S2BARRON’S

January18,2016

Ourexp

ertsseefewgains

forthebroad

U.S.m

arket,butlots

ofcheapstocks

tgrowthischalleng

ed,rateswillstay

low,and

Indiacould

prosp

er.Thecase

fo

AWorldofPoss

PhotographybyBradTrent;

followingpagesbyJennaBasco

m

Composite C M Y KP2BW018000-0-S00200-1--------XA CL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WE

BG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,LA,LD,LG,LK,MI,ML,PI,PV,TD,WO

January18,2016

BARRON’S

S3

tobuy.W

hyglobal

rAmerican

Express.

sibilitiesSerious,

substantive,

sobering.Alas,w

e’renotreferring

toanyofthis

year’spresi-

dentialcontenders,buttothethoughtfultalk

ofeconomics,

markets,and

investments

thatdominated

the2016

Barron’s

Roundtable.Turbulenttim

esdemandsuch

anappraisal,and

that’swhatournine

investmentpanelists

deliveredin

spades.•Optimismwasinshort

supplyatourannualgath-

ering,heldlastMonday

attheHarvard

ClubofNewYork,

probablyowing,in

part,tostocks’horrific

swoontheprior

week.O

pinionswereasplentifulas

troubledenergy

bonds,

however.B

roadlyspeaking,these

WallStreetlum

inariessee

morestock

market

turmoil,junk-bond

mayhem

,andglobal

strifeintheyear

ahead.They

alsoseeHillary

Clinton

winning

theWhiteHouse—

exceptforthose

whothink

the

votewillgo

toDonald

Trump.•Some’round

thetable

expect

U.S.stocks

toendtheyear

flatordown,whileothers

see

modestgains

ontheorder

of7%.Nearly

allagreethatjudi-

ciouslybuying

undervaluedequities

willyield

fargreater

returnsthan

stickingwithindex

funds.Ourpanelists

expect

theU.S.econom

ytoexpand

onlymodestly

thisyear,by

abit

morethan

2%,whileChina’s

economywillcontinue

tostrug-

gle,leadingtofurther

devaluationofthe

Chinese

currencyand

continuedpressure

oncommodities

andemerging

markets.

•Thegroup

thinkstheFederalR

eserve,whichfinally

lifted

interestratesinDecem

berforthefirsttim

einseven

years,

won’thike

fourmoretimesduring

2016,notwithstanding

its

statedintentions.T

hat’sbecause

market

conditionssimply

byLauren

R.Rublin

ROUNDTABLE

PART1

2016

CompositeCMYKP2BW018000-0-S00300-1--------XACL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WE

BG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,LA,LD,LG,LK,MI,ML,PI,PV,TD,WO

Composite C M Y K

S4BARRON’S

January18,2016

2016Round

tablePanelists

ScottBlack

Founderand

presidentDelphiM

anagement

Boston

AbbyJosephCohen

Seniorinvestm

entstrategist

andpresident

GlobalM

arketsInstitute

Goldm

anSachs

NewYork

Mario

Gabelli

Chairmanand

CEOGamcoInvestors

Rye,N.Y.

JeffreyGundlach

Co-founderand

CEODoubleLine

CapitalLosAngeles

William

PriestCEO

andco-CIO

EpochInvestm

entPartners

NewYork

Brian

Rogers

Chairman

T.RowePrice

Baltimore

Oscar

Schafer

Chairman

RivuletCapital

NewYork

MerylW

itmer

GeneralpartnerEagle

CapitalPartnersNewYork

FelixZulauf

PresidentZulauf

Asset

Managem

entCo-CIO

andpartner

Vicenda

Asset

Managem

entZug,Sw

itzerland

won’t

allowit.Indeed,

FedChair

JanetYellen

might

evenbeforced

toease

againafter

liftingrates

onemoretime,says

JeffreyGundlach,

oneoftheworld’s

bestbond

investors,co-founderofLosAngeles–based

DoubleL

ineCapital,and

anewcomertothe

Roundtable.

Theother

freshface

inthe

crowdisthatofWilliam

Priest,C

EOandco-

chiefinvestmentofficer

ofNewYork’s

Epoch

InvestmentPartners,w

hoboasts

along

andsuccessfulrecord

ofmining

macroeconom

ictrends

toidentify

smartinvestm

ents.Gundlach

isbracingly

bearish,Priest

onlyslightly

lessso.B

rianRogers,how

ever,chairm

anofT.RowePriceandoneofthis

week’s

twofeatured

stockpickers,isan

optimistbynature.T

hesedays,he

isbuying

sharesofcompanies

thathave

beenexces-

sivelypunished

byinvestors,

andthat

sporthealthy

dividendsandstrong

finan-cials.A

merican

Express

(ticker:AXP)and

Macy’s

(M)arehigh

onhislist.

Oscar

Schafer,chairmanofRivulet

Capi-

talinNewYork,is

alsoastockpicker,w

hobargain-hunts

among

mid-and

small-cap

names.H

enotes

thatthemarket’s

smaller

fryhave

beeninastealth

bearmarket

forthepast

year,even

astheFacebooks

andAmazons

oftheworld

havegone

tothe

moon.

YetOscar

likestheprospects

forthree

smaller

stocks,including

Calpine

(CPN),the

merchant

powerproducer,w

hichhehighlights

inthis

week’s

Roundtable

issue,thefirst

ofthree.

Barron’s:HappyNewYear,everyo

ne.Ithas

been

agreat

yearsofar,if

youignorethe

stockmarket,

theeconomy,theMiddle

East,andanyonerunningforpresid

ent.

Let’sstart

withtheoutlookforthe

economy.Mario,whatliesahead?

Gabelli:T

heconsum

eraccounts

for70%

oftheU.S.econom

y,andisdoing

well.W

agesarerising,

jobsareincreasing,

andcon-

sumerbalance

sheetsareOK,even

afterthedecline

inthestock

market

inthepast

threeweeks.A

utomobile

saleswillflatten

thisyear,

theconsum

erwillspend,

andhousing

isimproving.C

onsumeroutlays

forfood

andfuel

willcontinue

todecline,

atleast

throughthefall.C

ongresshaspassed

aninfrastructure

billandataxbill.W

e’refinally

spendingmoreonthemilitary.W

ewillhave

todeal

withthecost

ofgovern-

mententitlem

entprogram

s,andastrong

dollarishaving

anegative

impact

onexports.

But,overall,

theU.S.econom

ycould

growby2%thisyear.

Howdothingslookinotherparts

ofthe

world?

Gabelli: ln

Europe,M

arioDraghi[president

oftheEuropean

CentralB

ank]hasstimu-

latedtheeconom

y,andthings

willcontinue

toimprove.

InChina,

theconsum

erecon-

omy,which

accountsforabout

40%ofthe

total,couldgrow

by10%

ayear

inthenext

fiveyears.T

hebalance

oftheeconom

ywill

growata3%to4%rate,

andhaschal-

lenges.IlikewhatIndia’s

primeminister,

Narendra

Modi,is

doing.Ilikewhatishap-

peninginJapan.B

utIdon’t

havemuchopti-

mismformostLatinAmerican

economies.

Whatisyourview

,Bill?

Priest: There

areonly

threedrivers

ofstock-

TheRoundtablepanelists

lookforstockstooutperformbondsandtheU.S.to

beatmostothermarkets

in2016.

China’swoescouldkeep

thepressu

reonemergingmarkets.

P2BW018000-0-S00400-1--------XA CL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WEBG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,LA,LD,LG,LK,MI,ML,PI,PV,TD,WO

Composite C M Y K

S6BARRON’S

January18,2016

market

returns:earnings,

price/earningsmultiples,

anddividends.

TheStandard

&Poor’s

500index

wasup72%

from2012

through2014,

and56%

ofthat

gaincame

fromP/Emultiple

expansion.Quantitative

easing[central-bank

asset-buyingprogram

saimedatdriving

downinterest

rates]has

beenthedriver

ofvaluation

metrics,

andthat

isending

intheU.S.and

United

King-

dom,and

isn’tgoing

tohave

muchmoreof

aneffect

inEurope

orJapan.T

hatmeans

P/Eswillbe

flatordownfrom

here.Earn-

ingsareproblem

atic,aswell.M

anycompa-

niesarehaving

difficultygenerating

reve-nuegains,and

profitmargins

willbe

underpressure.D

ividendyields

willrise,but

thegrow

thrate

willbeless

thaninthepast.

Markets

willstruggle

thisyear

toappreci-

ateboth

globallyandintheU.S.

Larry

Summers[aHarvard

economist

andform

ersecretary

oftheTreasury]

hascalled

thecurrent

economicenvironm

entoneofsecular

stagnation,and

thatisan

accuratedescription.It

means

2%grow

this

thenew

4%inthedeveloped

world.M

ostof

the34countries

intheOECD[Organization

forEconom

icCooperation

andDevelop-

ment]

haveaninflation

ratebelow

1%,

which

presentschallenges

forpolicy

mak-

ers.Theissue

withChina

isoneofconta-

gion:AstheChinese

economyslows,mate-

rialsproducers

suchasBraziland

Australia

willsuffer,as

willChina’s

tradingpartners

inthePacific

Rim.InEurope,G

ermanyhas

abadcold,and

everyoneelse

willfeelit.

Brian,whatdoyouexpect?

Rogers:Iagree

withmuchthat

hasbeen

said.Growthischallenged,and

itallgoes

backtotheglobalfinancialcrisis.C

armen

Reinhart

andKenneth

Rogoff

calleditin

theirbook

ThisTimeIsDifferent:

When

youworkyour

wayoutofaglobalfinancial

crisiswithalotofleverage,grow

thisdiffi-

culttoachieve.

Wecould

belooking

atgrow

thof2.25%

inthe

U.S.this

year.Europe

isimproving,and

theonly

thingwe

knowabout

China

isthat

thegovernm

entexaggerates

economicstatistics.If

theysay

Thebullsonourpanelsee

stocksreturningnomorethan7%thisyear.

Thebears

expectthemarket

tobeflatordown,asmaterials

andmanufactu

ringcompaniesstruggle.

JeffreyGundlach,seco

ndfromright:“Ifconditionsweretoorockytoraise

ratesonSept.17,w

hyarewetalkin

gaboutraisin

ginterest

ratesfourtimesthisyear?

Theinvestm

ent

forecast

withthehighestprobability

ofsuccess

isthattheFederalReserve

won’traise

ratesfourtimesthisyear.”

P2BW018000-0-S00600-1--------XA CL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WEBG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,LA,LD,LG,LK,MI,ML,PI,PV,TD,WO

Composite C M Y K

S8BARRON’S

January18,2016

ScottBlack’s

PicksPRICE

TotalCompany/

Ticker1/9/15

12/31/15

Chang

eReturn

Viacom

/VIAB

$71.67

$41.16

-42.6%

-40.9%

Microsem

i/MSCC

28.02

32.59

16.3

16.3

Custom

ersBancorp

/CUBI

18.25

27.22

49.2

49.2

AresCapital/

ARCC

15.84

14.25

-10.0

-0.6

AbbyJosephCohen’sPicks

PRICE

TotalCompany/

Ticker1/9/15

12/31/15

Chang

eReturn

Carter’s

/CRI

$84.81

$89.03

5.0%

6.0%

FedEx/FDX

172.66

148.99

-13.7

-13.2

Quest

Diagnostics

/DGX

68.39

71.14

4.0

5.7

Acuity

Brands

/AYI

151.50

233.80

54.3

54.8

Siemens/SIE.Germany

€92.49

€89.88

-2.8

0.6

PaloAltoNetworks

/PANW

$125.82

$176.14

40.0

40.0

MarcFaber’sPicks

&Pans

PRICE

TotalInvestm

ent/Ticker

1/9/15

12/31/15

Chang

eReturn

BUY

Gold(spot,perounce)

$1,223.25

$1,061.15

-13.3%

Silver

(spot,perounce)16.51

13.84

-16.2

Platinum

(spot,perounce)1,233.31

891.45

-27.7

Market

VectorsJrGoldMiners

ETF/GDXJ

27.48

19.21

-30.1

-29.6%

30-Year

U.S.Treasury

bonds2.53%

3.02%

-6.9

BankofChina

/3988.HongKong

HKD4.44

HKD3.46

-22.1%

-18.5

WynnMacau

/1128.HongKong

20.55

9.06

-55.9

-52.9

SJMHolding

s/880.HongKong

11.62

5.53

-52.4

-48.6

Market

VectorsRussia

ETF/RSX

$15.21

$14.65

-3.7

-0.2

SINGAPOREREITS

CDLHospitality

Trusts/CDREIT.Singapore

S$1.76

S$1.33

-24.5%

-19.6%

FarEast

Hospitality

Trust/FEHT.Singapore

0.83

0.67

-19.9

-14.5

ReligareHealth

Trust/RHT.Singapore

1.00

1.00

0.0

7.7

ParkwayLifeREIT/PREIT.Singapore

2.35

2.33

-0.9

4.6

FirstREIT/FIRT.Singapore

1.28

1.20

-6.3

-0.5

SHORT

iShares

PHLXSemiconductor

ETF/SOXX

$92.63

$89.84

-3.0%

-1.7%

GlobalX

SocialM

ediaETF/SOCL

18.16

19.87

9.4

9.4

iShares

Nasdaq

Biotechnolog

yETF/IBB

313.32

338.33

8.0

8.0

Australian

dollar*1AUD=$0.82

1AUD=$0.73

*Short

afterAustralian

dollarrisesby3%.

Mario

Gabelli’s

PicksPRICE

TotalCompany/

Ticker1/9/15

12/31/15

Chang

eReturn

Graham

Holding

s/GHC*

$870.47

$918.63

5.5%

6.8%

RymanHospitality

Properties

/RHP

54.33

51.64

-5.0

-0.1

Cable

&Wireless

Comm./CWC.UK

49pence

74pence

51.3

55.7

Chemtura

/CHMT

$23.20

$27.27

17.517.5

PostHolding

s/POST

41.33

61.70

49.3

49.3

Kinnevik

/KINVA.Sweden

SEK247.90

SEK263.50

6.3

9.1

PattersonCos./

PDCO

$50.43

45.21

-10.4

-9.1

*Pricesandchange

reflectsspinoffofC

ableONE7/1/15

BillGross’Picks

PRICE

TotalInvestm

ent/Ticker

1/9/15

12/31/15

Chang

eReturn

JanusFlexible

Bond/JFLE

X$10.62/3.0%

$10.29/2.7%

-3.1%

-0.7%

PimcoMunicipalIncom

e/PMF

14.41/6.7

15.45/6.3

7.214.0

BlackR

ockBuildAmerica

/BBN

22.40/7.0

20.98/7.5

-6.3

1.0

SchwabU.S.TIP

S/SCHP

54.68/1.0*

53.13/0.3

-2.8

-2.6

*Estimated

David

Herro’sPicks

PRICE

TotalCompany

/Ticker

1/9/15

12/31/15

Chang

eReturn

Cie.Financiere

Richem

ont/CFR.Switz.

CHF90.05

CHF72.10

-20.0%

-18.2%

Diageo/DEO

$110.89

$109.07

-1.6

1.4

ToyotaMotor/

TM126.08

123.04

-2.4

0.4

BNPParibas

/BNP.France

€44.94

€52.23

16.2

19.3

Brian

Rogers’Picks

PRICE

TotalCompany

/Ticker

1/9/15

12/31/15

Chang

eReturn

Boeing

/BA

$131.54

$144.59

9.9%

12.7%

GeneralElectric

/GE

24.03

31.15

29.6

34.1

Hess/HES

71.12

48.48

-31.8

-30.7

Loews/L

40.05

38.40

-4.1

-3.5

Mattel/

MAT

29.10

27.17

-6.6

-0.6

VulcanMaterials

/VMC

68.29

94.97

39.1

39.7

Oscar

Schafer’s

PicksPRICE

TotalCompany

/Ticker

1/9/15

12/31/15

Chang

eReturn

CogentCommunications

Holding

s/CCOI

$33.99

$34.69

2.1%

6.7%

NICE-System

s/NICE

50.06

57.32

14.5

15.7

Maple

LeafFoods

/MFI.Canada

C$19.40

C$23.76

22.5

24.2

RealD

/RLD

$11.07

$10.55

-4.7

-4.7

MerylW

itmer’sPicks

PRICE

TotalCompany

/Ticker

1/9/15

12/31/15

Chang

eReturn

Gildan

Activew

ear/GIL

$27.76

$28.42

2.4%

3.2%

Graphic

PackagingHolding

/GPK

13.93

12.83

-7.9-6.6

Houghton

Mifflin

Harcourt

/HMHC

18.87

21.78

15.4

15.4

Cengage/CNGO

23.00

23.00

0.0

0.0

FelixZulauf’sPicks

PRICE

TotalInvestm

ent/Ticker

1/9/15

12/31/15

Chang

eReturn

iShares

20+Year

TreasuryBondETF/TLT*

$131.07

$120.58

-8.0%

-5.6%

U.S.Dollar

IndexFuture**

92.15

98.75

7.2

BuyU.S.dollar/

Short

Singapore

dollar**$1=S$1.33

$1=S$1.42

Market

VectorsGoldMiners

ETF/GDX***

$20.71

$13.72

-33.8

-33.2

Gold(spot,perounce)***

1,223.25

$1,061.15

-13.3

Market

VectorsRetailETF

/RTH****

72.05

77.72

7.910.3

*Sellafterstock

market

correction.ZulaufexpectstheU.S.stock

market

tocorrect

byabout

15%inthefirsthalfofthe

year.**Buyin

phasesasthedollarcorrects.Zulaufexpects

thedollarto

correctinthefirstquarterand

thenrally

intolate-2

016.***H

oldonly

untilthemiddle

of2015.****B

uyaftera

U.S.stock

market

correction.

2015Roundtab

leReportC

ardMembersoftheBarron’sRoundtabletradetheirpositio

nsand

changetheirinvestm

entopinionsasmarket

conditionschange.

Forthosekeep

ingscore,h

ere’showtheir2015

picks

performed.

P2BW018000-0-S00800-1--------XA CL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WEBG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,LA,LD,LG,LK,MI,ML,PI,PV,TD,WO

Composite C M Y K

S10BARRON’S

January18,2016

issuesisbeing

discussedoraddressed.

That’s

whysecular

stagnationwilllinger.

Listeningtoallo

fyou,acontrarian

might

wellassu

metheeconomyisontheverg

eofaboom.

Zulauf:Contrarians

aren’talwayswrong,

butthey

aren’talwaysright,either.

TheU.S.has

thebest

demographics

ofallthe

industrializednations.B

utwhatthe

U.S.housing

market

wastotheworldecon-

omyinthelastcycle,C

hinaisinthecurrent

cycle.China

hasamajorbalance-of-paym

entcrisis,w

hichmostexperts

don’tunderstand.

Abalance-of-paym

entcrisis

endswitha

recession.China’s

currencyisheading

south.Theonly

waytoprop

itupisto

restrictcapitalflow

s,butthat

would

createanother

bubbleinside

China,

leadingto

evenbigger

problems.China

eventuallywill

letthecurrency

fallinvalue.

Gabelli:F

elix,whynotletthecurrency

fallnow?

