An undervalued situation
Interview: Capital Management Associates---Zock, Joseph---President (slow)
>> welcome back. we continue to cover this breaking story with carl mccall resigning from the nyse board, saying he wants interim chairman john reed to move forward unencumbered. greg miles is following this story. he is here with more on the letter he sent to john reed.
>> i have a letter obtained by my colleague allen franks and mr. mccall in his letter which he obtained said i have provided leadership through this time of crisis. he says to insure you the nyse can move forward, he is resigning as of next monday, the 2829th. that’s when his committee, the governance committee is introducing a key report to the board of directors. he says, “what we have learned in the past few weeks is that disclosure is a good thing. he goes on about five or 10 things that this group is going to propose. that includes greater representation by the investing public on the board, and election of directors, also the evaluation of directors and splitting the posts of chairman and also c.e.o. and that was also, by the way, in an interview with bloomberg news. now, many investors and also managers speculated or demanded that all or part of the board of directors would resign. mr. mccall is the second to resign. richard grasso was the first one an inside member of the nyse. now mr. call. mr. mccall is one of the most prom nebt members on the board. he was a former state comptroller on the governance and compensation committee. now he became the lead director in the past few weeks. the big question in many investors’ minds is will more board members resign. all this comes a day before mr. john reed, the current interim chairman is about to meet with employees tomorrow at the new york stock exchange, formally beginning his tenure next week.
>> we’ll be keeping an eye out for more resignation letters.
>> the s&p 500 has climbed 26% since this year’s low on march 11th. but along with the gains are concerns that stocks may be getting a bit overvalued here. our next guest says if you look ahead to next year stocks are undervalued. his name is joseph sauk, president of capital management associates joining us with his view of the market.
>> thanks for the invitation.
>> why do you think this is an undervalued situation if you look ahead.
>> the most simplistic explanation is the e portion of the p.e. ratio will be changing over the next six months meaning earnings will increase on the upside and surprise everybody on the street.
>> can that happen if we see this jobless recovery effect.
>> the unemployment number is a lagging indicator. so theoretically you could have earnings surprises to the upside before you saw improvement there. but typically most managers will keep their employee lists low as long as they can, until demand really overwhel ms them and they are forced to hire people back.
>> we see so many announcements, whether kodak or many other names we’ve heard in the last several weeks. job cuts continue and then we have other names that have done well like viacom saying the revenue is not going to be what we expect after they look to see something that was better than expected.
>> you have picked the most notorious or conspicuous areas. the advertising revenue on viacom is a trailing number on an improving economy. eastman kodak is separate to its own, having made a couple of errors in its game plan and failure to execute. so i think those two cases are specialty cases. i would cite the early cyclicals and major industrials that are hiring people over this period of time.
>> one many you like here is flextronics. it’s had a very strong run along with many other names in technology. we have a one-year chart. a chart going back to the beginning of the year up here on the bloomberg. this chart is a little more specific about the other day’s action. it pulled back pretty substantially, all things considered after losing a $934 million verdict.
>> right.
>> was that overdone?
>> the verdict or the price change?
>> both.
>> the verdict was extremely overdone. it’s a perfect case for tort reform. the actual award that was passed down was a $3 million award. and, of course, the jury decided that punitive damages would be a multiple of $310 times that. we are expecting as most people are, that that would be reduced significantly. the two companies were in talks to negotiate a settlement at that point in time. so this came as a big surprise to both.
>> you think that in itself is overdone. we take a look at flextronics in the past. i can click on this twice and take it back through the boom time. there has been a fairly substantial rebound here, but it’s going to take a while for a lot of people to make their money back.
>> flextronics is a contract manufacturer. so as a result it manufactures phones or puts themming the for nokia, puts the xboxing the for microsoft, does that type of manufacturing. so you will see it rebuild as those types of electronic games and products improve. so it will be a long-term game.
>> talk aboutensco as well.
>> energy sector is where there are visible earnings, demand, need. the big surprise is the cost of energy will remain in the high 20’s for the next year. that’s not something i’m predicting. it’s something that’s been a fact the most people have underestimated the resiliency of that commodity.
>> you see volitility, though. as we saw that chart just a moment ago, it hasn’t been straight up or straight down. it’s been finding itself jagged. not that chart.
>> volitility in the energy sector is one of the easiest areas for those who play momentum to invest and extricate themselves out of that position. i think you’ll see that. s it’s related to a commodity who has that kind of event risk in iraq, afghanistan, things of that nature.
>> joseph zock, president of capital associates. levi strauss has been making jeans in the u.s. since the gold rush, but no more. that story when we return.
