Modern Approach to Graham and Dodd Investing Strategist Names His Current Favorite Stocks

• On 2:56 pm EDT, Friday October 9, 2009

67 WALL STREET, New York - October 9, 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); McDonald's (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 Graham and Dodd investment acolyte discusses the outlook for the market for investors.

Thomas P. Au, CFA, is Managing Director and Chief Economist at Pittsford Venture Group, a BRIC (Brazil, Russia, India, China) private equity startup. This firm was formed by the amalgamation of several other companies, including R.W. Wentworth & Co., an economic advisory firm, where he was earlier Executive Vice President for New Business Development. In addition to these roles, he has been an outside contributor to thestreet.com and other financial sites, where his specialty is value investing, particularly in the areas of health care, informatics, financial services and materials. Earlier he was an emerging markets portfolio manager for the investment arm of Cigna Corp. He was also an analyst with Unifund, SA, of Switzerland, and the Value Line Investment Survey. He graduated cum laude with a BA degree in Economics and History from Yale University, and an MBA degree in Finance from New York University. He is the author of A Modern Approach to Graham and Dodd Investing.

TWST: What about the stock market itself?

Mr. Au: I'll talk about the markets in general terms and then talk about the success and lack of success of particular picks. The first thing about the stock market from last year to this year is it has been a high beta market, that's to say the high beta cyclicals went down the most during last year's collapse, and by and large they've come up the most during this year's rally. What we seem to have been aiming for is the status quo ante, although the big question is where do you draw the line for "ante," or "before." It's probably not 14,000, but status quo ante seems to be more like 9,000, 10,000, maybe 11,000 on the Dow at the outside. Among my stocks picks of last year, Pfizer (PFE) was the most stable stock in terms of volatility. It was not one of the better performing stocks. The reason was they agreed to buy Wyeth (WYE). They've not closed the transaction, but they have made a major acquisition and more to a point they've cut their dividend in half to finance the acquisition. They are leveraging their balance sheet, not to imprudent levels but they used to be an AAA grade credit and now they are more like AA. Although Wyeth is also a very strong credit, so they are not diluting themselves by the acquisition of Wyeth but they are diluting their balance sheet by borrowing money to buy Wyeth if you know what I mean.

The other stock of lower quality that actually did better was the Ben Graham stock, which was National Presto (NPK) and that's raised its dividend significantly. It can't go on forever, but it's got electronic and defense related businesses on the operating side that support its other business, which is its municipal bond portfolio although there are a few risks there. But basically National Presto has acted like a high-quality investment even though many, by questioning its municipal bond portfolio, would say that's only medium quality in terms of its balance sheet. A third recommendation was Enerplus (ERF), that was the Canadian oil and gas company. It was in the mid-20s last fall, has fallen some towards low-20s, although it then had a mid-teens dividend, which partly compensated for the capital loss. The dividend has been cut, so it's now in the high single digits rather than in mid-teens. That I believe to be temporary because of the collapse in natural gas prices, but Enerplus is something I am still holding and waiting for a rebound. There used to be a 10:1 ratio relationship between the price of natural gas and the price of oil. That's to say, if oil was $70 a barrel the price of a natural gas should be $7 per 1000 cubic feet. It's now more like $4 and it was at one point below $3. Both in absolute dollar terms and also relative to the price of oil, natural gas was artificially low, which is to say that Enerplus, which is predominantly a gas play, was also depressed. It's not really a stock, more like our limited partnership units, but the units of Enerplus were depressed, and I am looking for a snapback in both the unit price and also for them to re-raise the dividend. The last stock that I recommended, which was the most successful of the recommendations, was Global Limited Partners (GLP), which has basically doubled in price, give or take, from the 10 to 12 range up to the low-20s. That was in the energy area, but that was a transporter of gasoline, which is to say, it wasn't tied to the prices of products, only to the volumes of products as long as the shipments were there, which they were. The company and the stock did quite well. What I have done more recently, say, the spring, as I said it was the commodity plays that bounced back the most during the course of 2009.

I made some forays into chemicals and two of my better chemical investments were Dow Chemical (DOW) and Ashland (ASH). DuPont (DD) also did very well, although I didn't use DuPont because I felt the other two would give bigger bang for the buck. The second theme that has characterized the 2009 market is what I call the proxy fight and takeover plays. I mean, after Pfizer announced the buyout of Wyeth, I actually bought a Wyeth position that was about twice the size of my Pfizer position. What happens is Pfizer is offering $33 in cash plus 0.985 shares, almost one Pfizer share for every Wyeth share. So actually Wyeth was a quasi cash play, but I mean earlier in the year Wyeth's stock was selling for about $4 a share below the $33 plus the almost one share of Pfizer. So there was an arbitrage play that has been working during the course of the year. There are some other more visible and less friendly proxy fight plays I was involved in. Agilysis is a software parts company; LCA-Vision (LCAV), the optical company; and perhaps the most visible one of all was Target (TGT), the retailer, that Bill Ackman tried and failed to change. But going forward, the market seems tired, except for gold and silver stocks, and those are the ones that I am most interested in right now. But I would advice people to stick with more mainstream companies, Barrick Gold (ABX) and Newmont Mining (NEM) and Hecla Mining (HL).

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 .

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