Zulauf:Thatisthebest

solution,but

adecline

of15%

to30%

fromhere

inthe

valueoftheyuan

hasnegative

implications

notjustforChina’s

tradingpartners

butits

competitors

aroundtheworld.C

hinaisthe

world’s

largestexporter,

andone

ofthe

largestimporters.Im

portswillbe

cutifthe

currencyfalls

sharply,and

pricesof

exportedgoods

alsowillgodown.Weare

talkingabout

amajordeflationary

hittothe

world

economy.Thatleads

tolowercorpo-

raterevenue

andprofits

outsideChina,forc-

ingcompanies

tocutcosts.T

henyouhave

aglobalrecession.T

hat’swhatthewhole

situ-ation

isleading

to.Gundlach:People

cometobelieve

thingssimplybecause

ofrepetition.

They

havecometobelieve

thatChina

cangrow

by7.5%

-plusevery

yearbecause

thatiswhat

hashappened

inthepast,at

leastaccording

toChinese

statistics.Theythink

thegov-

ernment,being

autocratic,canpush

abut-

tonorpulla

leverevery

timegrow

thslows,

andgetgrow

thback

upto7%-8%.Whyare

weallextolling

thevirtues

offree-m

arketcapitalism

?Let’sgetanautocrat

inplace

andgettheU.S.grow

ingby8%ayear.

Gabelli:

Justbepatien

t.

Gundlach:People

alsobelieve,

becauseof

repetition,thatinflation

willstay

atthese

lowlevels

forever.Based

ontheprice

ofTreasury

inflation-protectedsecurities

toordinary

bonds,themarket

isforecasting

inflationof1.75%

forevery

yearfrom

yearthree

toyear

30.That’s

justnotlogical.

China

isgrow

ingmuchmoreslowlythan

itadmits.T

hatisthemessage

ofthemarket.

China

representsnearly

50%ofglobal

demand

forcopper,

steel,and

aluminum

,and70%

ofdemandforcoal.

Cohen:Excuse

me,did

represent.

theeconom

yisgrow

ingby10%,itisn’t.

Whenwillth

eeconomyfinallyemerge

fromitspost-fin

ancial-crisis

funk?

Rogers:

We’llgetoutofpostcrisis

mode

probablyin2017

or2018.

People

arestill

working

throughpersonal

financialchal-

lenges.Onesign

ofthis

isthat

investorshaven’t

regainedtheir

animalspirits,even

afteranextraordinarily

longperiod

ofslow

growthand

decentmarket

returns.The

individualinvestordoesn’t

reallyhave

confi-dence

inthemarket

andiswilling

toearn

onebasis

point[one

hundredthofapercent-

agepoint]

inamoney-m

arketfund.

Black:

Torepair

theeconom

y,weneed

structuralchanges

inpublic

policy.From

2009to2014,gross

domestic

productgrew

byanaverage

of1.4%

ayear.T

henorm

al-ized

postwarrate

is3%.Wehave

hadno

bipartisanconsensus

onfiscal

policysince

President

Obamacameintooffice.W

eneed

ahuge

tax-policyoverhaul

tobring

jobsback

toAmerica.

Weneed

investmenttax

creditsformanufacturers,

andamajor

infrastructureprogram

.Mostpoliticians

areappealing

toouranim

alspirits.

Theyare

notdiscussing

publicpolicy.T

hismeans

we

willcontinue

tohave

lownominal

GDP

growthof2%to2.5%

.Gundlach:There

isnoconversation

about

theseissues.D

emocracy

isgovernm

entby

crisis.Things

goalong

untilsuddenlythere

isacallfor

change.Onefundam

entalprob-lemisdemographics.In

theU.S.,the

ratioofpeople

working

tothose

whoareretired

orwanttoretire

isn’tthat

badright

now.

Butthings

aredifferent

aroundtheworld.

Japanwentintoademographic

tailspin20

yearsago.C

hinanow

iswhere

Japanwas

then.Italywilllose

athird

ofitslabor

forceinthenext

generation.Russia

isonthe

vergeofthegreatest

implosion

ofpopula-

tioninthehistory

oftheworld,

absentfamine,w

ar,ordisease.If

youhave

fewer

peopleworking

asapercentage

ofthepopu-

lation,youneed

thatmuchmoreeconom

icgrow

thfrom

thosewhoareproductive.In

theU.S.,

thisissue

manifests

itselfin

government

policythrough

entitlement

programs.We’reinafairly

levelplaceuntil

2019or2020,but

thenthemomentwillcom

ewhenwerealize

wecan’t

keepthese

pro-gram

sinplace.

Onething

youcanrelyonisthatgrow

thestim

atesatthestart

oftheyear

willbe

marked

down.TheWorld

Bankjustdown-

gradedits2016

forecastforglobalgrow

thto

2.9%from

3.3%.I’m

abond

guy,soIlook

atFedpolicy.

Azero

interest-ratepolicy

forseven

oreight

yearsmotivated

alotof

behavioralchangesamonginvestors

andled

tomalinvestm

ent.Thatisonereason

themarket’s

P/Eratio

expanded.In2012,w

henIwaslaunching

afund

andseeking

7%returns,m

anyfinancialplanners

werepro-

moting

master

limited

partnershipsasa

wayofgetting

afatyield

without

takingbond

risk.Whatadisaster:M

LPsaredown

becausethey

wereleveraged

toenergy

prices.Thisisthebackdrop

tomythinking.

Zulauf:Comingback

tothequestion

ofwhensecular

stagnationends,it

couldlast

forthenext

15or20years.

Itrelates

inpart

todemographics.

We’ve

hadthree

demographic

waves

propellingtheworld

economy:Thebaby

boomerswenttowork,

Eastern

Europe

joinedtheworld

economy,

andChina

joinedtheworldeconom

y.That’s

allovernow.

Another

issueisdebt.T

heworld

econ-omyhaslevered

upsince

theearly

1980s,and

economicsubjects

havehittheir

borrowing-capacity

limits.Bydefinition,

thatmeans

lowerdemand.A

lso,regulationhasincreased

dramatically

inthepast

15years,and

thetrend

istowardeven

more

regulation.Thatisarestraining

forceon

growth.F

inally,badeconom

icpolicies

havefocused

fordecades

ondemandstimulation.

Wecan’t

changedemographics.W

eshould

restructuredebt,

reduceregulation,

andpursue

sounderpolicies.B

utnone

ofthese

ScottBlack,left:

“Torepairtheeconomy,weneed

structuralch

angesinpublicpolicy.W

ehavehadnobipartisan

consensus

onfiscalp

olicysincePresid

entObamacameintooffice.W

eneed

ahugetax-p

olicyoverh

aultobringjobsbacktoAmerica.”

P2BW018000-0-S01000-1--------XA CL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WEBG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,LA,LD,LG,LK,MI,ML,PI,PV,TD,WO

CYAN MAGENTA YELLOW BLACK Composite

January18,2016

BARRON’S

S11

Gundlach:E

xactly,becausethey

arebuying

lesstoday.

Commodities

pricesarefalling

everyday.

Thatcanonly

bebecause

Chi-

nesedemandisweak.P

ricesforcopper

andiron

orehave

beencutjustabout

inhalf.

Priest:Oilwasdown35%

lastyear.It

hasto

bedemand-based.

Witmer:T

hedrop

inoilis

supply-based.Cohen:Overcenturies,

thetrend

incom-

modity

priceshasalmostalwaysbeen

down

becauseofcapacity

additionsandtechnolog-

icaladvances.

Inshorter

timefram

es,supply-and-dem

andissues

influenceprices.

ToMeryl’s

pointabout

excessoilsupply,

therewasanexcess

incapitalexpenditures

intheoilindustry,

muchofitintheU.S.,

butelsew

here,too.Iseethisyear

asoneofdivergences.T

heU.S.has

demographic

advantages,andhas

rebuiltitsfinancialsystem

soonerthan

many

otherindustrial

economies.A

lso,U.S.con-

sumersarefeeling

better,andbalance

sheetshave

beenrepaired,except

withregard

tosubprim

eauto

loansandstudent

debt.The

riskstotheglobaleconom

yaren’t

somuch

themathem

aticsofwhatishappening

inChina,but

thepsychologicalim

pactnotjust

onportfolio

managers

butbusiness

manag-

ers.Just

1%ofU.S.sales

areexposed

toChina.A

stheyear

progresses,investorswill

haveabetter

understandingofhow

theU.S.

isperform

ing,relativetoother

economies.

Whatisyourforecast

forGDPgrowth?

Cohen:Something

between

2%and

2.5%sounds

aboutright.M

ycolleagues

atGold-

manSachs

haveaforecast

of2.2%

growth,

alittle

belowtheconsensus.K

eepinmind

theabsence

ofsomenegatives.W

ehadenor-

mousfiscal

dragforthree

orfour

years.Thisyear,

thatwillbeneutral

toslightly

positive.Also,the

sharpdecline

inenergy

capexwasanenorm

ousdrag.

Ifitdoesn’t

getweaker,by

definition,it’sanetpositive.

S&P500earnings

werehitlastyear

bytwofactors:currency-translation

lossesand

thesharp

declineinenergy

prices.The

dollarhasbeen

goingupsince

themiddle

of2014.

Onatrade-w

eightedbasis,

itisup

about30%.Willit

goupanother

30%?Not

likely.Thatmeans

currency-adjustedcor-

porateearnings

won’t

takethesamehit.

Energy-industry

earningsalso

declinedsharply,

andthat

probablywon’t

happenagain

tothesamedegree.

Zulauf:Thisisastrange

thing.People

sayS&Pearnings

arebetter

thanreported

ifyoudon’t

includetheenergy

sector.Butall

othersectors

benefitedfrom

lowerenergy

prices.Gundlach:It’s

likeanunderperform

ingport-

foliomanager

sayingtoareview

committee,

“Ifyoutake

outthestuffthat

wasdown,we

wereup.”

Rogers:O

rlikeacompany

reportingearn-

ingsbefore

expenses.Cohen:Iwanttogoback

toBill’spoint

aboutP/Emultiples.

WiththeS&P500

tradingatroughly

16timesthis

year’sexpected

earnings,itmight

notbesensible

toargue

foradditionalm

ultipleexpansion.

Thus,it

becomescriticalto

lookatearnings,

profitmargins,and

returnonequity.

Priest:Interestingly,from2008

to2014,and

maybe

to2015,the

U.S.w

astheonly

sourceofearnings

gainsinthedeveloped

world.

Industrial-productionmeasures

forthe

developedworld

havebeen

flatsince

2008.Theonly

growthinproduction

wasinthe

U.S.To

Jeff’spoint,C

hinawasthemarginal

buyerofeverything,

andsuddenly

itstopped.T

hecollapse

incommodities

pricesandsales

volumesisstill

feedingthrough

thesystem

.I’mnotsure

whatthebottom

isforsomeofthese

commodities

prices,but

quitepossibly,

wehaven’t

seenanyw

herenear

thebottom

yet.Zulauf:W

elikely

don’tunderstand

fullyhow

bigtheChinese

investmentandcredit

boomwas.D

uringitsthree

bestyears

ofeconomic

growth,C

hinaconsum

edasmuchcementas

theU.S.inthepast

100years.

It’smind-

boggling.Iftheyuan

fallsby20%,itwill

haveatrem

endouslydeflationary

effecton

theworld,

andallthenumbers

youmen-

tionedtoday

willbe

wrong.You

can’tescape

thebust

afterthebiggest

boommankind

hasseen.

Cohen:TheChinese

governmenthaspublicly

recognizedthat

itmustdeal

withissues

ofenvironm

entalqualityandgovernm

enttrans-

parency,whichalsorelate

totheeconom

y.I’llletothers

talkabout

thetransparency

issue,butwhentheChinese

governmentadmitted

attherecent

ParisClimateConference

toan

environmental

problem,that

wasanenor-

mousdirectionalchange.T

heU.S.econom

yisroughly

twiceaslarge

astheChinese

economy,yet

China

emits60%

morecarbon

dioxide.China

hassomeofthe

dirtiestairin

theworld,

andhalf

itswater

supplyin

severalprovincesistoodirty

forindustrial

use.Eighty

percentisunusable

fordrinking,

washing,and

agriculturalpurposes.Zulauf:Thepeople

arerebelling.

China

didn’tagree

totheclimate-change

dealin

Parisbecause

othernations

askeditto,but

becausetheChinese

peoplearedissatisfied

withthequality

oftheairandwater.T

hegovernm

enthastodosomething

aboutit.

Oscar,

wheredoyouseetheeconomy

headed?

Schafer:

Theconsum

erisingood

shape.Companies

outsidetheenergy

sectorare

doingwell.Whatworries

meabout

theeconom

yisthepossibility

ofawild-card

event,such

asachem

ical-weapons

attackagainst

acivilian

targetinEurope.

The

economywillgrow

alittle

bitthisyear.

Meryl,w

ehaven

’tgotten

yourview

.

Witmer: A

syouknow,I

trytostick

tostock-

picking.Companies

tellusthere

isn’talotof

growthoutthere.T

hereisnodriving

forcetomovethings

forward.T

hefracking

boomwasgreat

fortheeconom

yuntilit

ended.Ithelped

movethings

forward.H

ousingisOK.

Autosales

areprobably

atapeak.W

iththe

dollarsohigh,m

anycompanies

arehaving

troubleexporting

theirgoods.T

heoutlook

isn’trosy.It’s

justOK.

Gundlach:WhatIfind

remarkable

isthe

contrastincentral-bank

policiesbetw

eentheU.S.and

Europe

whenthere

isonly

a60-basis-point

differenceinGDPgrow

thrates.

It’slike

aparallel

universe.Eco-

nomicgrow

thhere

istrending

sidewaysto

down.European

GDPistrending

higher.TheU.S.grow

thrate

is60basis

pointshigher

now,butmaybe

intwoquarters

we’llbe

growingatthesamerate.E

urope

Mario

Gabelli,rig

ht:”Fro

mthedayofthispanel,sto

ckswillrise

andbeflatfortheyear.W

hetherChinamovesquickly

orslowlyto

devalu

etheyuan,currencytranslatio

nwillhelpmycompaniesincrem

entally

thisyear.”

P2BW018000-0-S01000-1--------XA

CYANMAGENTAYELLOWBLACKComposite

S12BARRON’S

January18,2016

hasnegative

interestrates

andistalking

aboutexpanding

QE.Weareraising

ratesand

tighteningcredit

conditions,first

byeliminating

quantitativeeasing.A

sofJune

2014,everything

changed.That’s

when

emerging

markets

andcommodities

startedtocrash.NominalG

DPisafantastic

indicatorof

bondyields,

onasecular

andshort-term

basis.NominalG

DPisvery

low,and

might

beheaded

toward2%.TheFedhasraised

interestrates

118timessince

1945orso.O

n112occasions,nom

inalGDPwashigher

than5.5%

;itaveraged

8.6%.Twicesince

the1940s,the

Fedhasraised

rateswithnominal

GDPbelow

4.5%.Thelasttimethey

didso

wasin1982.

They

hadtoreverse

coursealmostimmediately.

Schafer:T

heynever

raisedrates

whenthe

ISM[Institute

forSupply

Managem

entindex

ofbusiness

conditions]wasbelow

50,asitisnow.

Gundlach:That’s

true.Itisunprecedented

fortheFedtoberaising

interestrates

with

nominalGDPatornear

2%.TheFederal

Reserve

BankofAtlanta

publishessome-

thingcalled

GDPNow,which

forecastsreal

GDP[adjusted

forinflation]

everyday.It

isat1%now.

Cohen:Iseeoneenorm

ousdifference

be-tweentheU.S.and

Europe:

U.S.financial

institutionsareinamuchstronger

positionrelative

totheir

European

counterparts.There

hasn’tbeen

thesamesortofbalance-

sheetadjustm

entinEurope,and

thatcould

make

European

institutionsmuch

more

vulnerabletoeconom

icshock,m

anagement

error,and

soon.Also,while

theFederal

Reserve

hastightened,

conditionsaren’t

reallytight.Interest

ratesremainextrem

elylow.W

ecanargue

aboutnominalversus

realgrow

th,buttheboost

inrates

hasn’thada

negativeimpact

oncredit-sensitive

sectors,such

ashousing

andautos.

Rogers:

Wehave

togetawayfrom

thenotion

thatweareinamassive

tighteningcycle.W

ehadseven

yearsofbasically

zerorates.T

heFedhasmoved

once.Nocapital-

spendingdecisions

arebeing

influencedby

a25-basis-point

riseinthecostofcapital.If

anything,theFedwaslate.

Itprobably

shouldhave

liftedrates

forthefirst

time

when

GDPgrow

thwasat3%,12to18

months

ago.Gundlach:Things

would

beworse

now.

Raising

interestrates

can’tmake

thingsbetter.

OnSept.

17,theFeddidn’t

raiserates,

despitewidespread

expectations.A

keyreason

itdemurred

wasbecause

theFedgovernors

thoughtglobalfinancialcon-

ditionslooked

toorocky.T

heEEM[iShares

MSCIEmerging

Markets

exchange-tradedfund]

closedonSept.16

at$34.55.Yet,on

Friday

[Jan.8],the

pricewas$29.51.

Emerging

market

debtis3%lowersince

CMEGroup

isatrad

emark

ofCMEGroup

Inc.The

Glob

elogo

isatrad

emark

ofChicago

Mercantile

Exchange

Inc.Allother

tradem

arksare

theprop

ertyoftheir

respective

owners.

Cop

yright©20

16CMEGroup

.Allrights

reserved.

Inthe

U.S.alone,equity

markets

havegrow

nmore

than180%

since20

09.W

iththat

much

atstake

–for

individ

ualsas

wellas

institutions–mutualfu

nds,

retiremen

tfundsan

den

dowmen

tfundsneed

away

toman

agetherisks

ofsto

ckmarket

fluctu

ations.C

MEGro

upgives

investm

entp

rofessionalsthe

toolsthey

needto

address

market

exposure.T

hisis

howthe

financialind

ustrycan

offerinvestorsthe

rightbalance

betw

eenrisk

andrew

ard.T

hisis

howthe

world

advances.Learn

more

atcm

egroup.co

m/fin

ance.

Equity

investm

entto

talshave

reached

$66trillio

nworld

wide.

P2BW018000-0-S00900-1--------XA

CYAN MAGENTA YELLOW BLACK Composite

January18,2016

BARRON’S

S13

Sept.16.Bank

loanshave

fallen4%.The

S&P500isdown.Thedollar

isup3%.Ten-

yearTreasury

yieldshave

fallenby17basis

points.TheCRBcommodities

indexisdown

15%,and

oilisdown35%.

Yourpoint?

Gundlach:Ifconditions

weretoorocky

toraise

ratesonSept.17,w

hyarewetalking

aboutraising

interestrates

fourtimesthis

year?Theinvestm

entforecast

withthe

highestprobability

ofsuccess

isthat

theFedwon’traise

ratesfour

timesthisyear.

Zulauf:C

entralbankershave

noclue

aboutwhat’s

goingonintheworld.T

heyhadno

cluethat

markets

would

besougly

inJanu-

ary,and

theydon’t

understandwhatthe

situationinChina

means

fortherestofthe

world.

