NEW YORK, Feb 25 (Reuters) - As 2010 has brought about renewed turbulence after last year’s rally, Wall Street has become more of a stock picker’s market that will require an investor to stay nimble, says Doug Cannon, chief investment officer of Texas First Capital Management Company.
Cannon believes that while there are still some good values to be found in the market, they have become harder to unearth, increasing the importance of active management over indexing.
With the potential for increased government regulation this year, Cannon believes it is important to avoid sectors that may be affected by legislation. He expects business services stocks to perform well. Cannon did not divulge how much his firm has under management. WHAT IS YOUR BEST INVESTMENT THIS YEAR? WHY? STILL OWN IT?
So far this year, we are up 6.7 percent as of Feb. 23. Our biggest winners this year have been Consolidated Graphics CGX.N, which is up about 30 percent. Deluxe Corp (DLX.N), which is the company that prints checks and other forms, that’s up about 23 percent from Jan. 1. Brinker International (EAT.N) the restaurant company, is up about 21 percent. Those probably are our biggest winners as of right now. We are fairly concentrated in that, we will typically own about 20 to 22 stocks. We are very careful to be diversified, but you don’t need more than 18 to 20 stocks to get good diversification if you are in different industries. That is one of the reasons we’ve been so successful. We can put a lot of our money into our best ideas. WHAT WAS YOUR WORST INVESTMENT? WHY? DO YOU STILL OWN IT? We really only have a couple that are down and those are 1 percent. The most interesting one is Administaff ASF.N. That is a company that took a big hit recently and because they reported down earnings, and it’s a case where the market didn’t totally understand the fundamentals of the company. Their earnings were down because healthcare costs were up, and they weren’t able to pass those costs along immediately — there is always a lag time. It’s a temp agency and they do personnel management. But the thing is — it’s a world class company and they are selling near their 3- or 5-year lows. WHAT IS YOUR YEAR-END TARGET? We use the Russell 2000 Value .RUJ and also the Russell Midcap Value .RMV as benchmarks. It is very, very hard at this point to say what the market might do this year. It had that good run last year and even with the improving economy, a lot of that is probably already built in. So we are just focusing on stocks that we see are undervalued, but that also appear to have some margin of safety. IS IT IMPORTANT TO MAKE SURE THE COMPANY IS STABLE AS OPPOSED TO EXPECTING A LARGE PRICE RUN?
Last year, we wanted to make sure the balance sheets were solid enough so that they wouldn’t have to worry about their financial situation if the recession continued. Those factors aren’t quite as important this year. A key factor is: How is the government affecting the industry? Because we’ve seen the government continue to do things that affect major industries.
Democrats may see this year as maybe their last shot for awhile, when they have big majorities in Congress and the President to really get through some legislation that they would like to get through. A key factor for investors to look at now is what legislation is likely to get through and what is the effect going to be on these industries.
Some of the industries we think will do well are in the business services (category) — I’ve seen some of those do very well. Consolidated Graphics was up 70 percent last year and is up about 30 percent this year. They provide high-tech printing to businesses. I think a lot of businesses are turning around, and companies like Consoldiated Graphics and Administaff, and also maybe Deluxe Corp are benefiting from that. (Reporting by Chuck Mikolajczak; Editing by Jan Paschal)