[April 19, 2009] Manager says it's time to buy at the bottom Tweet Apr 19, 2009 (Milwaukee Journal Sentinel - McClatchy-Tribune Information Services via COMTEX) -- After what seemed like an endless decline, Chris Scheuer says we may be finally seeing a trough in the economy. The combination of a less dour economic outlook and research into company fundamentals has him and his colleagues moving money into new types of stocks, said Scheuer, a senior equity analyst in the Appleton office of Thrivent Asset Management. "It's not like we've thrown the switch and moved from one to another, but we have been moving money into more aggressive names," he said. "We generally have been moving away from defensive names like quick-service restaurants and cable-television providers, and transferring that money into stocks we feel will benefit from an economic recovery over the next few years." Market bottoms can last for a long time. But Scheuer said he believes what may well be a trough in earnings and price-to-earnings ratios make it worth taking a little more risk. That's not to say you shouldn't be selective. Scheuer said he's seeking companies that are leaders in their industries, and he's favoring select areas in media and lodging that have struggled the most in the last six to 12 months. "They were early into the economic downturn, and we think they'll be strong performers coming out of this," he said. McGraw-Hill Cos. Inc. (MHP, $29.47), New York, uses a variety of media including books, magazines, newsletters and television broadcasting to operate in finance, business, education and other markets. Scheuer said he likes McGraw-Hill for its exposure to fixed-income ratings through its Standard & Poor's subsidiary, which contributes about 75% of revenue. "It's a play on the eventual recovery in fixed-income new issuance. We've started to see some encouraging signs of new issuance," he said. In the teeth of the financial crisis last fall, there were no new bond issues coming to market. New bond issuance in March was positive for the first time since September 2007, Scheuer said. That's good news for companies like Standard & Poor's that provide analysis and ratings for those bond issues. The subsidiary also gets royalties based on the amount of assets under management from exchange-traded funds and others who use its S&P indexes. A stock market rise would increase those royalties. Most of the other 25% of McGraw-Hill's revenue comes from its education business. That business stands to benefit from more than $100 billion of the Obama administration's fiscal stimulus program targeted for education. Scheuer said a good chunk of that will be allocated to the kind of products McGraw-Hill sells, such as textbooks and testing materials. The biggest risk Scheuer associates with McGraw-Hill shares is the possibility the government might make moves to increase the number of accredited bond rating agencies or change the agencies' model so bond issuers aren't the ones paying for a rating. "We think the risk of more draconian actions like that is overblown," he said. Bond issuers who want to participate in the Federal Reserve's Term Asset-Backed Securities Loan Facility, which supports securities collateralized by student, auto and credit card loans, must use rating agencies like Standard & Poor's to get the AAA ratings they need to access the program. McGraw-Hill shares have traded as high as $47.13 and as low as $17.15 in the last 52 weeks. Scheuer said he would buy them at current prices and believes they could go as high as $35 over the next 12 months. They could double over the next two to three years, he said. Discovery Communications Inc. (DISCA, $18.25), Englewood, Colo., operates a range of educational cable channels including the Discovery Channel, the Learning Channel and Animal Planet. These shares have traded as high as $24.34 and as low as $10.02 in the last 52 weeks. Cable, satellite and other paid television providers have penetrated as much as 85% to 90% of U.S. households, Scheuer estimates. But television viewership has been migrating to cable, creating an expanding audience, he said. That equates to potential for solid increases in cable advertising. "You're buying a viewer who's somewhat aligned with what you're trying to sell, and you're getting to air that message at what we think is a very attractive value to that end consumer," he said. Discovery Communications offers what Scheuer views as the only pure play for taking advantage of that potential for cable advertising growth. Other companies like Disney, Viacom and Time Warner all offer programming, but they have a lot of other businesses in their mix as well. Discovery Communications has a "nice blend of offensive and defensive characteristics," Scheuer said. About half the company's revenue is from affiliate fees that are paid by TV operators, and the other half is from cable advertising, he said. The company also has some interesting opportunities on the horizon, including a 50-50 joint venture that will rebrand its Discovery Health Channel as the Oprah Channel, Scheuer said. Starwood Hotels & Resorts Worldwide Inc., (HOT, $17.97), White Plains, N.Y., operates high-end hotels around the world with brands that include St. Regis Hotels & Resorts, W, Westin and Sheraton. Starwood's shares have traded as high as $55.34 and as low as $8.99 in the last 52 weeks. Tighter credit conditions have created a pronounced and accelerating decrease in the supply of new hotels coming on line. There's slow demand now, but from 2010 to 2012 that reduced supply may not be able to keep up with rising demand, Scheuer said. "We think we'll have better pricing and profit trends than the market is expecting," he said. Starwood has more than half its pipeline of new hotels in parts of the world like China, Eastern Europe and the Middle East, whose economies are expected to expand faster than the U.S. economy, Scheuer said. To see more of the Milwaukee Journal Sentinel, or to subscribe to the newspaper, go to http://www.jsonline.com. Copyright (c) 2009, Milwaukee Journal Sentinel Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. [ Back To TMCnet.com's Homepage ]