Iamnotanadmirer

ofzero-based

interestrates,but

thetimingoftheFed’s

ratehike

wascompletely

wrong.T

heydidn’t

raiserates

basedonthefacts,but

becausethey

feltthey

neededtodoso.

Black:

Ifyoulook

atcompanies

onacase-

by-casebasis,the

industrialeconomyisroll-

ingover.W

ehave

abifurcated

economy.On

theconsum

erside,personal

income,retail

sales,and

thesavings

rateareallinthe

pluscolum

n.Gundlach:Retail

salesare

upsimply

becauseofauto

sales.Ex-autos,the

number

isnegative.

Black:

Butweadded

2.5million

jobslast

year.Across

theboard,

thingslook

good.Ontheindustrialside,how

ever,newfactory

ordersandrigcapacity

utilizationareroll-

ingover.T

hereisnoearnings

momentum

.Asaninvestor,you

wanttobuycompanies

withsustainable

earningspower.B

utthatis

difficultbecause

theindustrialsector

isin

badshape.F

edChair

JanetYellen

hadto

putapositive

spinonherspeech

aboutthe

U.S.econom

yafter

sheraised

ratesin

Decem

ber,buthadshelooked

atindustrial

companies,she

would

haveseen

thatthey

aren’tdoing

well.

Priest:Whenyouwalkintoanauto

dealer’sloan

office,youtake

outa78-m

onthor84-

month

loanandthey

giveyouacar.In

many

ways,there

ismoredebt

outstandingtoday

onaglobalbasis

thaninthepast.T

hegross

amount

ofdebtperdollar

ofGDPiswayup.

Rates

arelow,soitiseasy

toservice

thatdebt,but

itwastheextension

ofcredit

thatallow

edforreal

GDPgrow

th.Onereason

retailspendingisn’t

ashigh

asexpected

isbecause

peoplehave

topaydownthisdebt.

Gabelli:Inthesharing

economy,you

don’tneed

toownacar,thanks

totheUbers

oftheworld.

Across

industries,allsorts

ofstructuralchanges

aregoing

on.Cohen:W

hatistheimpact

ofthese

changesontheeconom

y?Itisentirely

possiblethat

governmentdata

onretail

spendingare

incorrect,inpart

becausesomuchishap-

peningonline.W

emight

bemis-measuring

productivityand

capexand

GDP,aswell.

Oureconom

yisundergoing

amajorshift,as

industriesincorporate

digitaltechnologies,whether

inhealth

care,autoproduction,or

manyother

industries.Sometimes,invest-

ments

thatwemight

thinkofascapital

spendinggetcounted

asoperating

expendi-tures.T

oborrow

anexam

plefrom

Michael

Porter

atHarvard

Business

School,when

Amazon.com

[AMZN]decides

tobuild

itsAmazon

Primebusiness

atalossbecause

itwants

toattract

newAmazon

shoppers,isit

reallyaloss,

oraform

of21st

centurycapitalspending?Withregard

toChina,the

gapbetw

eenthepublished

dataandreality

couldbeas

muchastwopercentage

points.Butthere

arealso

gapsinourdata

systemsbecause

ourdata

systemshaven’t

keptpace

withthe

structuralchangesinoureconom

y.

So,ifwewerecountingthingscorrectly,

howfast

wouldtheeconomybegrowing?

Cohen:Idon’t

knowforsure,

butsome

studiessuggest

anadditionalone-quarter

toone-half

percentagepoint

ofgrow

th.

Let’sgobacktointerest

rates.Whatis

youryear-en

dforecast

forthe10-year

bond,Jeffrey?

Gundlach: I

hadstrong

viewsonthe10-year

for’14and

’15.In2014,

Iwassure

rateswould

fall.In2015,

Ithought

they’dgo

nowhere.

Thisyear,

therecould

beabig

moveininterest

rates,basedsimplyonthe

coilingaction

ofthemarket.

The10-year

hasbeen

tradinginanarrow

errange.

Ityields

2.17%now,exactly

whatityielded

attheendof2014.F

romachart

perspective,there

couldbeasignificant

move.W

hileI

don’thave

nearlytheconviction

thatIhad

in2014,I’d

saytheyield

onthe10-year

isgoing

up.HowcanIpredict

thatwhen

Idon’t

expecttheFedtoraise

rates,commodity

pricesarelow,and

thejunk-bond

market

isinturm

oil?U.S.interest

rateshave

beenrising

forseveral

years.Treasury

yieldsbottom

gradually,thensuddenly.W

earein

thegradualphase

now.Thetwo-year

Trea-

surybottom

edalmostfiveyears

agoat15

basispoints.F

ive-and10-year

Treasuries

bottomedinJuly

2012.The30-year

Trea-

surybottom

edayear

ago.Onereason

ratescould

riseinthisenvironm

entisbecause

ofliquidation

[ofTreasury

bonds]byforeign

holders.People

havebeen

worrying

aboutthis

forthepast

15years.

Liquidation

bycentral

banksandsovereign

wealth

fundsseem

stobeoverw

helmingtheflight-to-

qualitydemandforTreasuries.

WhenIcalled

forlowerinterest

ratesin

2014,Igained

somenew

friendsamongthe

doom-and-gloom

crowd.W

henIsaid

inter-

estrates

would

riselastJanuary,they

feltbetrayed.B

utmybase

caseisn’tadeflation-

arybust.

Myguess

isinterest

rateswill

movehigher

in2016

without

alotofconvic-

tion.TheFedwillbeless

likelytoraise

interestrates

inasequential

fashionbecause

themarkets,particularly

thejunk-

bondmarket,are

throwingafit.

Ifyouownabroadbond-market

index

fund,willth

erise

inyield

sbeenough

tooffset

thelossinbondprices?

Gundlach: L

astyear,rates

rosealittle,and

investorsearned

around50basis

pointsin

abroad

bondindex.T

heriseinyields

was

solittle

atthelowend[amongshort-term

bonds]thatitsaved

themarket

fromaneg-

ativereturn.

Buttheduration

ofatotal

bond-market

indexis5½years.Ifrates

riseby40basis

points,which

ispossible,

itwould

takeawayallthe

gain.Priest:

Whatdoyouthink

theyield

curvewilllook

likethisyear?

Gundlach:If

theFeddoes

whatIthink,the

curvewillsteepen.W

hentheFedtightens,

thecurve

reliablyflattens.F

inancialcondi-tions

startedtightening

inJune

2014,andtheyield

curvehasbeen

flatteningever

since.Priest:A

flatteningyield

curveisdeath

forcertain

typesoffinancials.You

areseeing

thatinthestock

market

today,withfinan-

cialsselling

off.Gundlach:That’s

becausetheFedhasn’t

dialedback

itsrhetoric

aboutfour

ratehikes

thisyear.

Herewehave

theworst

firstweekoftheyear

inhistory

forstocks,

andtwoFedgovernors

havecomeoutand

said,“We’reontrack

forfour

ratehikes.”

Thisiswhythemarkets

areintrouble.

Underlying

positivefundam

entalsaren’t

there.Junkbonds

arereally

introuble.T

hejunk-bond

ETF[SPDRBarclays

High

Yield

Bond

ETF/JNK]istrading

ata

lowerprice

nowthan

threeweeks

afterLehmanBrothers

filedforbankruptcy

in2008.T

hinkabout

howtheworld

wasfeel-

ingthen.Iexpect

theFedtohike

earlyintheyear

andthen

ease.Itwillgo

up,thendown.But

theFedneeds

todialback

itsrate-hike

rhet-oricbecause

themarkets

arethrow

ingafit.

Thequestion

is,howlong

willthis

take,andhowmuchmorewilljunk

bondshave

tosuf-

fer?Thejunk-bond

market

willbe

populatedincreasingly

byEMM—energy,

materials,

andmining

issues.Evenifoilprices

stagea

majorrally

to$40abarrel,the

clockwillrun

outonalotofenergy

companies.

Ahuge

percentageofNorth

American

energycompanies

arelosing

money.

We

aregoing

toseeanincrem

entalrise

indefaults,

andtriple-B

,and

evenA-rated

companies

willbedowngraded

bycredit-

ratingagencies.

Wehave

alreadyseen

asignificant

turnintheupgrade/dow

ngraderatio

asmorecorporate

bondsgetdown-

graded.Troubled

sectorscould

gofrom

20%ofthejunk-bond

market

toperhaps

35%.Probably

theworst

investmentisa

junk-bondindex

fund,because

itwillget

overexposedtodefaults.Sim

plistically,thejunk-bond

market

isabetonoil.If

youare

bettingonoil,then

betonoil.Ifyour

thesisforowning

junkbonds

isthat

oilisgoing

backto$70,buy

oil!Rogers:

Junkbonds

canbegreat

invest-ments.

Butjunk

bondsand

ETFsaren’t

madeforeach

other.Cohen:B

rian,wouldn’t

youagree

thatmost

Oscar

Schafer,rig

ht:“Itreally

willbeastockpicker’s

market,

becau

sealotofstocks

thataredown30%

or40%

arebuysnow.”

P2BW018000-0-S00800-1--------XA

CYANMAGENTAYELLOWBLACKComposite

S14BARRON’S

January18,2016

bondsandETFsaren’t

agood

blend?Rogers:M

anythings

andETFsdon’t

match,

butIdigress.

Going

backtointerest-rate

guesstimates,w

ewon’tseefour

ratehikes

thisyear.T

heFedwillact

twice,because

itisn’t

goingtoactonly

once.Itwasn’t

“Decem

berand

done,”unless

thereisa

materialdow

nturnintheworld

economyin

comingmonths.

Theyield

onthe10-year

Treasury

willapproach

3%,which

means

you’llprobablylose3%or4%onthebond.

Iseeagentle

upwardmoveinrates,w

iththefederal-funds

target[the

ratebanks

chargeoneanother

onovernight

loansof

fundsmaintained

attheFed]moving

upto

0.75%-1%.That’s

twohikes

fromhere.T

heFedhasnever

hikedonce

andthen

stopped.Zulauf:There

aremanythings

thatnever

happenedthat

arehappening

inthiscycle.

Cohen:TheFed’s

rhetorichas

beenfar

morenuanced

thanpeople

seemtothink,

evenifyou

examineJanet

Yellen’sstatem

entinDecem

berwhen

theFedfirst

raisedrates.T

heFedmadeitclear

thatanything

itdoes

inthefuture

willbe

data-dependent.Itsactions

willdepend

inlarge

partonhow

thelabor

markets

areperform

ing.As

Decem

ber’sterrific

jobsreport

shows,the

labormarket

isgetting

better.Household

incomesarerising,and

thesavings

ratewas

upto5.2%

inthelatest

reportedquarter.

Wedon’t

fullyunderstand

theconse-

quencesofthenegative

interestrates

we’re

seeinginmanycountries.It

isonething

forthistolastashort

periodoftime,but

nega-tiverates

inmuchofEurope

andelsew

herehave

peculiareffects

onindividuals

andcor-

poratedecision-m

aking.TheFedistrying

tomovetoamorenorm

allevelofbetw

een0.5%

and1%onthefed-funds

rate,basedon

theeconom

icdata.T

hatmight

notbesuch

abadidea,given

thatthezero-lim

itbound

issomething

wedon’t

havemuchexperience

with,especially

onanextended

basis.Schafer:

Ihave

nogreat

viewoninterest

rates.Butlowinterest

ratesarelike

theshot

clockinbasketball.

Before

theshot

clock,youcould

delayand

delayagame.

Onceitcameinto

use,you

hadtomake

decisions.Withlowinterest

rates,thereis

noopportunity

costforcompanies

indoing

nothing.Thus,

risinginterest

rateswould

helptheeconom

yinaway.

Priest:Iseeonly

onemoreratehike

coming,

becausetheworld

isn’tingreat

shape.If

youconsider

whatHoneyw

ell[HON],3M

[MMM],and

Staples[SPLS]said

when

theyreported

earningsforthelatest

quar-ter,all

werepretty

darnednegative.T

heyalllow

eredexpectations.T

hefirst

twoare

globalcompanies,and

Staplesisthelargest

office-supplyretailer

intheU.S.Noneof

themsaid

lifeisgetting

better.Iheard

agreat

definition:Theplural

ofanecdote

isdata.N

owyouhave

dataabout

theglobal

economy.Thisyear

isgoing

toberemark-

ablydisappointing

forrealgrow

th.Zulauf:I’m

theoddguyouthere.I

saythe

Fedwon’thike

ratesthisyear

becausethe

economywillsurprise

onthe

softside.

Therefore,

itdoesn’t

make

sensetolift

interestrates.It

isclear

thattheFederal

OpenMarket

Committee

[theFed’spolicy-

making

committee]

wants

toreturn

tonor-

malcy

ontherate

front,butcircum

stancespose

aproblem

.Iagree

withJeffrey

thatsomeforeign

centralbanksareselling

largequantities

ofTreasuries

tosupport

theircurrencies.It

isn’tjustChina,but

theSau-

disandOmanisandsomeothers,too.T

hesesales

arebeing

feltintheTreasury

market;

that’swhybond

yieldsdidn’t

fallasmuchas

youmightexpect,given

whathashappened

tocommodities

prices.Ittells

youthedown-

sidepotentialin

yieldsisprobably

limited.

However,

thereisatrade

here.Yields

couldfirst

fallon10-year

andlonger-dated

Treasuries,

butthen

riseagain,

becauselater

intheyear

theU.S.dollar

couldhave

abig

correctionagainst

theeuro,

andmaybe

eventheyen.

Itisgoing

tobea

trickyyear.T

hebottom

ingprocess

inyields

andinterest

ratescould

stretchoutfor

anotherfewyears.

Cohen:T

hedecline

inenergy

priceshasput

pressureonthecurrent

accountsofenergy

exporters.Butsomecountries

mightbenefit

fromit.Doing

aback-of-the-envelope

calcu-lation,today’s

energyprices

couldproduce

anetbenefit

ofabout$100

billionforChina.

That’s

notchicken

feed.Zulauf:C

hina’scurrent

accountisprobably

runningasurplus

of$300

billionorso.B

utwhatcounts

inthecurrent

situationisthe

capitalaccount,which

isrunning

adeficit

ofroughly

$1trillion.

Whatdoesallo

fthismean

fortheperfor-

manceofstocksin2016?

Black:

Themarket

isgoing

nowhere

thisyear.Gabelli:F

romFriday’s

close,orfrom

Jan.1?Black:

From

Jan.1.TheS&P500finished

lastyear

at2043.94.A

nalystsexpect

S&P500

companies

topost

earningsfrom

operationsof$125.56

in2016,

upfrom

anestim

ated$106.39

lastyear.T

hatimplies

18%grow

th,which

isn’tinthebag.

Isee4%grow

thin

earningspershare

fromnetincom

eand3%

fromstock

buybacks,which

takesyou

toabout

$114.Based

onFriday’s

S&Pclose

of1922.03,the

market

istrading

for16.9times

estimated

earnings.Byhistoricalstandards,

themarket

isslightly

overvalued.Manyofusspecialize

insmall-andmid-

capstocks,w

hichdidvery

poorlylastyear.

Ashomogeneous

riskclasses,both

arestill

expensive.Themid-cap

Russell2500

indexis

tradingatabout

21timesexpected

earnings,andthesmall-cap

Russell2000

isatroughly

22times.It

ishard

tofind

greatvalues

inindividualstocks,and

hardtobebullish

ontheU.S.stock

market

asawhole.

Itisa

market

thatfavors

individualstockselection.

Meryl,d

oyouagreewiththat?

Witmer:Scott

isstarting

fromthebeginning

oftheyear.

Iwould

startfrom

Friday’s

close.Based

onthat,I

couldseethemarket

easilygoing

up5%,6%,7%fortheyear.

Companies

willhave

somecash

accretionandpaydowndebt.A

sI’vesaid,there

isno

greatdriving

forceintheeconom

y.But

valuationsatthebeginning

oftheyear

were

broughtdownbyabad

selloffinstocks.

There

areopportunities

outthere.

Schafer:W

ehadastealth

bearmarket

lastyear.

Despite

thefact

thattheaverages

didn’tdomuch,70%

ofstocksintheRussell

2000aredownmorethan

20%from

their52-w

eekhighs.T

hatisalso

trueof49%

oftheS&P500,and

68%oftheNasdaq

Com-

Brian

Rogers:

“Asanasset

allocato

r,Iaskmyself,C

anyouinvest

inaportfolioofbusinesses

whosevaluewillaccrete

bymorethan

3%ayear?

Thatismyexpected

bondyield

,andthethresh

oldforanequityinvesto

r.”

P2BW018000-0-S00700-1--------XA

CYAN MAGENTA YELLOW BLACK Composite

January18,2016

BARRON’S

S15

posite.Itreally

willbe

astockpicker’s

mar-

ket,becausealotofstocks

thataredown

30%or40%

arebuys

now.

Zulauf:Themedian

stockintheS&P500

wasdown22%.Butstealth

bearmarkets

alwaysturn

intorealbear

markets.T

hat’show

bearmarkets

start.Schafer:W

eareinabear

market

now.But

within

thatbear

market,you

canstillbuy

goodstocks.D

avidTepper

[founderofAp-

paloosaManagem

ent]hasasaying:T

herearetimestomakemoney,and

timesnotto

losemoney.T

hisisatimenottolosemoney.

Gundlach:Iagree,

andthat’s

noteven

aprediction.

It’sanobservation.

Themar-

ket’sbreadth

isterrible.B

eyondthat,the

divergenceinthe

performance

ofjunk

bondsandtheS&P500wasgiving

amon-

stroussell

signalwhen

theFedraised

ratesinDecem

ber.Youmustpayattention

tothat

sortofdivergence.

Ithappens

maybe

10%ofthetime,and

sendsasignal

thatisnever

wrong.

Schafer:There

haverarely

beentimesinmy

careerwhen

therehave

beensomany

uncertainties,whether

it’sinterest

ratesor

terrorismorChina

ortheeconom

y,orall

theother

thingswehave

beendiscussing.

Gundlach:W

estarted

gettingworried

aboutgeopoliticalissues

threeorfour

months

agobecause

ofthelame-duck

presidencyand

thetimewindow

leadingtothenext

presi-dential

election.Itistheperfect

timefor

badactors,

and,unfortunately,

thingsare

playingoutaswefeared.

Zulauf:InEurope,

therifts

betweenthe

euro-philesandtheanti-euro

members

aregrow

ing,asaretherifts

betweenthose

who

areforandagainst

multiculturalsocieties.

Gundlach:Felix,

itseem

stome[German

Chancellor]

Angela

Merkelhas

beenkeep-

ingthewhole

thingtogether.W

hathappens

ifsheloses

hergrip

onpower?

Zulauf:Shehasbeen

agreat

moderator,but

shehasnever

takenabigstance

onpolitical

issues.Thatishow

shehasremained

inpowerforsolong,

ridingamiddle-of-the-

roadpopulist

policy.NowtheGermanpeo-

plearebecom

inguneasy

abouttheinflux

ofrefugees

fromtheMiddle

East.

Merkel

couldbeintrouble.She

haslostinfluence

notjust

inGermany,

butthroughout

Europe.She

can’tfulfillthe

roleofthe

mod-

eratorwithin

Europe

asshedidinthepast.

