Bullish on industrials & energy
Interview: CastleArk Management---Castellini, Jerry---President
>> let’s recap or actually take a look at some of the day’s top stories, today. wachovia, lehman brothers and american express are among companies that may make a bid for beleaguered strong capital management according to people involved in those talks. strong being investigated for alleged abuses in mutual fund trading and has ordered to find a buyer. pay day for investors who hold shares in some janus mutual funds. janus capital group plans to pay $31.5 billion to reimburse fund investors hurt by improper trading practices.
>> a u.s. judge temporarily blocked mesa air group’s attempt to replace atlantic coast’s board. mesa has offered $512 million in stock to acquire atlantic coast and is seeking to replace the board that opposed the deal. yesterday the u.s. justice department began an antitrust investigation of that proposed take-over. verizon communications won a legal battle to keep the names of its internet customers out of the hands of a recording industry trade group. a u.s. appeals court says verizon doesn’t have to hand over names of people suspected of downloading copyrighted music and sharing the files. the recording industry association of america was seeking the names to help it combat music piracy on the internet. industrials and energy are the industries our next guest is most bullish on. he says in the new year these will be the new leaders in the market. rotation is under way from technology to those groups. jerry castellini, president of castleark management joins us from our offices in chicago. you’re selling technology and bullish on industrials and energy. fill me in.
>> right. the normal cyclical recovery in both the economy and the stock market is one where you follow the earnings that evolve from higher levels of economic activity. had year, portfolio managers and investors jumped into tech right away, expecting that to be one of the first beneficiaries of an economic recovery. those stocks have now risen and trade at 30, 40, 50, 60 times earnings for next year. we feel that’s pretty fully valued, and when you compare that to some of the industrial cyclicals and energy stocks that are still at 20, 15, or 10 times earnings the disparity in valuation is too broad, too wide to avoid.
>> the energy theme is certainly not a new one. energy stocks have been red hot for weeks now. is this something new? and also, is it something that can continue?
>> very much so. the great thing about the energy industry is that virtually no analyst on wall street, and for the most part most companies will not accept current energy prices, gas and oil prices as being sustainable, so traditionally you have much lower earnings estimates for these companies than they actually achieve. 2003, for example, companies are going to earn significantly higher numbers than what people expected them to earlier. 2004, as an example, most investors expect these companies to have down earnings because they expect prices to fall. this isn’t happening. so you’re going to see a good acceleration in earnings for the first and second quarter and the stocks will have to follow that acceleration. we only think you have seen maybe the first couple innings of that move and we’re just -- and the other aspect i want to emphasize is you watch the way portfolio managers act this time of year because you can see the technology names starting to churn and roll over where, as you pointed out, energy is just starting to turn up.
>> talk to me here in the shorter term you have told our producers that you think the market is going to go down 5-10%. shorter term?
>> near-term, over the next 6-10 weeks, i feel there is risk because there is probably too high a valuation in the tech names. as you notice, the nasdaq 100 never got to a new high while the s&p and dow have pushed to those levels. this tells me that those names are tired, and i think if they have a correction the first four or five weeks of next year they will probably bring the market down with them.
>> when you say those names, what names?
>> cisco, applied material --
>> technology names?
>> intel―the whole list of big-cap tech names.
>> which goes back to your main premise that tech in general is tired and there is a big rotation at foot. 30 seconds, my friend.
>> those names should roll over and you should be buying a name like exxon which is trading we think at close to 12-13 times earnings, should probably end up at 16-17 times earnings and it’s a great play on the dollar it’s a great play on the industrial recovery. and it’s a very attractive dow, cheap stock .
>> and it also is a stock that you own in your portfolio. may i just --
>> yes, we do.
>> point that out.
>> we have been buying it recently and think it’s got a $55-60 target.
>> fair enough. always appreciate your information and insight. folks, that is jerry castellini, president of castleark management. we’re going to head to tokyo.
