Deflation Trade Investing Strategy Not The Right Play: Focus On The Obesity Trade Says Chief Investment Officer Of North American Management

• On 7:16 am EDT, Tuesday October 13, 2009

67 WALL STREET, New York - October 13, 2009 - The Wall Street Transcript has just published its TWST Investing Strategies Report offering a timely review of the sector to serious investors and industry executives. This 28 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Raising Dividends -- Depressed Units -- Limited Partnership Units -- Retrogression in Consumption -- Effects of a Global Credit Crisis -- Chinese Economy -- Gold and Silver Exports -- Rebounding -- Survival of the Fittest -- Less Available Credit -- Reflation Trade -- Global Growth -- Market Stress Issue -- Valuation Opportunity -- Equity Exposure -- Emerging Markets -- Sustained Economic Growth -- Credit Quality -- Investing in ETFs -- Emerging Countries versus Developed Countries -- Educating Clients

Companies include: Novo Nordisk (NVO); Enterprise Products Partners (EPD); Expeditors International (EXPD); FBR Small Cap Financial Fund (FBRSX); Matthews Asian Growth and Income Fund (MACSX); Northrop Grumman (NOC); McDonalds (MCD); AFLAC (AFL); Diamond Offshore Drilling (DO); Abbott Labs (ABT); LCA-Vision (LCAV); Target (TGT); Barrick Gold (ABX); Pfizer (PFE); Wyeth (WYE); Dow Chemical (DOW); Ashland (ASH); Newmont Mining (NEM); Hecla Mining (HL); DuPont (DD); Global Limited Partners (GLP); Enerplus (ERF); National Presto (NPK)

In the following brief excerpt from just one of the interviews in the 28 page report, a Chief Investment Officer discusses his outlook for the stock market and picks some winners for investors.

DAVID H.M. BAKER, CFA, is Managing Principal and Chief Investment Officer at North American Management. Previously, he was a Principal of Berents & Hess Capital Management prior to its 2001 merger with North American Management. In 1998, he founded Rivendell Capital, which he later merged with Berents & Hess. His prior experience includes Cilluffo Associates LP, a proactive hedge fund, PNC Finanical, and Lehman Brothers. He is on the Boards of Advisors for FastAsset, Inc., Great Island Lobster LLC, and the Egan Entertainment Network. He is founder of Rivendell Ventures LLC, Mariel Technologies LLC and Airnet Connect LLC.

TWST: Do you have any companies or any asset classes that you forecast to have the potential for significant future returns?

Mr. Baker: At the moment, we are focused on building our exposure to financials, having been absent from the sector for nearly 3 years. We are also moving out of areas that are overly exposed to the reflation trade as we believe we are in a period of deflation. We do not see any significant inflationary pressure presently as the world appears to be awash in capacity. We have seen many reflation trades, but believe there are risks going forward as these trades remain leveraged to strong global growth. We do think that there will be growth, but do not think it inconceivable that oil could touch its lows of the last year. We already have tremendously low capacity utilization in many countries, and the US is languishing in the 60s.

We have taken a significant position in healthcare. We do not believe that Obama will be completely successful with the proposed healthcare legislation. Some very high quality healthcare names are trading at valuations as if the legislation has already passed. We are underweight in technology by about 400 basis points. We have very little exposure in consumer discretionary, due to our previously stated belief that the consumer is going to be challenged this year. At present, our core holdings are more defensive in nature, and we will consider adding to areas that we believe have more economic leverage, such as industrials and financials. We have also been increasing our international exposure and will be giving thought to more consumer related names going forward as economic conditions improve.

When we build these portfolios, we try to barbell exposure within each sector, selecting stocks that are more defensive together with those that are more aggressive.An example of one of the more aggressive names in the healthcare sector that we own is Novo Nordisk (NVO). This Danish company is focused on diabetes and insulin, which we think is one of the best growth sectors in the healthcare industry due to the dynamics of an increasingly obese population. Insulin is roughly 68% of its business, and is projected to increase to 76% over the next five years. When we invest in growth companies such as this, we like to see companies that have very high Research and Development expenditure and this company is investing 16% of its sales in R&D. That is critically important because as we know, in any of these drugs there is always a risk of generics. We believe this is a company that should grow its EPS 16% a year for the next five years, whereas this sector is going to grow at a rate of about 10%. It's trading reasonably at 14.5x 2010 earnings, although this is a little more expensive than some of its European peers, such as Roche or Sanofi (SNY) or Bayer, and also more expensive than Eli Lilly (LLY). This is a company that could double its franchise to more than $12 billion by 2015 with a very strong operating income of 28%, moving towards 30%. It is a good balanced business with 38% in Europe, 33% in North America, 11% in Asia and 18% in the rest of the world. This is a good core play, but there is some risk here. They do have a product that was denied FDA approval in April. However, analysts' consensus is that there is a 70% - 80% probability that this will be approved at the end of the third or fourth quarter of this year, which should be positive for the stock. We continue to believe that this is a great long-term opportunity.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 28 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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