Priest:Welook

atthree

kindsofcontagion:

financial,economic,and

political.Europe

isthelocus

ofpoliticalcontagion.Iagree

with

Felix:

Merkel’s

politicalpopularity

hasslipped,but

isstillaround

57%-58%

.Shehas

kindoflosttouch

withthepeople

onthe

street,andtheCologne

attacks[sexual

as-saults

blamedonmigrant

gangs]aggravatedthat.F

elix,whatwillhappen

totheSchengen

agreement,w

hichallow

sforfreemovem

entoflabor

acrosstheEuropean

Union?

Ifthatends,the

wholeeuro

structurewillfallapart.

Zulauf:Schengen

isdead.O

nthepositive

side,theEUcould

adjustitsgoals

andbecom

eless

centralist.Thatwould

keepthings

together.Alternately,if

thebureau-

cratsinBrussels

stiffeninitsresolve

tobring

othernations

intoline,there

isarisk

theeuro

zonewillbreak

apart.TheEuro-

peaneconom

ysurprised

ontheupside

lastyear.A

tleast

itsurprised

me.Som

emajor

factorsdriving

thatgrow

tharegoing

todisappear.T

heeuro

won’tdecline

furtheragainst

thedollar;the

rateofchange

inoil

priceswillslow,and

countrieshave

loos-ened

uponausterity.T

heEuropean

econ-omycould

softenthisyear.

Rogers:Every

day,for40years,

Thomas

RowePrice,

thefounder

ofmyfirm,said,

Today

isthemostdifficult

daytoinvest.

Gabelli:H

ewasright.

Rogers:T

roublingstuff

isalwaysoutthere.

Asanasset

allocator,Iaskmyself,C

anyou

investinaportfolio

ofbusinesses

whose

valuewillaccrete

bymorethan

3%ayear?

Thatismyexpected

bondyield,

andthe

thresholdforanequity

investor.Gabelli:It

dependsonyour

startingprice.

Rogers:C

orrect.Ifearnings

areup4%this

yearandyouaddtheS&P’s2.2%

dividendyield,

yougetabout

a7%total

return.I

assumeP/Emultiples

willbe

flatbecause

Idon’t

reallyknow

.Thissuggests

investorswillhave

atough

year,butadecent

one.Lastyear

wasn’t

allthatbad.T

heS&Pwas

up1%,and

theNasdaq

Composite,6%

.Zulauf:T

heS&Prose

becauseofahandfulof

companies

withvery

richvaluations.I

expectthebear

market

tocontinue,

leadingto

opportunitiestobuylater

intheyear.W

e’llprobably

haveabetter

market

in2017.L

et’stalkabout

itwhentheS&Preaches

1600.Gabelli:I’m

gladyousaidthatbefore

weate

lunch.Priest:To

me,stocks

stillaremuchmoreat-

tractivethan

bonds,butyour

holdingperiod

hastobemeasured

inyears,not

12months.

Nonetheless,w

herewillth

emarket

end

theyear?

Priest: Itwillbe

flattodownslightly.

Cohen:Mycolleagues

thinkS&Pearnings

couldbepretty

goodthisyear,albeit

notas

highastheconsensus

estimate.

We’re

at

$117,again

of$10-$11

from2015.Som

eof

thatgrow

threflects

apickup

inenergy-

company

earnings,andsome,the

absenceof

currencytranslation.

Assum

ingtheprice/

earningsmultiple

staysthesame,mycol-

leagueDavid

Kostin

[Goldm

anSachs’U

.S.equity

strategist]has

ayear-end

pricetarget

of2100.

Buttosummarize

today’sdiscussion,you

don’tbuytheS&P.You

are

buyingspecific

securities.Rogers:Lastyear,

interm

soffund

flows,

theS&Pisallthat

anyonebought.

Cohen:I’m

talkingabout

thepeople

atthis

table.Gabelli:I’m

inMeryl’s

camp.From

theday

ofthispanel,stocks

willrise

andbeflatfor

theyear.W

hetherChina

moves

quicklyor

slowlytodevalue

theyuan,currency

trans-

lationwillhelp

mycompanies

incrementally

thisyear.Second,there

willbe

somesortof

surprisethat

liftsoilprices.In

anelection

year,wewilladdress

issuesliketaxreform

andcorporate

regulation.We’llalso

haveto

addresstheissue

oftaxinversions.H

eadinginto2017,things

willlook

OK.

Witmer:H

owshould

weaddress

thatissue?

Bylowering

corporatetaxes?

Gabelli:

We’llhave

tomovefrom

taxingcompany

earningsglobally

totaxing

themterritorially

[applyinga35%

corporatetax

rateonly

toincom

eearned

intheU.S.].If

thathappens,the

effectivetaxrate

willbe

materially

lower.N

ooneisbaking

thatinto

2017forecasts.

Gundlach:Inequities,

therehas

beena

tremendous

movetowardpassive

investing.

FelixZulauf,right:“ThemedianstockintheS&P500

wasdown22%

.Butstealth

bear

markets

alwaysturnintorealb

earmarkets.Th

at’showbearmarkets

start.”

“Whenjunk

bondsfall20%

andthestock

market

sitsatahigh,som

ethingiswrong

withthepicture.

Thesemarkets

aremoving

likealligator

jaws.Ultimately,they

willmovetogether.”

—Jeffrey

Gundlach

P2BW018000-0-S00600-1--------XA

CYANMAGENTAYELLOWBLACKComposite

S16BARRON’S

January18,2016

Itistheopposite

infixed

income.Index

investinginfixed

incomewaspopular

20years

ago.When

theFedraised

ratessharply

in1994,there

wasgreat

turmoilin

thebond

market,and

peopledoing

wacky

orcreative

thingshadhorrible

returns.Now

wehave

moved

intotheworldofuber-active

managem

entinfixed

income,represented

byunconstrained

bondfunds.Yet

theyhave

beenadebacle.T

heyaregenerating

nega-tivereturns.It

isinteresting

howthepen-

dulumswings

inthisbusiness.D

owhatyou

want,

butjust

don’ttellme.Essentially,

that’swhatanunconstrained

bondfund

is.Theproblem

is,theyendupturning

intocredit

fundswithrelatively

lowinterest-rate

risk,which

isexactly

thewrong

thingto

ownright

now.Credit

isdoing

poorly,andeven

withrates

uplastyear,

bondsdeliv-

eredapositive

return.Iamworried

aboutwhatmight

happenintheafterm

athofthe

ThirdAvenue

gating[ThirdAvenue

Focused

Credit

fundbarred

shareholderredem

p-tions

lastmonth

asitmoved

toliquidate].

Herewasanopen-end

40-Actmutualfund

thatwassupposed

toallow

redemptions

daily.Then,w

ithouteven

tellingtheSecuri-

tiesand

Exchange

Commission,

itfroze

investorassets.T

hefund

saiditwasdown

30%fortheyear,but

thatdoesn’t

seemcor-

rect.Ifyou’re

down30%,sellyour

holdingsandgive

themoney

back.Itispossible

thefund

wasdownmore.

Let’ssayI’minvested

inasimilarfund,

leveragedonce.

IftheThird

Avenue

fundwasdown50%,I’mwiped

out.IfIgeta

statementnext

month

sayingmyfund

was

down30%

forthequarter,I’m

goingtosay,

“Getmeout.”

IfIdon’t

getoutfirst,I’llbe

leftwithpay-in-kind

energybonds

worth

zero.Icanseearedem

ptioncycle

occurringincredit

hedgefunds.

Gabelli:W

heredoes

thisend?

Gundlach:W

ewillsee

ahigher

defaultrate

inthejunk-bond

market.

Junk-bondissu-

anceused

torepresent

about1%ofGDP.

Thenitrose

to2%.Itwassomething

ofa

stimulant

totheeconom

y.Also,thestock

market

hasbeen

buyback-driventoan

extent,and

higherborrow

ingcosts

will

makethat

moreproblem

atic.Investm

ent-gradebonds

alsohave

beendropping

invalue.T

heLQD[iShares

iBoxx

$Investm

entGrade

Corporate

BondETF]

consistentlydropped

inprice

through2015.

Wheninterest

ratesrose,it

waschallenged

byinterest-rate

risk.Whentheworldlooked

problematic,it

waschallenged

bycredit

risk.Itseem

slikethere

isalmostnowaytowin.

When

investment-grade

creditisdown-

graded,itfalls

intojunk

territory,which

makes

itun-ow

nableforalarge

numberof

institutionalinvestors.Thecredit

market

issending

amessage,and

thestock

market,at

leastuntil

recently,waswhistling

through

moreattractive

toinvestors.

Timeforaquiz;we’llg

radeyounextyear.

Whoisgoingtobethenextpresid

entof

theU.S.?

Black: H

illaryClinton.

Gundlach:Donald

Trump.

Gabelli:T

rumpwins.

Cohen:Oneofthenominees

willwin.I

expectthem

tobeHillary

Clinton

andPaul

Ryan.Priest:

Iagree

withheronthenominees.

Hillary

Clinton

isgoing

towin.

Rogers:C

hrisChristie

willbe

theRepubli-

cannominee

andbeat

Hillary

Clinton

ina

tightcontest.

Schafer:H

illaryClinton

willwin.

Felix,you’renotaU.S.citizen

,soyoucan’t

vote.B

utyouarepermitted

anopinion.

Zulauf:Hillary

Clinton

willprobably

make

itdespite

herlack

ofintegrity.

Donald

Trumpwould

begood

onafewpoints,but

extremelydangerous

fortheworldeconom

y.Hewould

closeourdoors

totheworld.

Trumpisareflection

ofhow

upsetthe

peoplearewiththepoliticalestablishm

ent.Youseethesamedevelopm

entinEurope,

which

isbadnews,because

eventuallyitwill

putmore

populistsinpower.Andthat

createsamuchlessstable

world.

Witmer:I

expectaRepublican

towin.

Gundlach:H

illaryisgoing

tolosebadly.She

istheopposite

ofwhatFelixdiscussed:the

antiestablishmentmood.

Thepopulist

mo-

mentum

isunstoppable.If

Trumpwinsthe

nomination,he

willow

nherinthedebates.

Zulauf:WilltheRepublican

Party

allowa

guylikeTrumptorunforthepresidency?

Gundlach:H

eisrunning

rightnow!Theout-

comeofthe

electionwillbe

highlydependent

ongeopolitics

andtheeconom

y,andneither

isgoing

tobesupportive

ofthestatus

quo.

Quizover!

Now,how

areinvestors

going

tomakemoney

inwhatlooks

tobeadevilish

year?Brian,tellus

where

youseevalue.

Rogers:These

aremycriteria,particularly

inthecontext

oftoday’s

discussion,where

themostbullish

commentary

wasthatU.S.equi-

tiesmightrisebyupper-single

digitsin2016.

Thatseem

slikeawideleap,based

onwhere

themarket

sitsnow.Ihave

soughttoiden-

tifyahandful

ofcompanies

withstaying

power,but

withsomecontroversy

reflectedintheshare

price.There

aren’tmanytriple-

A-rated

companies

anymore,but

thereare

companies

thathave

beenthrough

cyclesand

willlast

throughother

cycles.Ilookforman-

agementthatiseither

stronglyincentivized,

underpressure,

orfeels

someneed

toimprove

performance.L

astly,thesecompa-

niespresent

goodvaluation

opportunities.Listed

alphabetically,thefirst

isAmerican

Express

[AXP].

thegraveyard.W

henjunk

bondsfall20%

inprice

andthestock

market

sitsatahigh,

something

iswrong

withthepicture.T

hesemarkets

aremoving

likealligator

jaws.Ulti-

mately,they

willmovetogether.

Inotherwords,you’renottoobullish

on

stocks.

Gundlach:Ifstocks

staywhere

theyare,

junkbonds

mustgoup.If

junkbonds

staywhere

theyare,stocks

mustgodown.

Cohen:Butwasn’t

thejunk-bond

market

skewedtowardindustrialissues?

Gundlach:I

amleery

ofargum

entsfortak-

ingoutthebadstuff,w

hichmakes

every-thing

elselook

good.That’s

justtrying

tosugarcoat

therotatthecenter.T

hecredit

market

isclearly

signalingadefault

cycle.Junk

bondshave

beenweakening

for17-18

months.N

owonder

stockshadabadstart

totheyear.

Youhaven

’tsaid

muchtodayabout

emergingmarkets.

Felix,isyouroutlook

dismal,orworse?

Zulauf: Emerging

markets

aresatellites

ofChina.T

hoseinNortheast

Asiaaresubcon-

tractors,and

thoseinLatin

America

aresuppliers

ofcommodities

toAsia.B

othare

doingbadly

asChina

struggles.Brazilis

inavirtualdepression,and

therearenosigns

ofimprovem

ent.Econom

ically,thebusiness

cycleisturning

down.EMcurrencies

begansliding

aheadofChina’s,and

thedecline

isn’tover

yet.Mostareexperiencing

abalance-

of-payments

crisis.Iwould

avoidemerging

market

currencies,bonds,andequities.

Gundlach:Emerging

market

equitiesare

correlatedtocommodities

prices.Ican’t

comeupwithasingle

goodargum

entfor

owning

emerging

market

equitiesversus

U.S.stocks.

Cohen:Oneemerging

economythat

might

moveintheopposite

directionin2016

isIndia.

Thecountry

hasbeen

moving

forwardwithreform

s.Structuralissuesare

beingaddressed

correctly,albeitslowly.

Gundlach:India

isfacing

many

potentialpositives

thatChina

facedageneration

ago.Its

laborforce

couldsee

tremendous

growth,w

hereasChina’s

labor-forcegrow

thwillbe

zero.Ihave

noideawhatwillhappen

toIndian

stocksthisyear,but

Indiaisthe

thingtobuyforyour

grandchildren’seduca-

tion.Putyour

statements

inashoe

boxand

don’topen

it.Cohen:Wehave

talkedtoday

aboutthe

thingsinvestors

might

wanttoavoid

in2016.B

utfrom

anasset-allocation

perspec-tive,

where

shouldyou

putyour

money?

Thedollar

isanappreciating

currency.Itwouldn’t

besurprising

toseecapitalflow

totheU.S.T

hatcould

pushP/Eshigher

thanourmodels

might

otherwisesuggest.

Priest:Indiahasamajorcorruption

problem.

Gundlach:There

areallkinds

ofnegatives.

Thatmeans

thereisroom

forimprovem

ent.Rogers:Ifpeople

collectivelyfeelthere

isno

reasontoinvest

inemerging

markets,that

couldbereflected

intheir

valuations.If

Brazil

isinadepression,

perhapsthat

iswhenyouwanttobuy.

Zulauf:Brazilhasn’t

addresseditsproblem

s.Itjustfights

thesymptom

s.Aslong

asthat

isthecase,

thedarkest

hourhasn’t

yetarrived.

HasArgentinaturnedthecorner?

Zulauf: Thenew

presidentandhisteam

areexcellent,but

theyhave

torestructure

theeconom

y.There

willbe

layoffsandlesswel-

faresupport

forcitizens,

andthecountry

willhave

todealw

ithforeign

creditors.But,

sometimethisyear,A

rgentinacould

become

AbbyCohen:“Mycolleag

ueshaveayear-en

dprice

targetof2100”

ontheS&P500.

P2BW018000-0-S00500-1--------XA

CYAN MAGENTA YELLOW BLACK Composite

January18,2016

BARRON’S

S17

WhenIthink

ofablue-chip

company,I

thinkofAmerican

Express.It

hasagreat

legacyand

innovativemanagem

ent,and

developsgreat

leaders.Also,the

stockhas

beenunder

tremendous

pressure.Analysts

rarelymention

American

Express

without

mentioning

Costco

Wholesale

[COST],

withwhich

AmExhad

anexclusive

co-branded

charge-cardarrangem

entuntil

lastyear.

Theseparation

takeseffect

March

31.Thestock

wasasloppy

per-form

erin2015,

andsold

offtothepoint

where

we’vegotalowmultiple

onahistor-

icallyhigh-return

business.

HowfardidAmerican

Express

fall?

Itwasdown25%,and

closedFriday

[Jan.8]at$63.63.T

hereare985million

shares.Our

earningsestim

atesare$5.30

ashare

for2015,m

ovingupto$5.50

thisyear.T

hedivi-

dendyield

is1.8%

.Thecompany

raisedits

dividendlastyear,and

probablywillraise

itagain

in2016.

Itisgiving

guidancethat

earningswillbe

backtoa12%

growthtra-

jectoryby2017,w

hichgets

youto$6.35

ashare

nextyear.

Spendingonleisure

andbusiness

travelisup,and

creditlosses

aredown.Interest-

ingly,thecompany

hasbeen

hurtbylower

pricesforgasoline

andairline

tickets.Butit

doesn’ttake

ahuge

leapoffaith

toassum

ethat

ifAmerican

Express

maintains

itsP/E

ratio,now

about13,and

earningscome

throughinthenext

18months,you

couldbe

lookingatan$82stock.

Ifyou

puta10

multiple

onearnings

18months

out,belowtoday’s

multiple,

youhave

a$60stock.

Sothere

islimited

downside,

decentupside,

goodmanagem

ent,and

aboard

thatis

underalotofpressure.

There

hasbeen

speculationthat

ifthecompany’s

fortunesdon’t

improve,there

couldbeamanagem

entchange.M

anagementcontinues

tobuyback

stock,andisshrinking

theshare

countby

about5%annually.

Witmer:H

owisthebalance

sheet?

Rogers:Thebalance

sheetisgreat,M

eryl.Keepinmind,A

merican

Express

isabank

now.Itsdividend

andbuyback

planshave

tobeapproved

eachyear

bytheFed.T

herisks

hereareanuptick

incredit

losses,more

adverseregulation

thanwe’vealready

seen,andageneraleconom

icslowdown.Thestock

wentthrough

itsownbear

market

in2015,

which

wasunwarranted.B

ythistimenext

year,peoplewon’tbethinking

aboutCostco.

Zulauf:Whatmakes

thelossofCostco

suchabigproblem

?Rogers:T

hedeal

withCostco

generateda

mid-single-digit

percentageofAmerican

Express’revenue.T

heylostthecontract.

Gundlach:Mid-single

digitscamefrom

that,andthestock

isdown25%?That’s

outofline.

Rogers:T

hat’swhatwethink.

Zulauf:TheAmExcard

isn’taswidely

acceptedbymerchants

asother

cards,be-cause

American

Express

chargesmerchants

ahigher

fee.Black:

Thatismoreofanissue

inEurope

thantheU.S.

Gabelli:Thishasbeen

anissue

sincefor-

ever.Butthenumber

ofcards

inforce

keepsgoing

up.Rogers:Moving

on,Comcast

[CMCSA]is

theonly

stockI’llm

entionthat

didn’thave

abear-m

arketdecline

lastyear.It

wasdown

2.7%.Thebusiness

istwo-thirds

cableTV

andone-third

NBCUniversal.If

thehurdle

isabond

yieldof3%,Comcast’s

valuewill

accretebymorethan

3%inalmostany

givenyear.

Comcast

couldearn

$3.70a

sharein2016,probably

goingupto$4.15

in2017.T

hereare2.5billion

shares.Chairm

anBrian

Roberts

andhisfamilycontrolabout

33%ofthestock.

