WHAT THEY’RE BUYING| Leeb's Market Forecast Analysis and Tips

Fidelity Pacific Basin, which joins our Fund Portfolio this issue, has an outstanding record. So when its managers really like a stock, it pays to listen. And they really like Toyota Motors (TM ADR)—in fact, the automaker is the fund’s single largest position. Moreover, Fidelity Management & Research, the company to which Fidelity Pacific Basin belongs, more than doubled its stake in the stock last quarter, making it the largest U.S. holder of Toyota shares.

What’s to like about Toyota? Actually, there’s nothing not to like. The No. 1 automaker in Japan and No. 3 in the world, it’s a truly global company that sells its vehicles in more than 160 countries. This year, for the first time, Toyota captured more than 10 percent of the U.S. market, and almost 40 percent of its revenues come from North American operations.

One reason for its success is its commitment to high-quality products. Another is its leadership position in developing new technologies, including those used in creating environmentally friendlier autos. To date the company has sold more than 120,000 of its second-generation gas-electric hybrid Prius, which gets some 60 miles to the gallon. Motor Trend magazine’s 2004 “car of the year,”, the Prius has achieved this fuel efficiency at a relatively low cost in terms of “drivability”—for instance, it has a more powerful engine, and accelerates faster, than Honda’s competing hybrid. Toyota also is in the forefront of the development of hydrogen fuel cell vehicles.

Looking ahead, the rapidly developing market for autos in China, where Toyota enjoys a marked competitive edge, is likely to be an increasingly important factor in driving earnings growth. The stock is undervalued by most historical metrics and is a buy despite the strong yen. Buy Toyota below 70.

Another shrewdly managed fund is Selected American (SLASX), a five-star domestic large-cap fund with nearly $5.5 billion under management. It has been in the top 10 percent for its category for each of the last 1-, 3-, 5-, and 10-year periods. In the last quarter it added no new positions and increased its stake in only one of its top 20 holdings—HSBC Holdings PLS (HBC ADR).

Over the last five years, through a series of successful acquisitions, HSBC has become a truly global financial services company. It now has more than 9,500 offices in some 80 countries and territories in Europe, the Asia-Pacific area, the Americas, the Middle East, and Africa. Recently it moved to acquire a stake in one of India’s retail banks, part of a strategy to obtain growth over the medium term from selected emerging markets, including Latin America as well as India.

Nearer term, growth should continue to come from developed markets, the U.S. in particular. A year ago HSBC acquired subprime consumer lender Household International Inc., which is being successfully integrated into existing services and businesses. Given the scale of HSBC’s operations, its financial health, and its potential for further growth, it will be a major beneficiary of world economic recovery. The current dividend yield of more than 3 percent is a nice bonus. Buy HSBC up to 80. —GT

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