With the severe decline
of the high technology sector in early 2000 investors have
since shifted their purchases toward fundamentally
undervalued, cyclical, commodity-based and dividend-paying
stocks. Moreover, with short-term interest rates having
plummeted to 2-2½%, investors have also transferred their
purchases to high yielding securities such as royalty and
income trusts.
Clearly it appears that
investors have retreated to investment conservatism and
have gone back to the basics. Also interesting is the fact
that investors have rediscovered accounting. Many
investors are now scrutinizing cash flow and earnings per
share multiples, debt/equity ratios, goodwill and the
like. Unfortunately these financial indicators were less
widely followed during the heady high tech mania of
1998-2000. As a result, investors who were mesmerized by
the high technology bubble sadly discovered months later
that many widely-touted equities had little revenue,
sparse cash flow, low shareholders' equity in relation to
market capitalization and substantial cash burn rates.
Needless to say, the resulting experience proved to be
financially painful for numerous investors.
Today this shift back
to "terra firma investing", I believe, signals a
new era for fundamental value investing. Certain common
shares, which were languishing 12 months ago, are suddenly
being rediscovered. Cyclical, basic commodity plays and
everyday suppliers of goods and services such as bread,
wine, groceries, oil and gas, etc. are now in demand.
Since they are basic, everyday staples and have
functional, inelastic demand, companies providing these
products have surged in price. Moreover, because they
supply everyday consumer needs investors feel that they
are less prone to sudden negative shocks. As a result,
investors feel they can sleep comfortably with these
common share holdings.
Due to continued
worldwide economic, financial and political uncertainty we
believe that investors will remain generally risk-averse,
over the next 12-18 months. We believe that terra firma
investing, including the hunt for fundamentally
undervalued equities should continue for the balance of
2002 and probably beyond. If correct, this notion would
provide for a sustained rally in value stocks with a
particular emphasis on share selectivity and hardcore
fundamental research.
In summation, with
historically low interest rates combined with significant
investor cash reserves, we believe, the overall market
outlook remains fairly positive. We expect this optimism
to extend to the next 12-18 months. While share price
volatility will harangue the market place for the
foreseeable future, we believe a well-diversified
portfolio of fundamentally undervalued equities will
provide superior performance compared to treasury bills
and bonds over the next year.
Irwin A. Michael,
CFA