There

wasalotofexcitem

entaround

thestock

lastyear

when

thecompany

attempted

toacquire

TimeWarner

Cable

[TWC].Thedeal

fellapart

inApril,

andComcast

thenturned

itsattention

toaccel-

eratingshare

repurchases.Itbought

backabout

3%ofitscapitalization

in2015

andwillcontinue

tobuy

backshares

in2016.

Welook

atComcast

asanasset-rich

com-

pany,whether

it’stheUniversal

theme

parks,thePhiladelphia

Flyers,or

thevalue

ofNBC.Wetrytoapply

aP/Emultiple

oramultiple

ofenterprise

valuetoEbitda

[earningsbefore

interest,taxes,deprecia-tion,and

amortization],or

aprice-to-free-

cash-flowmultiple

tothese

assets.Indoing

so,wecomeupwithastock

priceof$69,

versusFriday’s

closeof$54.67.U

singbear-

ishassum

ptions,wegetastock

priceof

$50;puttinginbullish

assumptions,w

eget

aprice

of$78.Som

eother

folkshave

donevaluation

workbased

onmultiples

ofcable

andNBCUEbitda,

andcomeupwitha

priceof$80.T

hereisnoChina

riskhere,

andless

economiccyclicality

riskthan

insomeother

companies.

Buttherehavebeen

widespread

concern

saboutcable-TV

subscrib

erscancelin

gservice

or“cuttingthecord.”

Rogers:Subscriber

growthhasbeen

hold-ing.

Comcast

hasintroduced

afancy

X1

interactiveproduct,and

willcontinue

toroll

outX1products

inthenext

coupleofyears.

After

2017,cash

flowwillimprove

asthe

company

willbemaking

lessofaninvest-

mentintheX1.

Comcast

managem

entmadegood

deci-sions

lastyear.

TheTimeWarner

Cable

decisionwasmadeforthem

byregulators,

butbuying

backstock

wasprobably

atleast

asgood

asaninvestm

entasTWC

would

havebeen.

Witmer:D

oesn’tComcast

makemostofits

money

fromproviding

broadbandInternet

service?Gabelli:Yes.

Thevideo

partofcable

has

becomeamarginalcontributor.

Rogers:Wetalked

todayabout

thelack

ofmomentum

inindustrial

America.

That

bringsmetoEaton

[ETN],which

closedFriday

at$49.17.T

hecompany

makes

elec-trical,hydraulic,autom

otive,andaerospace

products.Eaton

boughtCooper

Industriesin2012.It

wasareally

gooddeal.

Eaton’s

stockwasdown23%in2015,after

falling11%

in2014.T

hecompany

hasa$23

billionmarket

value.Ithasgood

businesses,butachallenged

earningsoutlook

hascaused

thestock

toweaken.E

atoncould

probablyearn

$4.25for2015

and$4.30

in2016,so

I’mbullish

onabout

fivecents.

Managem

entraised

thedividend

to$2.20

ashare

lastyear.

Rogers:

“WhenIthinkofablue-ch

ipcompany,IthinkofAmerican

Express.It

hasagreat

legacyandinnovative

management,

anddevelo

psgreat

leaders.A

lso,thestockhasbeen

undertrem

endouspressu

re.”

“Iftheyuan

fallsby20%

,itwillhave

atrem

endouslydeflationary

effectontheworld.

Youcan’t

escapethebustafter

thebiggestboom

thatmankind

hasseen.”

—Felix

Zulauf

P2BW018000-0-S00400-1--------XA

S18BARRON’S

January18,2016

tation,Occidentaltalked

aboutgrow

ingthe

dividendonsixoutofeight

pages.Whena

company

doesthat,I

amwilling

tobetthe

dividendissafe

foratleast

twoorthree

years.They

cancertainly

coveritoutof

operatingcash

flow.

Doyoufeelth

esameaboutthedividends

ofmostoftheoilmajors?

Rogers: T

hemajors

canmaintain

theirdivi-

dendsforafewyears.

Itisn’t

aforegone

conclusionthat

theycanmaintain

themfor-

ever,nomatter

whathappens

tooilprices.

InOccidental’s

case,thecompany

iscutting

capexfrom

$9billion

in2014

to$4billion

thisyear.C

hevron[CVX]isalso

cuttingcapex

andusing

themoney

tohelp

fundthedivi-

dend.Thisisn’t

agood

long-termstrategy,

butintheshort

term,itisdefensible.

Zulauf:Ifmorecompanies

cutcapitalspend-

ingdram

atically,thatwould

bebadforGDP

thisyear.

Rogers:Youaren’t

goingtohave

growthcom-

ingfrom

theenergy

sector,that’sforsure.

Priest:Fewoilcom

paniescanmaintain

theirdividend

atcurrent

levelsifoilstays

at$30

abarrel.

Dividend

payments

canbesus-

tainedbycapex

cutbacksforawhile,

butthatisscary.D

ependingonhowmuchlever-

ageacompany

has,aweird

thingcould

unfold,whereby

thepresent

valueofthe

assetsideofthebalance

sheetiscollapsing,

whilenothing

ischanging

ontheother

side.There

isaninsolvency

problembrew

ingin

thatwhole

industry.Wehappen

toownOxy,

butthewhole

environmentisvolatile.

Rogers:Occidental

hasproduction

growth

andwillbe

asurvivor.If

dividendcuts

arecoming,O

xywon’tbeinthefirst

wave.It

isanintriguing

situationifyou

areatrue

contrarian.Lastly,

welike

Qualcom

m[QCOM].

Thisisacash-flow

-return-to-shareholdersstory.

Qualcom

mmakes

chipsforsmart-

phonesandlicenses

intellectualpropertyto

almostevery

smartphone

manufacturer.

Thecompany

hasdisappointed

sharehold-ersforthepast

fewyears.T

hestock

lost32%

lastyear.

Qualcom

mhas$70billion

inmarket

valueand

$10ashare

ofnetcash.

Thestock

closedFriday

at$45.88.In

theyear

endedinSeptem

ber2015,Q

ualcommearned

$4.60ashare.

Theywillprobably

earn$4.90

intheSeptem

ber2016

year.

Whatisthedividend?

Rogers:They

pay$1.92

ashare,

andthe

stockyields

4.2%.Theform

erCEO,Paul

Jacobs,becam

eexecutive

chairmanafew

yearsago,and

StevenMollenkopf

waspro-

moted

toCEO.Steve

isfocused

onshare-

holdervalue,and

stockbuybacks

anddivi-

dendgrow

thhave

pickedup.W

ethink

thelicensing

businessisworth

between$40and

Thestock

yields4.4%,and

thepayout

ratioisalmost50%.Theycould

takethedividend

upto$2.40

thisspring,

forayield

ofnearly

5%.Thecom-

panywasprofitable

eveninthelast

downturn,

in2008

and2009,

when

otherindustrialcom

panieswerechal-

lenged.Eaton

haspeak

earningspowerofsomewhere

inthe$6-$7

range.Itbought

back2%ofits

shareslastyear,

andwillbuyback

stockthis

year.Itiscutting

costsaggressively.

Whatisthecompanyworth?

Ifyou

putmultiples

thataren’t

particularlyhigh

ontheelectrical,

hydraulics,aerospace,

andvehicle

businesses,and

subtractdebt,

yougetahypotheticalstock

priceinthe

$65-$75range.

TheCEO,Sandy

Cutler,

whohasbeen

runningthe

company

foralong

time,willretire

inthespring,

andCraig

Arnold,

anotherEaton

veteran,willsucceed

him.Eaton

isagood

business,with

strongfinancials,cyclical

headwinds,and

decentprofitability.

Thestock

hassignifi-

cantupside

ifandwhentheeconom

icenvi-

ronmentimproves.

Schafer:W

illtherebeanychange

withthe

newmanagem

ent?Rogers:I

don’texpect

so.Cutler

hasbeen

agood

leader.Somepeople

might

saythe

company

couldhave

usedabreath

offresh

air,and

shouldhave

hiredanoutsider

toreplace

him.ButArnold

hasbeen

therefor

years,andwilldo

afinejob.It’s

steadyas

shegoes.

Black:Eaton

hasnorevenue

growth.T

hereisnoinflection

pointthat

Icanseeinthe

nextthree

tosixmonths.

Rogers:T

hat’swhythestock

isdown30%.

It’sanyone’s

guesswhenEaton

willreturn

topeak

earningspower.

Gabelli:They’ve

gotgreat

businessesthat

theyarerunning

well.

Rogers:AndIamconvinced

thedividend

yieldissafe.T

hisislikeabond

withacall

option.Witmer:W

hywould

theypayoutsomuchin

dividends?Rogers:T

heygenerate

alotofcash

flowand

don’thave

manythings

toinvest

in.Schafer:You’d

ratherthey

spendthemoney

ondividends

thanadumbacquisition,w

hichmanyother

companies

do.Rogers:A

bsolutely.Mynext

recommenda-

tionismymostcontroversial.M

acy’shas

beeninthenewsalotmorethan

itmight

havewished.T

hecompany

announcedre-

centlythat

itwastaking

earningsguidance

down.Onthedayitannounced,the

stockwentupabit,w

hichIconsider

agood

sign.Macy’s

operates770

Macy’s

stores,50

Bloom

ingdale’s,andBloom

ingdale’soutlets.

Thecompany

hasa$12billion

market

capandannualrevenue

of$27billion.M

anage-mentreduced

itsearnings

outlookforthe

yearending

thismonth

to$3.85

ashare.

Thestock

closedlastFriday

at$35.89.

Forecasting

earningshere

istricky,

asWallStreet

expectedMacy’s

toearn

$4.25a

sharefortheyear.

Abold

guessforthe

fiscalyearending

inJanuary

2017would

bethat

earningsareflat,although

thatcould

proveoptim

istic.Macy’s

raiseditsdividend

lastyear

to$1.44

ashare,giving

thestock

a4%yield

attoday’s

price.Thestock

isinexpensive

at9.3timesearnings,

and5.5

timesenterprise

valuetoEbitda.M

acy’shas

beenmaking

progressonitsInternet

busi-nesses,

bothatmacys.com

andbloom

-ingdales.com

.Butithadmorecompetition

fromother

onlineretailers

inthefourth

quarter,andsuffered

frombadweather.

Cohen:You

mean

goodweather.

They

weren’t

sellingenough

coats.Rogers:W

armweather

inthewinter

isbad

forMacy’s.L

ikewise,a

strongdollar

reducedtourist

trafficatthestores.

These

thingsarereversible,and

man-

agementresponded

bysaying

itwould

closesomestores

andcutcosts.T

hecompany

hascutitscapitalization

fasterthan

itsstore

count.Share

counthasbeen

reducedto330million

sharesfrom

540million

10years

ago.Starboard

Value,anactivist

inves-tor,hasbeen

involvedwithMacy’s,

andclaim

sthecompany’s

assetsare

worth

$21billion.R

elativetoitsmar-

ketvalue,that

isabiggap.T

hecom-

panyhas

beeninvigorated

bythis

investorand

isexam

iningdifferent

possibilitiesforchange.A

tnine

times

earnings,and

witha4%yield

andpotential

changesinhow

thecom-

panyisrun,

thisseem

slike

anintriguing

situation.

Couldthechangesinvolvenew

management?

Gabelli:N

o.Terry

Lundgren

[Macy’s

CEO]hasdone

agreat

job.Black:

Brian,are

youbuying

thisonearn-

ingspowerorpotentialm

onetizationofthe

realestateassets?

Rogers:Iambuying

itbecause

thereisa

lotmorevalue

inMacy’s

thanthe$12bil-

lionmarket

capreflects.

Lundgren

hasdone

anexcellent

job,andthechief

finan-cialofficer

isoutstanding.T

heyknow

thepressure

they’reunder,and

aretrying

todotheright

thing.Occidental

Petroleum

[OXY]isalarge

independentoilproducer.It

hasamarket

valueofabout

$48billion,and

isthelargest

producerinthePermianbasin.T

heCEO,

StephenChazen,

isstepping

downthis

spring,andVickiH

ollub,whohasbeen

with

thecompany

forseveraldecades,w

illsuc-ceed

him.Occidentalw

asonce

viewedasthe

low-quality

company

inthesector.M

anage-menthasdone

agreat

jobofselling

assets,monetizing

assets,andinvesting

intheright

sectors.Thecompany

isfinancially

strong,withasingle-A

creditrating.

We’llsee

whathappensifoilfalls

further.

Rogers: E

stimating

thevalue

ofOccidental

istricky.

In2013,

thecompany

generatedEbitda

of$14billion.In

2015,itwillbe$5

billion.Earnings

havebeen

similarly

vola-tile.A

fewyears

ago,thestock

wastrading

above$100

ashare

andthecompany

earnedeight

bucks.For2015,it

couldearn

allof28

cents.Youdon’t

buyacompany

likeOcci-

dentalbasedonitscurrent

earningpower.

Thedividend

wasincreased

lastyear

to$3

ashare;the

stockyields

4.7%.

Isthedividendsafe?

Rogers:In

itsmostrecent

investorpresen-

Price

Company/

Ticker1/8/16

American

Express/AXP

$63.63

Comcast/

CMCSA

54.67

Eaton/ETN

49.17

Macy’s

/M

35.89

OccidentalP

etroleum/OXY

63.17

Qualcom

m/QCOM

45.88

Source:B

loomberg

Brian

Roger’sPicks

Rogers:

“Ilookforout-of-favo

rcompanieswithgooddividendyield

s.”

CYANMAGENTAYELLOWBLACKCompositeP2BW018000-0-S00300-1--------XA

January18,2016

BARRON’S

S19

Schafer:It

dependsonthestock

price.Ilove

toseek

outmanagem

entteam

swithwhich

Ihave

hadsuccess

inthepast.I

particularlylikeinvesting

withateam

thatconfronted

asimilarfactpattern

thatledto

significantgains

inaprior

period.Thatis

thecase

nowwithCommScope

Holding

[COMM].Thecompany

isaleading

pro-vider

ofcell-tow

erantennas

forwireless

carriers,and

providesfiber

solutionsfor

residentialnetworks

anddata

centers.The

businesshasgrow

nby3%or4%ayear,and

shouldcontinue

tobenefit

fromincreasing

demandforbandw

idth.CommScope’s

businesscan

belumpy,

quartertoquarter,or

evenyear

toyear,as

itslargest

customersarethemajortelecom

saround

theworld.T

hislumpiness

hashurt

thestock.

Nonetheless,

managem

enthas

doneanexcellent

jobofimproving

profitmargins.

Inthepast

10years,

operatingmargins

doubledto20%.

InAugust,

CommScope

closeditsthird

majoracquisition.H

avingwatched

thisman-

agementexcelat

integratingandoptim

izingprior

acquisitions—Avaya

Connectivity

in2004

andAndrew

in2007—

Iamconfident

thatthere

issignificant

opportunityforearn-

ingsaccretion

inthenext

threeyears

asthe

company

integratesitsnewestpurchase,the

telecom,enterprise,and

wireless

businessof

TEConnectivity

[TEL].Based

onthe

stock’svaluation,m

anyothers

don’tagree.

Whatisthestockprice?

Schafer:

CommScope

isselling

for$23.36,

or10.5

timesanalysts’2016

earningsesti-

mates

and8.5times2017

estimates.

The

company

islevered

at4.6timestrailing

Ebitda,

butgiven

thestrong

seculartail

winds,I

amnotasconcerned

asImightbe

withacyclical

industrialcompany.

The

stockhasatleast

50%upside,and

closerto

75%inthenext

18months.

Last

year,Irecom

mended

NICE-

System

s[NICE],anenterprise-softw

arecompany.

Thestock

hasrisen

10%since

then,butthere

couldbe40%

upsidefrom

here.Newmanagem

enthasanopportunity

tocreate

significantvalue

forshareholders

byoptim

izingthe

company’s

bloatedexpense

structureand

overcapitalizedbalance

sheet.Inthepast

year,NICE

expandeditsprofit

margins,sold

twonon-

corebusinesses,and

generatedalotoffree

cashflow.Thestock

isselling

for$55,and

thecompany

has$14ashare

ofnetcash.It

willprobably

earn$3.50

ashare

thisyear,

soitischeap

at12timesearnings,exclud-

ingthecash.N

ICEhasagrow

ingrevenue

streamand

continuedoptionality

aroundbusiness-m

odelenhancem

entand

cashdeploym

ent.

That’spretty

nice.Th

ankyou,Oscar.

�

$43ashare,based

ona20-year

discountedcash-flow

analysis,and

thechip-m

akingbusiness

isworth

$16ashare,

basedona

multiple

of12timesearnings.T

hetwobusi-

nesses,plusthenet$10ashare

ofcash—we

onlycount

theaccessible

cashthat

isn’toverseas—

getsyoutoa$69stock

price.There

aremanyrisks

here,andopportu-

nities.JanaPartners

becameinvolved

lastyear

asanactivist

investor,arguingforthe

company

tobebroken

intotwoseparate

businesses.Qualcom

mopted

nottodothat.

Thecompany

hashad

alotoflicensing

disputeswithAsiangovernm

ents.Whenwe

addupthecash

flowfrom

licensingandthe

earningsfrom

chip-making,the

stockissell-

ingattoobigofadiscount

tounderlying

value.Thisisaninteresting

situationforan

income-oriented

investor.Lastyear,a

lotoftheaction

wasin

theFANGstocks—

Facebook

[FB],

Amazon,N

etflix[NFLX],and

Google

[GOOGL],now

calledAlphabet.M

anygood

companies

weredownbetw

een10%

and30%,not

justintheoilpatch.

Ilook

forout-of-favor

companies

with

gooddividend

yieldsand

long-termstaying

power.

Thanksyou,Brian.Oscar,yo

u’reon.

Schafer:I

havethree

stocks,alldown

about30%.Thefirst

isEvertec

[EVTC],thedominant

transaction-processing

company

inPuerto

Rico.It

processes75%

ofallm

erchanttrans-

actions,and

more

than70%

ofall

ATManddebit-card

transactions.It

alsoprovides

bank-processingser-

vices,predominantly

forBanco

Popu-

lar,which

isowned

byPopular

[BPOP],Evertec’s

formerparent.

Itwascarved

outofthebank

in2010.

Evertec

isexpanding

acrossCentraland

SouthAmerica,to

countriessuch

asColom

-bia,Costa

Rica,Peru,

andtheDominican

Republic.R

evenuesarerecurring,returns

oncapitalare

high,andthebusiness

gener-ates

alotoffree

cashflow,which

itregu-

larlyreturns

toshareholders.D

espitethese

attributes,thestock

sellsforless

than10

timesearnings,w

hilesimilarbusinesses

intheU.S.,Europe,

andSouth

America

allfetch

20to25timesearnings.

Whythesteep

discount?

Schafer:Theknock

onEvertec

isitslocation.

Puerto

Ricoaccounts

formorethan

80%of

itsbusiness.

Itisburdened

withanover-

whelm

inglevel

ofgovernm

entdebt,a

highunem

ploymentrate,and

ashrinking

popula-tion.Its

economyhasbeen

inarecession

fornearly

adecade.

