’t think you’re complaining. In TCI’s first full quarter (the fourth quarter of 2003), the portfolio climbed more than 16 percent, outperforming a peppy S&P 500 by nearly 5 percentage points. Every group and risk classification participated, and only one stock—Weight Watchers (which we still like, see p.11)—was down by more than 1 percent. Gains of 25 percent and more were chalked up by favorites ranging from Apex Silver to Tyco to H&R Block. Our energy stocks also were strong, though they remain cheap relative to the market and the current level of energy prices. These results didn’t stem from any black boxes—just diversification, an abiding emphasis on low PEG ratios, and a lot of elbow grease to ensure our growth and earnings estimates remain on target.
 
We’re making two sales and one new purchase.
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Stocks with Leg(g)s

Bold choices from a top-ranked Value fund

 
One of the very best funds in the entire Morningstar universe is the Legg Mason Value Trust (LMVTX). It has outperformed the S&P 500 for 13 consecutive years, a record unmatched by any other fund. Moreover, it finished in the top 1 percent for its category for the last 10 years, the top 9 percent for the last five years, and the top 2 percent for the last three years. When this fund talks, it obviously pays to listen. (The only reason we don’t own it is its high 1.72 percent expense ratio.)
 
Like any true leader, the fund is willing at times to make bold decisions, and some of its stocks may seem surprising choices for its category, Large Cap Value.
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Let’s Hear it for Health

Strong vital signs for a drug benefits manager and a hearing care provider

 
We love buying growth industries, or growth stocks, when they’re out of favor. By holding onto them patiently, you ultimately benefit from growth in earnings and expanding P/Es alike as Wall Street falls in love with the stocks all over again.
 
Right now, with investors busy chasing technology stocks, health care is being spurned. But health care is an undeniable growth area: people are living longer, baby boomers are aging, and pharmaceuticals and various medical products are becoming ever more technologically sophisticated.
 
One stock positioned to benefit is MIM Corp., a pharmacy benefit management (PBM) and specialty pharmaceutical company that partners with managed care organizations and health care providers to control pre-scription drug costs.
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Good Sports

The best international soccer clubs can help you meet your investment goals

 
For investors who also are avid sports fans, there is something particularly appealing in the idea that you can make big money by investing in a big sports franchise. Not that every sport offers such an opportunity—you might have to forego, say, football (American-style), baseball, and basketball. So what’s left? If you’re at all up on the international sporting scene, you’ve guessed it: soccer.
 
Soccer, hands down, is the world’s biggest sport, attracting the most fanatic fans and garnering more television viewers worldwide than any other athletic pastime. While soccer clubs have struggled to gain market share in a saturated U.S. entertainment market, they have established a dominant position in the European and Asian entertainment media and represent some of the world’s most powerful brands. Many, though not all, are publicly traded, and the best positioned are using their on-field wins to become successful media companies with considerable investment appeal.
 
Not every soccer club, of course, is a smart investment.
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