Ican’t

tellyouwhenthe

Puerto

Ricandebt

crisiswillbe

resolved,butitsounds

likearestructuring

might

finallytake

place.Anything

thatimproves

theecon-

omywould

helpmakeEvertec

ahomerun,

butwedon’t

needanimprovem

entinPuerto

Ricoforthestock

todowell.

Whyisthat?

Evertec

isbenefiting

fromasecular

shiftfrom

cashtransactions

toelectronic

pay-ments.T

histransition

isstillis

intheearly

innings.Only50%

ofthe

populationof

Puerto

Ricoisbanked,

versusmorethan

75%intheU.S.,and

card-usagelevels

arerelatively

low.Lastyear,

Evertec’s

boardhired

anew

CEO,Morgan

Schuessler,tasked

withmanaging

thebusiness

inPuerto

Ricoandre-accelerating

thegrow

thinother

countries.Heiswellsuited

forthe

job,asheexecuted

asimilarplaybook

atGlobal

Payments

[GPN].Hehasalready

announcedakey

winwiththe

second-largest

bankinPuerto

Rico,and

thecom-

pany’sfirst

acquisitioninColom

bia.Ifnew

managem

entcan

accelerategrow

th,Evertec

couldtrade

inline

with

U.S.peers,or

fordouble

thecurrent

priceof$15.E

ventually,itcould

beattractive

tolarge,

globalpaym

entcompanies

forits

regionalfootprintandfavorable

taxrate.A

fewweeks

ago,GlobalP

ayments

agreedto

acquireHeartland

Payment

Systems

[HPY]for30timesearnings.

WhatisEvertec’s

market

capitalizatio

n?

Schafer:It

is$1.2

billion.Calpine’s

shares,likeEvertec’s,have

fallento$14from

$23.Calpine

hasa$5billion

market

cap.Itisan

independentpower-producer

generating27,000

megaw

attsofpowerfrom

natural-gas-fired

andgeotherm

alplantsinCalifor-

nia,Texas,and

theNortheast.A

sawhole-

salepowercompany,

itsells

intocom-

petitivemarkets.

Asaresult,

itdoesn’t

earnthesteady,

guaranteedreturns

ofa

typicalregulatedutility.It

isatough

busi-ness,

andIoften

viewtheindustry

asa

cautionarytale

aboutderegulation,

over-building,and

bankruptcy.

Calpinetookaspinthroughbank-

ruptcycourt.

Schafer: It

filedforbankruptcy

protec-tionin2005.A

tthetime,ithadthedubi-

ousdistinction

ofbeing

theeighth-

largestbankruptcy

inU.S.history.

To

stealaline

frommyfriend

Howard

Marks

[co-founderofOaktree

Capital

Managem

ent],there

aren’tany

badasset

classes,just

badprices.

Inthe

caseofCalpine,the

stockistoocheap

toignore.C

alpineistrading

foronly

fivetosixtimesourestim

ateof2017

freecash

flowpershare,

andatless

thanhalfofreplacem

entvalue.T

hemanage-

mentteam

isuniquely

focusedoncreat-

ingvalue

forshareholders.

Whenyour

readersarefinished

with

thisweek’s

Barron’s,I

would

encouragethem

toread

thefirst

fewpages

ofCalpine’s

10K,where

managem

entlays

outitsinvestm

entphilosophy.

Youmean

if,notwhen.

Thestock

isdownfortworeasons.

Mild

weather

hasledtolowpowerprices,

andinvestors

areworried

aboutthelong-term

impactofcom

petitionfrom

renewableenergy

sources,suchassolar

andwind.I

can’tpre-

dicttheweather,and

Iexpect

renewables

tocontinue

togrow

anddisrupt

thepowerand

utilityindustries,w

hichisawonderfulthing.

Butfortheforeseeable

future,mostenergy

willbefrom

theleast

environmental,

leastflexible,and

mostexpensive

sources,mainly

coal-firedandnuclear

generation.Iexpect

Calpine

tocontinue

generatingstrong

cashflow,w

hichmanagem

entwillallocate

inintel-

ligentways.T

heshares

coulddouble

inthe

nextonetotwoyears.

Doesthecompanyhavemuchdebttoday?

Schafer:It

islevered

fivetimestoEbitda.

Willm

anagementuseanyofthefree

cashflowtopaydowndebt?

Schafer:

Calpine’sshares

“coulddouble

inthenextonetotwoyears.”

Price

Company

/Ticker

1/8/16

Evertec/EVTC

$15.47

Calpine

/CPN

14.53

CommScope

Holding

/COMM

23.36

NICE-System

s/NICE

55.54

Source:B

loomberg

Oscar

Schafer’s

Picks

CYAN MAGENTA YELLOW BLACK Composite P2BW018000-0-S00200-1--------XA

January25,2016

BARRON’S

R3

Ourinvestmentexpertsshare31ideastohelpyou

makemoneyintroubledtimesandroiledmarkets.

PeeringInto

TheFuture

Afunny

thinghappenedlastweekatthelocalTrader

Joe’s.YourhungryRoundtableeditorpoppedin

forsomedinnerprovisions,andgotanunbidden

earfulofmarkettalkfromacheerfullybearish

cashier.Stockswillfallalotfurther,hepre-

dicted.TheBalticDryIndex,whichmeasures

thecosttoshipstufflikegrainandsteelaround

theworld,hascollapsed.Inventoriesarepiling

up,deflationislooming,andtheFederalRe-

servemightweighafourthroundofquantita-

tiveeasing.•Itwaslikedéjàvualloveragain:

The2016Barron’sRoundtable,convenedJan.11

inNewYork,washeavyonthesameworrisome

talk,andlastweek’sfrequentlydismalstockac-

tiononlyconfirmedtheprescienceofouras-

sembledmarketseers.•Whilebig-pictureprog-

nosticationsdominatedthefirstRoundtable

issue,publishedJan.18,theyalsofeatureprom-

inentlyinthisweek’sinstallment,thesecondof

three.But,happily,thefourexpertsshowcased

inthepagesaheadalsohaveplentytosayabout

specificinvestmentsthatcouldyieldrichre-

turnsintheyearahead,notwithstandingthe

troublesomebackdrop.•Sharingthebear’slair

thisyearareRoundtableveteranFelixZulauf,

thesagaciousSwissinvestorwhohelmsZulauf

AssetManagement,andnewcomerJeffreyGun-

dlach,co-founderofDoubleLineCapital,a

mostlybond-focusedshopwhosereturnshave

byLaurenR.Rublin

ROUNDTABLEPART2

2016

PhotographybyBradTrent;followingpagesbyJennaBascom

Composite C M Y KP2BW025000-0-R00300-1--------XA CL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WE

BG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,LA,LD,LG,LK,MI,ML,PI,PV,TD,WO

CompositeCMYK

R4

BARRON’S

January25,2016

dazzledsinceitsformationin2009.Bothriff

atlengthonthepotentialcalamityfacing

emergingmarketsduetoChina’scooling

economy,andthinkU.S.stockshaven’tseen

theirlowsyet.Felixoffersabevyofshort-

sellingideastoprofitfromthepain,while

Jeffreycombsthefixed-incomeuniversefor

mispricedassets,suchasclosed-endfunds

andamortgageREIT,thatcouldrewardin-

vestorsinmultipleways.Aconsummate

contrarian,healsoseesopportunityin

PuertoRico’sdistresseddebt.

AbbyJosephCohen,astandoutstrate-

gistandpublicpolicyguruatGoldman

Sachs,alsosharesherbestbetsforthenew

year,intheformofsevenstocksfavoredby

thefirm’sanalyststhatamplifyhercurrent

investmentthemes.Cautiousaboutthein-

dustrialeconomy,sheistiltingtoward

healthcare,retailing,andhousingplays

thatcouldbenefitfromtheconsumer’sim-

provedfinances.

MarioGabelli,themasterofGamcoIn-

vestorsandashrewdguidetocorporate

deal-making,roundsoutthisweek’squar-

tetwithalookatmediacompaniesthat

couldenrichshareholdersbybuying,sell-

ing,orrearrangingvaluableassets.There

isalottochewoninhiscalculationsand

commentary—andintherestofthismeaty

Roundtablesegment.

ABBYJOSEPHCOHEN

Barron’s:Abby,whatareyourecommend-

ingtoday?

Cohen:Aswediscussedearlierinthisses-

sion,capex[capitalspending]hasweak-

enedamongU.S.companies.Buttherehas

beenagreatdealofcapexinsomeindus-

tries.Whilespendingisweakinenergy

andchemicals,andamongsomeheavilyin-

dustrialcompanies,itisquiterobustinin-

dustriessuchasdigitaltechnologyand

medicaltechnology.Philips,basedinthe

Netherlands,isacapexbeneficiary,butnot

intheusualcyclicalsense.Philipsisselling

for10times2016estimatedearnings,below

thesectorP/E[price/earningsratio]of12.5

times.ItsEuropeanshareshavefallen7%

inthepast12months,to22.15euros[clos-

ingpriceonJan.8]andyield3.6%.Ouran-

alystexpectsPhilipstoearn€2.21ashare

[$2.39]thisyear,wellabovetheconsensus

estimateof€1.64.

IstartedlookingatPhilipsafterthinking

aboutoneofmypicksfromlastyear’s

Roundtable—AcuityBrands[ticker:AYI],

amakerofLEDlighting.Newenergy-effi-

cienttechnologies,likelighting,havealong

roadaheadintermsofgrowth.Philipshas

beenaroundsince1891butisalwaysrein-

ventingitself,andhasahistoryofinnova-

tioninmanycategories,fromtraditional

lightbulbstoBlu-raydiscs.Whilethecom-

Zulauf:Wouldyouhedgethecurrency?

Schafer:Thecompanydoesalotofbusi-

nessoutsidetheEuropeanUnion.Ifthe

stockisgoingtowork,itwillgoup50%.

Thecurrencyisn’tgoingdown50%,soyou

canaffordtobewrongonthecurrency.

Cohen:Mynexttwonamesareinthe

health-caresector,whichperformedwell

lastyear,butranintohardtimestoward

theendof2015.Thereweresignificant

outflowsinthefourthquarterfromhealth-

caremutualfunds,andfrommanystocks,

particularly

pharmaceuticals.AbbVie

[ABBV]wasone.Ithasayieldof4%.In

the12monthsendedFriday,thestockwas

down18%.

Thechiefconcernhasbeenthehigh

concentrationofHumira,atreatmentfor

arthritis,initstotalbusinessmodel.Hu-

mirahasdominatedAbbVie’srevenue,and

investorsareconcernedthatabiosimilar

drugwillbelaunched,posingcompetition.

Ouranalystbelievesthelaunchofabio-

similarprobablywon’thappenuntil2020,

and,ifthatisthecase,AbbViestillhas

goodearningsgrowthahead.Earnings

couldgrowatacompoundannualrateof

13%from2015through2020.[Subsequent

totheRoundtable,AbbViehadamajor

patentwinonHumira.]

AbbViehassomepromisingthingsinits

productpipeline.Itisworkingonanum-

berofvaccinesforHIVandhepatitisC,al-

thoughthehepatitisproductisofftoa

slowlaunch.

Priest:Abby,weownAbbVie.Ithasbeen

inanegativetrendforafewweeks,andI

can’texplainitssignificantunderperfor-

manceversusmanyothernames.Maybeit

isconcernaboutpotentialcompetitionto

Humira.

Black:TheFoodandDrugAdministration

haswarnedthatthecompany’shepatitisC

treatmentscouldcauselivertoxicityin

peoplewithcirrhosis.Thisisabigplusfor

GileadSciences[GILD],whichmakesthe

leadinghepatitisCtreatments.Thenews

tookdownAbbVie’sstock.

Cohen:OursecondnameisMylan[MYL]

whichwashurtbecauseofitsfailedbidlast

fallforPerrigo[PRGO].Botharemakersof

genericdrugs.Mylan’sstockfell13%inthe

past12months.Itistradingfor9.8times

2016estimatedearnings,belowtherestof

theindustry.

Althoughinvestorsareupsetaboutthe

failedbid,moreconsolidationislikelyinthe

generic-drugindustry.Mylanislikelytobe

anacquirer,andseemstobebenefiting

frompreviousdeals.Thecompanybought

somegenericproductsfromAbbottLabo-

ratories[ABT],andisworkingthem

throughitssalesanddistributionsystem.

Also,acompetitorhadaproblemwithits

ownversionofMylan’sEpiPen[anepineph-

panyistypicallyviewedasanindustrial,it

hasarobustconsumerbusiness.Italsohas

arobustlightingbusiness.

Philipshasafirst-moveradvantagein

providingequipmentsuchaslightingand

ultrasoundservicestoitscustomers.Philips’

lightingisusedinpublicandindustrial

spaces,buttheareathatintriguesmeis

healthcare.

Howso?

Cohen:ThecompanymakesCTscanners

andMRIscanners.Ithasuseditsdigital

expertisetobuildaprettyrobustbusiness

inhospitalmanagementandinformation

managementinthehealth-careindustry.

The

stocktrades

inAmsterdam

[PHIA.Netherlands]andviaAmericande-

positaryreceipts[PHG].

Whichsecuritydoyourecommendbuying?

Cohen:Ifyouaredollar-based,buytheADR.

AbbyCohen:“Weareoptimisticaboutthehousingmarket.Demographicsfavora

pickupinhouseholdformation,whichwillhelpLowe’s.”

2016RoundtablePanelists

ScottBlack

Founderandpresident

DelphiManagement

Boston

AbbyJosephCohen

Seniorinvestment

strategistandpresident

GlobalMarketsInstitute

GoldmanSachs

NewYork

MarioGabelli

ChairmanandCEO

GamcoInvestors

Rye,N.Y.

JeffreyGundlach

Co-founderandCEO

DoubleLineCapital

LosAngeles

WilliamPriest

CEOandco-CIO

EpochInvestmentPartners

NewYork

BrianRogers

Chairman

T.RowePrice

Baltimore

OscarSchafer

Chairman

RivuletCapital

NewYork

MerylWitmer

Generalpartner

EagleCapitalPartners

NewYork

FelixZulauf

President

ZulaufAssetManagement

Co-CIOandpartner

VicendaAsset

Management

Zug,Switzerland

P2BW025000-0-R00400-1--------XACL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WEBG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,LA,LD,LG,LK,MI,ML,PI,PV,TD,WO

CompositeCMYK

R6

BARRON’S

January25,2016

rineauto-injectorusedtotreatlife-threat-

eningallergicreactions],soMylanisbene-

fitingfromthat.

HowlargeistheEpiPenmarket?

Cohen:Itcouldbeasbigas24millionpeo-

ple,largerthanMylanpreviouslythought.

Mylan’sapplicationtosellagenericversion

ofCopaxone[amultiplesclerosistreat-

ment]isnowbeforetheFoodandDrug

Administration;itdoesn’tseemtohaveany

problems.Thecompanyalsohasageneric

versionofAdvair[anasthmatreatment]on

track,andhasbuiltanewmanufacturing

facilitytoproduceit.Mylanhassometem-

poraryissues,butouranalystseesgood

valueinthestock.

Next,theU.S.consumerhadatough

timeforawhile,butisdoingfarbetter

now.ThatbringsmetoSignetJewelers

[SIG],whichoperatesstoresintheU.S.,

theU.K.,andCanadaunderavarietyof

names.SignetacquiredZalein2014.Inthe

U.S.,Signetoperates1,400storesunder

theKayJewelersandJaredtheGalleriaof

Jewelrybrands.TheZaledivisionhas

1,600storesintheU.S.andCanada.The

companyhadagoodholidayseason.Maybe

peopleweren’tbuyingalotofcoats,but

theywerebuyingjewelry.

Howhasthestockdone?

Cohen:Inthepast12monthsSignet’s

shareshavebeenflat.Thestockclosed

Fridayat$126.93,andyields0.6%.Forthe

fiscalyearendinginJanuary2017,ourana-

lysthasanearningsestimateof$8.07a

share,roughlyinlinewiththeconsensus.

Thecompanyhashadsomeissues:Itwas

suedforgenderdiscrimination.ButSignet

isheldinhighesteembycustomers,and

hasagooddistributionnetwork.

Zulauf:Aretheysellingupscaleproducts,

orarangeofproducts?

Cohen:Theycatertomiddle-andupper-

middle-incomebuyers,andsellalotof

diamonds.

Lowe’s[LOW]alsocouldbenefitfroma

strongerconsumer,andastronghousing

market.Itbenefitsfromtherenovation

market,inparticular.Thestockwasflatin

thepast12months,andyields1.5%.We

areoptimisticaboutthehousingmarket.

Demographicsfavorapickupinhousehold

formation,whichwillhelpLowe’s.

WhydoyoupreferLowe’stoHomeDepot

[HD],anotherhousingbeneficiary?

Cohen:Lowe’shasacheapervaluation.It

sellsfor18timesthisyear’sexpectedearn-

ings. BhartiAirtel,basedinIndia,provides

mobiletelecomservicesinIndiaandelse-

where.IttradesontheBombayStockEx-

change[BHARTI.India].Thecompanyis

spendingtoexpandits3G

and4Gtelecomnetworks.

Thestockwasdownabout

10%intheyearended

Jan.8,butouranalyst,

basedinIndia,hasanearn-

ingsforecastforthisyear

thatisdramaticallyabove

consensus.Heexpectsthe

companytoearn19.89ru-

pees[29cents]versusthe

consensusforecast

ofINR16.91.Thestockis

tradingfor16timesex-

pectedearningsforthefis-

calyearendinginMarch

2017,andyields1.4%.

Lastly,OcadoGroupis

anonlinesupermarketcom-

panybasedintheU.K.The

sharestradeinLondon

[OCDO.UK].Thestockdid

poorlyinthepast12

months,falling29%.The

companywasformedin

2000andhasinvestedheav-

ilyindistributionandinven-

tory-controlsystems.There

havebeenconcernsthat

Amazon.com

[AMZN],

whichhaslaunchedinthe

U.K.,willhurtthem.But

AmazonisbasedinLondon,

whichisJSainsbury’s

[SBRY.UK]territorymore

thanOcado’s.

Rogers:Doesthecompany

dobusinessasOcado?

Cohen:Yes.Italsoprovidesdeliveriesfor

Morrisons,awell-knownsupermarket

chainintheU.K.Ocadohasalower-cost

modelthanothersupermarketsintheU.K.

Ithasverylittleproductwaste,which

keepsitscostsdown.Here,too,ouranalyst

hasabove-consensusestimates—3.43pence

[fivecents]forthefiscalyearendingin

November,versustheconsensusestimate

of2.98p.

Thisisn’tanewindustry,butanexample

ofanoldindustrytryingtotakeadvantage

ofsomenewertechnologies.Macy’s[M],

whichBrianrecommendedtoday[Rogers’

pickswerefeaturedinlastweek’sRound-

tableissue]isalsobuildingasignificantIn-

ternetplatform.Totheextentthatold-line

retailerscanadaptsuccessfullytotheIn-

ternet,theyshoulddowell.

Thankyou,Abby.Let’shearfromFelix.

FELIXZULAUF

Zulauf:Asmostofyouknow,Iamamacro

guy.Iinvestbasedonmyanalysisofmac-

roeconomictrends,andtrytofigureout

whereweareintheeconomicandfinancial

cycle.Mybasecaseisthis:Thedeveloped

economieshavehadadisappointingrecov-

erysincethefinancialcrisis,butthe

emergingeconomieshadabigboomuntil

afewyearsago.Thatboomwentbustin

2012-’13.Nowweareinadowncyclethat

willendwithcrisisandcalamity.China’s

troubledeconomyistotheglobalfinancial

marketwhattheU.S.housingmarketwas

inthepriorcycle.Manypeopledon’tun-

derstandthis.WhiletheU.S.iswidelyana-

lyzed,Chinaoftenismisunderstood,asthe

economicdatapublishedbytheChinese

governmentareofpoorquality.

Inthepast12months,Chinatriedtore-

igniteitseconomy.Debthasrisendramati-

cally,tomorethantwicegrossnational

product,withalmostnoimpactonthereal

economy.Chinahasreportedannualgrowth

ofnearly7%,buttheindustrialcomplexis

inarecession,andIestimatetheservice

sectorisgrowingbyonly4%ayear.Inre-

ality,then,growthisprobablyaround2%,

andslowing.

Priest:Doesn’tChinahaveahugepercent-

ageoftheworld’sdebt?

Zulauf:Itdoes.Chinahasdoubleditsdebt

inafewyears’time.Inboomtimes,the

corporatesectorinChinaandother

emergingmarketsmadeallsortsofmis-

takes.Companiesoverexpanded,tookon

toomuchdebtandstaff,andraisedlabor

costsexcessively.Officially,Chinesecor-

porationshaveissued$1trillionindollar-

denominateddebt.Unofficially,itcouldbe

ashighas$3trillion.

Whenwealthiscreatedduringaboom,

thereisnoneedtodiversifyintoother

economies.Oncetheboomisover,how-

ever,thewealthywanttodiversifyout-

sidethecountry.Bylookingatwhathap-

penedinothereconomieswhenboom

timesended,wecanestimatethatabout

$3trillioninwealthwantstoleaveChina.

Thatisahugeamount,andoutflowshave

beenincreasing.

Mosteconomistsandstrategiststhink

Chinaisgrowingby5%or6%.Theylook

atthecountry’scurrent-accountsurplusof

$300billionandthinkeverythingisfine.

ButChinaisrunningacapitalaccount

deficitof$1trillion.Itdoesn’tpublishthat

number,althoughyoucanfigureitout.

Howdidyoufigureitout?

Zulauf:Foreign-exchangereservesfellto

$3.3trillionlastyearfrom$4trillion.The

current-accountsurplusis$300billion,so

thatmeans$700billionhasflowedoutofthe

countryonanetbasis.Thegrossoutflowis

about$1trillion.Ifweassume$1.3trillion

ofChina’sreservesareilliquid,only$2tril-

lionremains.Ifmoneycontinuestoleave

thecountryatthecurrentrate,Chinacould

loseallitsforeign-exchangereservesina

littlemorethanayear.

Topreventthatfromhappening,China

eventuallywillstopinterveninginthecur-

rencymarketstopropupthevalueofits

currency,theyuan,andletitfall.Thegov-

ernmenthasotheroptions:Itcouldraisein-

terestrates,whichwouldbedreadfulfor

theChineseeconomy,ortightencapitalcon-

trols,whichwouldpostponetheproblemof

capitalflight,butcausebiggerproblemsin

thefuture.ThatiswhyChinawillhaveto

letthecurrencyfall.Chinahasabalance-of-

paymentscrisis,whichusuallyendswitha

recessionintherealeconomy.Thecurrency

ABBYJOSEPHCOHEN’SPICKS

Company/Ticker

Price1/8/16

Philips/PHG

$24.04

AbbVie/ABBV

55.65

Mylan/MYL

49.42

SignetJewelers/SIG

126.93

Lowe’s/LOW

70.88

BhartiAirtel/BHARTI.India

INR323.85

OcadoGroup/OCDO.UK

295pence

Source:Bloomberg

Cohen:Whilespendingisweakinenergyandchemicals,itis

“quiterobust”indigitaltechnologyandmedicaltechnology.

P2BW025000-0-R00600-1--------XACL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WEBG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,LA,LD,LG,LK,MI,ML,PI,PV,TD,WO

CompositeCMYK

R8

BARRON’S

January25,2016

outsidetheU.S.Thefu-

turescontractsaretraded

ontheCME.]Friday’s

closingpricewas$98.94.

The

impliedyieldis

1.06%,or100minusthe

price.Theactualyieldis

0.62%,whichmeansafur-

therrateincreaseof44

basispoints[hundredths

ofapercentagepoint]is

pricedin.Thatwon’thap-

pen.IftheFedhikesone

moretimeby25basis

points,youwouldstill

earn19basispointson

thecontract,or44minus

25.Thenotionalsizeof

thecontractis$1million,

andtheterm

isthree

months.Ifyoubuyone

contractandearn44basis

points,that’s$1,100.You

canbuy100or1,000contracts,andmake

yourmoneythatway.

Howwouldyoulosemoneyonthis?

Zulauf:YouwouldlosemoneyiftheFed

hikesratesby25basispointsmorethan

twice.

Doyoubuythefuturesoroptionsonthe

futures?

Zulauf:Webuyboth,butIlikethefutures.

Inequities,IwouldshorttheEEM,or

iSharesMSCIEmergingMarketsex-

change-tradedfund.[Shortsellerssellbor-

rowedsharesintheexpectationofrepur-

chasingthemlateratalowerprice.]

IrecommendedthisintheJuneMid-

yearRoundtable,aswell[“2015Midyear

Roundtable–TopStockPicks,”June15,

2015].TheETFissellingfor$29.50.The

2008lowwas$18.24.Iexpectittohitthat

lowagain.

Second,IrecommendshortingS&P500

futures.TheU.S.corporatesectorhasarel-

ativelyweakbalancesheet.Companieshave

loadedupondebt.Thestockmarketisvul-

nerable,andpricescouldgomuchlower.

The

averagebear-marketdeclineis

22%-23%forU.S.indexes.Iamprepared

foradeclineofmorethan20%.Peoplewill

besurprisedbyhowlowthemarketgoes.

Cohen:Whatisthetimingofyourprojected

decline?

Zulauf:Itstartedlastspringwithastealth

bearmarket.Thefirstlegdownoccurred

lastsummer,andarecoveryattemptfailed.

Nowthesecondlegdownhasbegun.There

mightbeabounce,butthenthesellingwill

resume.Iexpectthreedownlegsfromlast

year’shighs.IamnotsayingtheS&P500

willfall50%,but1600ismyminimumdown-

sidetarget,andIexpectthemarkettohitit

overshootsonthedownside,

andinterestratesrisetoex-

tremelevels.Thatiswhatlies

ahead.

Thatissomebasecase.What

aretheimplicationsforthe

restoftheworld?

Zulauf:China’sAsiantrading

partnerswillalsolettheircur-

renciesfall.Itisconceivable

thatSingapore,whichhasat-

tractedalotofforeigncapital

overtheyearsbecauseofits

imageasastrong-currency

state,willbeextremelyex-

posedtothesituationin

China.Singapore’sbanking-

sectorloanshavegrowndra-

maticallyinthepastfiveorsix

years.Singaporeisnowlosing

capital,whichmeansthebank-

ingindustryislosingdeposits.

Whenthathappens,carry

tradesgoawry,whichisusu-

allyaprescriptionfordisaster.

Iexpectabankingcrisisto

developinSingaporeandto

spreadeventuallytoHong

Kong.

WhatwillhappentotheHong

Kongdollar?

Zulauf:TheHongKongMone-

taryAuthorityhassaiditwill

defendtheHongKongdollar.

Duringthefirststageofthe

crisis,capitalflowedfrom

mainlandChinatoHongKong,

whichdepressedinterestratesinHong

Kong.Inthepastfewdays,thereverse

hashappened;capitalhasflowedoutof

HongKongandshorterrates[interest

ratesonshorter-termgovernmentdebt]

havegoneup.TheHongKongdollaris

peggedtotheU.S.dollar.

Risinginterestrateswillbedeadlyfor

theHongKongstockmarketandreal-es-

tatemarket.Eventually,astheircurrencies

losevalue,Chinaandtheemerging-market

countrieswillreducetheirimports,which

willexertacontractionaryforceonthe

worldeconomy.Theywilltrytoexport

morebycuttingprices,whichwillinfluence

thepricingmechanismthroughoutthein-

dustrializedworld.

Areyoutalkinghereaboutacurrency

war?

Zulauf:Somecallitacurrencywar.

Gabelli:Government-ownedenterprisesin

Chinaarealreadydumpingsteel.

Zulauf:InAsia,aswellastheU.S.,there

hasbeenalargebuildupofinventories,

andinventorylevelsaretoohigh.Thecor-

poratesectorinbothregionsoveresti-

matedfinaldemand.Nowithastocutpro-

duction.Companiesalsooverestimated

theirdebt-carryingability.Rememberthat

cuttingcostsiscuttingsomeoneelse’srev-

enue.Thus,theglobaleconomywillcon-

tinuetoweaken.

Investorsareprettyfullyinvestedin

equitiesaroundtheworld,becauseequities

havebeentheonlygameintown.Theslo-

ganwasTINA:Thereisnoalternativeto

stocks.AmongU.S.householdsandinstitu-

tionalinvestors,equityallocationsareap-

proachingthe2000and2007peaks.Inves-

torsareextendedandvulnerable,anddon’t

havealotofcash.

Atthesametime,themonetaryback-

dropischanging.TheU.S.FederalRe-

servehikedinterestratesinDecember,

andatthemarginisshrinkingitsbalance

sheet.ThePeople’sBankofChinahas

shrunkitsbalancesheetdramaticallybe-

causeitislosingforeign-exchangere-

serves.TheEuropeanCentralBankwon’t

engageinfurtherquantitativeeasing[buy-

ingassetstodrivedowninterestrates]be-

yonditscurrentround,whichmeans

QEisfinishedasapolicytoolfor

now.[MarioDraghi,presidentofthe

EuropeanCentralBank,suggested

ThursdaythattheECBmightease

monetarypolicyfurtherinMarch.]

TheBankofJapanwillcontinuewith

QEreluctantly,butisunhappywith

thegovernmentofPrimeMinister

ShinzoAbebecauseitisn’tdelivering

onreforms.TheBOJwillincrease

QEwhenbondyieldsrise,buying

morebondstopushyieldsdown.In

sum,thebigmonetarypushwehave

seeninyearspastisover.Globalli-

quidityisdeteriorating.Tocomplete

thepicture,thegeopoliticalbackdropwill

deterioratefurther.

Isthereanyhopeforinvestorsunderyour

scenario?

Zulauf:Investorsshouldstayasdefensive

aspossible.Ifyouhavetostayinvested,

stickwithsectorssuchasconsumerstaples

andutilities.Myfirstrecommendationisin

moneymarkets.Idon’texpecttheFedto

hikeratesfurtherthisyear.Instead,Fed

officialswillbringtheirdotsdown.[Mem-

bersoftheFed’spolicy-makingcommittee

publishtheirexpectationsforthefederal-

fundsrateonachartcalledthedotplot.]

TheEurodollarfuturesmarketispredict-

ingtwomoreratehikes.Theywon’tbeex-

ecutedbecausetheworldeconomywill

turnmuchsofter.TheU.S.dollarremains

toostrongversusemerging-marketcurren-

cies.Itdoesn’tmakesensetohikerates

andmakethedollarevenstronger.

TheU.S.economywillsurpriseonthe

downside.IrecommendbuyingDecember

2016Eurodollarfutures.[Eurodollarsare

timeddollar-denominateddepositsheld

FelixZulauf:“IamnotsayingtheS&P500willfall50%,

but1600ismyminimumdownsidetarget.”

Investment/Ticker

Price1/8/2016

BUY

CME90DayEurodollarFuture(Dec.16)

$98.94

CURRENCYTRADES

BuyU.S.Dollar/ShortoffshoreChineseyuan

$1=CNH6.68

BuyU.S.Dollar/ShortSingaporedollar

$1=S$1.44

BuyU.S.Dollar/ShortKoreanwon

$1=KRW1,198

BuyU.S.Dollar/ShortTaiwandollar

$1=TWD33.34

SHORT

iSharesMSCIEmergingMarketsETF/EEM

$29.51

CMES&P500IndexFuture

1,911.50

IBEX35IndexFuture(Spain)

€8,890.80

iSharesMSCISingaporeETF/EWS

$9.58

GermanStockIndexFuture

€9,859.50

EuroSTOXX50Future

3,029.00

Source:Bloomberg

FELIXZULAUF’SPICKS

P2BW025000-0-R00800-2--------XANABG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,LA,LD,LG,LK,MI,ML,PI,PV,TD,WO

CYANMAGENTAYELLOWBLACKComposite

January25,2016

BARRON’S

R9

greatestsportsarenaintheworld—Madi-

sonSquareGarden,inNewYork.Thecom-

panyhas25millionsharesoutstanding,

sellingat$154each,foramarketcapital-

izationof$3.8billion.Ithas$1.5billionof

netcash,andhascommittedtobuying

back$500millionworthofstock.

MadisonSquareGardenownsseveral

sportsfranchises,includingtheNewYork

Knicks,NewYorkRangers,andNewYork

Libertywomen’sbasketballteam.Asa

group,itssportsfranchisescouldbeworth

$1.7billion.InadditiontotheGarden,the

companyownspropertiessuchastheFo-

ruminL.A.,andtheChicagoTheatre.It

leasesRadioCityMusicHallandtheBea-

conTheatreinNewYork.

Anditisareal-estateplay.

Gabelli:That’sright.FromManhattan’s

West34thStreetsouthalongtheHigh

Line,therehasbeenaconstructionrenais-

sance.Therehavebeenmanydiscussions

aboutrenovatingPennStation.Theair

rightsoverMadisonSquareGarden,which

sitsatopPennStation,couldbeworthas

muchas$500million,andthecompanyis

startingtolookatwaystomonetizethat

asset.Thecombinationofcashflow,asset

values,andstockbuybacksallowsmeto

putavalueonthestockof$200to$300per

share.Anotherwaytolookatitis,ifyou

buythestock,yougettheKnicksforfree.

Throughits4.5millionBshares,the

Dolanfamilycontrolsthecompany.There

arealotofwaystomakemoneyhereby

monetizingthecompany’sassets.

Next,Griffon[GFF]isasmall-cap

stock.Thecompanyhas48millionshares.

Thestocksellsfor$16.60.Griffonisin-

volvedinseveralindustries.Throughits

homeandbuilding-productsdivision,the

companyisinvolvedintheU.S.garage-

doorbusiness.Itisa$1.8billionmarket,

andGriffon’sClopayunithasa25%market

share.ItcompeteswithOverheadDoor,

andothers.ItsellsmostlythroughHome

Depot.Thisisagoodbusiness,anditis

improving.Thecompanyhasaddedafew

productlinesinitshomedivision,including

TrueTempergardenandsnow-removal

tools.

WhatareGriffon’sotherbusinesses?

Gabelli:Thecompanyisacomponentsup-

plierfordiapers.Procter&Gamble[PG]

accountsforhalfofGriffon’sdiaperbusi-

ness,andisgainingshare.Griffon’scosts

havefallenasresinpriceshavecomedown,

andthesecostsavingsarepassedonto

customers.But,onbalance,thistooisa

goodbusinessforthecompany.

Griffonalsodevelopsandsellsequip-

mentforthemilitarythroughitsTelephon-

icsunit.Itmakessubmarine-monitoring

hardwareforhelicopters,andisafirst-tier

suppliertoLockheedMartin[LMT].Mili-

taryspendingwillincreasein2016,’17,and

’18,givenChina’smoreaggressiveposture

intheSouthChinaSea,NorthKorea’sre-

portedtestofahydrogenbomb,andthe

eventsintheMiddleEast.TheU.S.has

underspentonitsmilitary,andwe’llhavea

newpresidentnextyear,whichmeans

spendingwillrise.

Herearethenumbers.Griffongener-

atedrevenueofabout$2billionforthefis-

calyearendedSept.30.Ebitda,orearn-

ingsbeforeinterest,taxes,depreciation,

andamortization,wasabout$171million.

Inthecurrentfiscalyearrevenuecould

riseto$2.05billion,andEbitda,to

$180million.Griffonearned73centsa

shareinitslatestfiscalyear.Itcouldearn

85centsasharethisyear,and$1infiscal

2017.GoldmanSachsownsmorethanfive

millionshares.

IsthereanychanceGriffonmightbreak

itselfuporspinoffbusinesses?

Gabelli:Wewouldpreferthat

theydon’tbreakthingsup.

We’dlikemanagementtofocus

onusingthecompany’scash

flowtogrowthebusinessesit

isin,andmakeafewtuck-in

acquisitions.Tome,Griffonis

intherightbusinesses.

Kaman[KAMN],basedin

Connecticut,tiesintotwo

themes:highermilitaryspend-

ing,andthestrugglesofthe

energy,metals,andminingin-

dustries.Kamanhasabout

30millionfullydilutedshares.

Thestockistradingfor$38.

Proforma,withtwoacquisi-

tions,netdebtis$435million.

KamanacquiredTimkenAlcor

AerospaceTechnologiesfrom

thisyear.Thisisaglobalaffair;European

marketswillfall,aswell.Iwouldshortthe

weakestmarketinEurope—Spain,via

IBEX35indexfutures.Spanishcompanies

havealotofexposuretoLatinAmerica,

Brazilinparticular,andSpanishbankswill

sufferbadly.

Imentionedthepotentialforabanking

crisisinSingapore.Idon’trecommend

shortingSingaporebankstocks,butrather

theEWS,oriSharesMSCISingapore

ETF.Inthiscase,aninvestorwillbenefit

frombothdeclininglocalstockpricesand

adeclineintheSingaporedollaragainst

theU.S.dollar.Finally,inEurope,Irecom-

mendshortingtheGermanDAXindexand

theEuroStoxx50,bothviafutures.My

minimumdownsidetargetfortheDAXis

7500.

Schafer:WhereistheDAXtradingnow?

Zulauf:Itisaround9000.Ialsowould

shortemerging-marketcurrencies,particu-

larlyAsiancurrencies.Iwouldbuythedol-

laragainsttheCNH,theChineseyuanoff-

shore.Theyuanoffshoreispricedatabout

$6.60,andcouldshootupto$8.

Cohen:Whatisyourtimeframeforthat?

Zulauf:Iexpectittohappenthisyear.This

willbeanextremelybadyearforinves-

tors.Hopefully,itwillyieldmanyinvest-

mentopportunitiesin2017.Youwillhear

mesoundingbullishthen.

Wedon’tbelieveyou.

Zulauf:IwouldbuytheU.S.dollaragainst

theSingaporedollar,whichistradingfor

$1.43-$1.44.Iwouldalsobuythedollar

againsttheKoreanwonandTaiwandollar.

SouthKoreaisthemosthighlyleveraged

industrialeconomyinAsia.

Schafer:Wheredoesgoldfitintoyourin-

vestmentportfolio?

Zulauf:Goldwillbeatremendoustradeat

somepointthisyear,butweareinadefla-

tionaryenvironment,whichisn’tgoodfor

gold.Whensystemicriskthrives,gold

couldbecomeanimportantinvestment,but

goldisn’tenteringanewbull-marketcycle.

Thepricecouldbreakbelow$1,000an

ouncefirst,andthenrunto$1,400,soI

don’twanttorecommendittoday.You’ll

havetotimeyourentryduringtheyear.

Thesameistrueforbonds.Therewill

beasafe-havenrunintoU.S.Treasuries,

pushingtheyieldonthe30-yearTreasury

bonddownto2.50%orsofrom2.91%.Then

yieldswillriseagain,asthemarketsas-

sumetheauthoritieswillexpandthedeficit

oncetheeconomyturnssour.Governments

willtrytosupportthesystem,butweneed

acalamitytooccurfirst.

Thanksforyourthoughts,

Felix.Mario,you’renext.

MARIOGABELLI

Gabelli:Wehavetalkedtoday

abouttheimpactofChina’s

weakeningeconomyonthe

commoditiesmarket,andhow

problemsintheindustrialsec-

torwillhurtStandard&Poor’s

500earnings.Iamgoingto

discusssomethingunrelated:a

companyIhavefollowedfor

sometimethathasgrown

moreexciting[putsonNew

YorkKnickscap].Iamrefer-

ringtoMadisonSquareGar-

den[MSG],whichownsthe

Zulauf:“IwouldshorttheweakestmarketinEurope—Spain.Spanishcompanieshave

alotofexposuretoLatinAmerica,Brazilinparticular,andSpanishbankswillsuffer.”

MarioGabelli:“TheairrightsoverMadisonSquareGarden,which

sitsatopPennStation,couldbeworthasmuchas$500million.”

P2BW025000-0-R00800-2--------XA

CYAN MAGENTA YELLOW BLACK Composite

R10

BARRON’S

January25,2016

itiscashbreak-even.Atsomepoint,Milli-

comwillbeabletomonetizeitsAfrican

business.TheLatinAmericabusinessop-

eratesinCostaRica,Honduras,Guatemala,

ElSalvador,Bolivia,Colombia,andPara-

guay.Thecompanyalreadyhassoldoffits

Asianoperations.

HowwillitmonetizetheLatinAmerican

portion?

Gabelli:JohnMalone[chairmanofLiberty

Media/LMCA]recentlymergedColumbus

International,atelecomproviderinthe

CaribbeanandCentralandSouthAmerica,

intoCable&WirelessCommunications

[CWC.UK],inwhichhehasastake.Last

summerLibertyGlobal[LBTYA],which

hecontrols,createdatrackingstockcalled

LibertyLiLACGroup[LILAK]totrack

itsoperationsinLatinAmericaandthe

Caribbean.Next,Maloneislikelytouse

LibertyLiLACtofurtherconsolidateoper-

ationsinthatpartoftheworld.Millicomis

likelytobesoldattherightprice.Thecur-

rentCEOofMillicompreviouslyranthe

ChileanoperationsofLibertyLiLAC.

WhatcouldMillicombeworthinabreak-

upandsale?

Gabelli:Letmeputitthisway:IfIwere

runningMillicom,Iwouldfirstselloffthe

Africanbusinessforacoupleofbilliondol-

lars.Ithasabout$200millioninannual

Ebitda.ThenIwouldconsolidateLatin

AmericanoperationswithMalone’s.Thisis

goingtobeabigwinner.Here’sthemath:

Millicomhas100millionshares.TheU.S.

sharesaretradingfor$52.Thecompany

couldgenerate$7billioninrevenuethis

year,and$2.3billioninEbitda.Nextyear

revenuecouldhit$7.4billion,andEbitda,

$2.4billion.Annualcapexis$1.2billion,so

thebusinessiscash-flowpositive.

Next,CBS[CBS]has38millionclassA

shares,ofwhichSumnerRedstone’sNa-

tionalAmusementsowns30million.There

areeightmillioninpublichands.Ourcli-

entsownaboutfourmillionoftheA

shares.TheAsharesaresellingaround

$50,andtheBshares,at$46.Thereare

474millionsharesinall.CBShasaneq-

uity-marketcapitalizationof$22billion;

$8billionofdebt,andanenterprisevalue

of$30billion.Thecompanyoperatestelevi-

sionstationsandproducescontentforTV.

CBShad$13.8billioninrevenuelast

year,goingupto$14.6billionthisyear.

Election-relatedandSuperBowl50adver-

tisingwillbolsterrevenuein2016.Ebitda

was$3.1billion,andcouldriseto$3.4bil-

lion.Thecompanymightbeharvestingas-

setsthroughthespectrumauctionlater

thisyear.Thepriorspectrumauctiongen-

eratedproceedsofmorethan$40billion,

althoughthisauctionwon’tgenerateclose

dendannuallyforthepast59years.Ithas

fouroperatingsegments.Theautomotive

business,conductedundertheNapaname,

contributed$8billionoutofatotal$15bil-

lionin2015revenue.Weexpectrevenueof

closerto$16billionthisyearand$16.5bil-

lionin2017.

Whyhasthestockunderperformedpeers?

Gabelli:About25%ofautomotiverevenue

comesfromCanada,Australia,NewZea-

land,andMexico.Revenuewasupnicelyin

localcurrencylastyear,butdownsignifi-

cantlywhentranslatedintodollars.Atsome

point,thecurrencyheadwindwillflatten

outandthenegativeimpactwilldisappear.

GenuinePartsalsohasanMRObusi-

ness,whichsellsrepairparts.Itcompetes

withFastenal[FAST]andW.W.Grainger

[GWW].Annualrevenueforthisbusinessis

about$4.5billion.Ithasbeendecliningse-

quentiallyinthepastfewmonths,butthe

businessisOK.IexpectGenuinePartsto

earn$4.50asharefor2015,$5thisyear,and

$5.50nextyear.Thecompanypaysanan-

nualdividendof$2.46ashare,whichitis

likelytoraiseagainthisyear.

Shiftinggears[everyonegroans],people

areuncomfortablewiththeoutlookfor

emergingmarkets,butIlikeKinnevik

[KINVB.Sweden],aSwedishcompanythat

hasseveralemerging-marketsubsidiaries.I

recommendeditlastJanuary.Ifyougive

$1billiontoaprivate-equityfund,theytake

feesand20%ofprofits,andyouhavenoli-

quidity.InKinnevik’scase,youcaninvestin

abasketofcompaniessellingatadiscount

tonetassetvalue;managementdoesn’ttake

two-and-20[2%infeesand20%ofprofits],

andyoucangetyourmoneyout.

Whatisthestockprice?

Gabelli:Kinnevikhas277millionA-andB-

classshares.Thestockwaspricedat238

Swedishkronor[$28]lastFriday.Kinnevik

hasinvestmentsine-commerceoperations.

ThebusinessIamfocusedonisMillicom

InternationalCellular[MIICF].

Millicomhas60millionwirelesscustom-

ersinAfricaandLatinAmerica.InAfrica,

Timken[TKR]for$45million.

KamansellsJPFs,orjointprogramma-

blefuzes,usedtoprogramprecision-guided

bombsaboardmilitaryplanes.TheU.S.Air

ForcehasplacedordersforKaman’sJPFs,

ashaveothernations.Onesmallbutimpor-

tantconcernisthattheU.S.Navyjust

awardedafuzecontracttoanothercompany,

whichwillbephasedinstartingin2021.

Witmer:Whichcompanyisthat?

Gabelli:It’sOrbitalATK[OA].Kamanalso

isasubcontractortoLockheedMartinfor

cockpitsfortheBlackHawkhelicopter.It

hasanaerospace-structuresbusiness.But

thecrownjewelisabusinessthatmanufac-

turestaperedrolledbearingsforcommer-

cialaircraft.Astherampraterisesonnew

planesfrom

Boeing[BA]andAirbus

Group[AIR.France],Kamanbenefits.This

businesshasbeenparticularlystrong.In-

cludingrecentacquisitions,bearingsreve-

nuecouldreachabout$300millionthis

year,and$320millionin2017.Ebitdacould

risefrom$105millionin2016to$120mil-

lionin2017.TheJPFbusinessisoperating

atcapacity.Growthcanbeaccommodated

bymachineryandlabor.

Whatishappeningontheindustrialside

ofthecompany?

Gabelli:Thatbusinessfaceschallenges.Ka-

mangeneratesabout$1.2billioninannual

revenuefromitsdistributionsegment,

whichmainlyincludesthesaleofMRO

[maintenance,repair,andoverhaul]sup-

plies.About20%ofdistributionrevenueis

tiedtoEMM—energy,mining,andmetals.

Thecompanyacquiredabusinesswithop-

erationsinPennsylvania,neartheMarcel-

lusShale.Thathasbecomeanairpocket:

Revenueinthedistributionsegmentde-

clinedatanacceleratingrateinthefourth

quarter,asenergypricesfell,andwill

probablycontinuedeteriorating.

Kamangeneratesalotofcash.Itisrea-

sonablywell-managed,andthedefense

sideofthecompanywillgetmoretraction

incomingyears.Charles“Chuck”Kaman

foundedthecompanyinthe1940s.Asan

aside,thefirsttimeIvisitedhisoffice,the

guy’sdog,Otto,cameoverandputhis

headonmylap.Ididn’taskanyaggressive

questionsafterthat.

ChuckKamanwasasmartman.

Gabelli:IexpectKamantoearn$2.90a

sharethisyearand$3.10in2017.

Auto-partsstockswereataleoftwocit-

ieslastyear.O’ReillyAutomotive[ORLY]

wasup31%.PepBoys—Manny,Moe&

Jack[PBY]wasup87%.GenuineParts

[GPC]wasdownabout20%.GenuineParts

istradingfor$78andhas150.8million

shares.Thecompanyhasraisedthedivi-

Gabelli:”IfIwererunningMillicom,IwouldfirstsellofftheAfricanbusiness.ThenI

wouldconsolidateLatinAmericanoperationswiththoseofJohnMalone.”

MARIOGABELLI’SPICKS

Company/Ticker

Price1/8/16

MadisonSquareGarden/MSG

$153.84

Griffon/GFF

16.60

Kaman/KAMN

38.40

GenuineParts/GPC

78.56

MillicomIntlCellular/MIICF

51.90

CBS/CBS

46.46

DiscoveryCommunications/DISCA

26.01

Source:Bloomberg

P2BW025000-0-R00700-1--------XA

CYANMAGENTAYELLOWBLACKComposite

January25,2016

BARRON’S

R13

tothat,duetobuyerexhaustion.

WhatisCBSlikelytogenerateinearn-

ings?

Gabelli:Thecompanyearned$3.30ashare

lastyear,andcouldearn$3.90thisyear

and$4.25nextyear.Thestockissellingfor

11timesnextyear’sestimate.Thebroad-

castingbusinessaccountsforalmost$9bil-

lionofrevenue.Ontheprogrammingside,

IlikeRayDonovanbetterthanDownton

Abbey,andIlikeTheWalkingDead.

Gundlach:That’salotofTV.

Gabelli:Inadditiontobigsourcesofadver-

tisingandthespectrumsale,thereisCBS

AllAccess,thecompany’s“over-the-top”or

streamingservice.

Black:Thestockischeapstatistically,but

[CBSCEO]LeslieMoonvesmakesnorth

of$50millionayearandhasn’tdelivered

muchtop-linegrowth.

Gabelli:Comeon,hedge-fundmanagers

makealotofmoney.Thisguy[pointsto

Gundlach,sittingtohisright]runs$63bil-

lioninfixed-incomeportfolios,andmakes

alot.

GiveustherangeofoutcomesatCBS.

Gabelli:Redstoneis92.Whenhepasses

fromthescene,willhisfamilyhangonto

Viacom[VIAB],whichhealsocontrols,

andsellCBS?Alotoforganizationsand

individualsmightlikeCBS.

Lastly,DiscoveryCommunications

[DISCA]has645millionsharesoutstand-

ing:223millionAshareshaveonevote,

sevenmillionBshareshave10votes,and

415millionCsharesdon’tgetavote.Ma-

loneisinvolvedwiththiscompany,too;he

ownsaboutsixmillionoftheBshares.Dis-

coveryhas$7.3billionofdebt,anda$25

stockprice.Ithasamarketcapof$16bil-

lionandanenterprisevalueof$23.7billion.

Thecompany’svariouscable-TVchannels

generated$6.4billionofrevenueinthelat-

estyear,abouthalfoutsidetheU.S.

Revenuecouldclimbto$6.8billionthis

yearand$7.2billionnextyear.Weforecast

Ebitdaof$2.6billionfor2016,and$2.9bil-

lionfor2017.Thecompanyearned$1.80

lastyear.Itcouldearn$2.15thisyearand

$2.55nextyear.NeitherCBSnorDiscov-

eryhasmuchcapex.Theyaregreatcash

generators.ThebigissueforDiscoveryis

howtomigrateitscontenttoglobalplat-

forms,includingsmartphones.TheCEO,

DavidZaslav,isterrific.Discoverywonthe

non-U.S.broadcastrightsfortheOlympic

Gamesfrom2018through2024.That’sit.

Inthatcase,thankyou.Jeffrey,it’syour

turnatbat.

JEFFREYGUNDLACH

Gundlach:FelixlaidoutalotoffactsthatI

havealsobeenobserving.Iagreethatthe

Fedwon’tbeabletoraiseinterestratesac-

cordingtoitsdots,particularlyifyoufollow

thedotplottotheendof2017.Itsuggests

theFedwillhikerateseighttimes,by200

basispointsinall.Basedonthedeteriora-

tioninstockprices,commodities,andjunk

bonds,Ihavebeenwaitingfor

theFedtostartdialingback

itsrate-hikerhetoric.Wegota

littleofthattoday,whenDen-

nisLockhart[presidentofthe

FederalReserveBankofAt-

lanta]saidtheFedmightnot

haveenoughdatatomove

ratesupinMarch.

Accordingtosomefixed-

incomemanagers,thestep-

functiondeclineinjunk-bond

priceshascreatedanover-

whelminglyattractiveoppor-

tunity.AtDoubleLine,weare

notofthatopinion.While

junkbondstiedtothecom-

moditiescomplexareduefor

arally,itwillbearallywithin

acorrection.LikeFelix,we

believeChinaisgrowingata

muchslowerratethanthe

governmentclaimsandpeo-

plewanttobelieve.The

WorldBankrecentlydropped

itsglobalgrowthestimatefor

2016to2.9%from3.3%.Since

Chinais16%oftheworld

economy,globalgrowthmight

beonly2%.

Inthisenvironment,currencydevalua-

tionbecomestheonlytooltospurgrowth

formanycountriesexperiencingnegative

GDP.InBrazil,thelargesteconomyin

SouthAmerica,GDPgrowthisnegative4%,

evenifthecountry’sfinanceministersaysit

isnegative2%.Again,likeFelix,Irecom-

mendshortingtheiSharesEmergingMar-

ketsETF.

Weallowdoubles.

Gundlach:Thecorrelationbetweenthe

emerging-marketsETFandcommodity

pricesisincrediblyhigh,andthegaptoday

betweencommoditypricesandtheETF

priceisremarkablywide.Thissuggests

furtherdownsideinemerging-market

stocks.TheMSCIEmergingMarketsIn-

dex,whichtheETFtracks,isnowaround

700.Ifcommoditiespricesstayatcurrent

levels,historysuggeststheindexshouldbe

around450.Itwouldprobablyovershootto

thedownside,soyoucouldbelookingata

40%,orpossibly50%decline.

Howmuchworsecouldthingsgetinthe

junk-bondmarket?

Gundlach:Iexpectittoremainchallenged.

Itwouldrequireabigrallyincommodities

pricestoavoidadebt-defaultcycle.How-

ever,aportionofthecreditmarkethasa

safetycushionlargeenoughtoabsorban-

other200-or300-basis-pointwideningin

junk-bondspreadsversusTreasuries.I’m

referringtoclosed-endbondfunds,which

JeffreyGundlach:“Basedonthedeteriorationinstockprices,commodities,andjunkbonds,Ihave

beenwaitingfortheFedtostartdialingbackitsrate-hikerhetoric.”

��

��

�NuveenAll-American

MunicipalBondFund

FAARX

Avalue-oriented

approach

totax-exem

ptincome*

OverallM

orningstarRating™forClassIsharesamong191

MuniNationalLongfundsasof9/30/15

��

��

�NuveenRealAsset

IncomeFund

NRIIX

Diversifiedincomefrom

global

tangibleassets

OverallM

orningstarRating™forClassIsharesamong465

WorldAllocation

fundsasof9/30/15

��

��

NuveenStrategic

IncomeFund

FCBY

X

Abroadlyflexible,multi-sector

bond

fund

OverallM

orningstarRating™forClassIsharesamong225

MultisectorBondfundsasof9/30/15

Morningstarratingsarebasedonrisk-adjustedreturns.

*Someincomemaybesubjecttostateandlocaltaxesand

thefederalalternativeminimum

tax.

Ratingsarefortheperiodended9/30/15.Morningstarrated

theNuveenAll-AmericanMunicipalBondFund’sClassI

shares,fortheoverall,three-,five-and10-yearperiods,

5starsamong191,191,181and147MuniNationalLong

funds,respectively;theNuveenRealAssetIncomeFund’s

ClassIshares,fortheoverallandthree-yearperiods5stars

among465WorldAllocationfunds,respectively;andthe

NuveenStrategicIncomeFund’sClassIshares,fortheoverall,

three-five-and10-yearperiods,4starsamong225,225,169

and101MultisectorBondfunds,respectively.Theseratings

areforClassIsharesonly;otherclassesmayhavedifferent

performancecharacteristics.Investmentperformance

reflectsapplicablefeewaivers.Withoutsuchwaivers,total

returnswouldbereducedandratingscouldbelower.Some

fundsm

ayhaveexperiencednegativereturnsoverthetim

eperiodsrated.Forfundswithatleastathree-yearhistory,

aMorningstarRating™

isbasedonarisk-adjustedreturn

measure(includingtheeffectsofsalescharges,loads,and

redemptionfees)withemphasisondownwardvariations

andconsistentperformance.TheOverallMorningstar

Rating™

forafundisderivedfromaweightedaverageofthe

fund’sthree-,five-,and10-year(ifapplicable)risk-adjusted

returnmeasuresandMorningstarratingsmetrics.Thetop

10%offundsineachcategoryreceive5stars,thenext22.5%

4stars,thenext35%3stars,thenext22.5%2stars,andthe

bottom

10%1star.Eachshareclassiscountedasafraction

ofonefundwithinthisscaleandratedseparately.©2015

Morningstar,Inc.AllRightsReserved.TheMorningstar

informationcontainedherein:(1)isproprietarytoMorning-

star;(2)maynotbecopied;and(3)isnotwarrantedtobe

accurate,completeortim

ely.NeitherMorningstarnorits

contentprovidersareresponsibleforanydamagesorlosses

arisingfromanyuseofthisinformation.

Pastperformanceisnoguaranteeoffutureresults.

P2BW025000-0-R00400-1--------XA

R14

BARRON’S

January25,2016

tradeontheNewYorkStockExchange.

Closed-endsareoneofthebestplaysonthe

Fednotraisinginterestrates.Ilikethem

betterthantheEurodollarfuturesideaFe-

lixdiscussed.

Closed-endfundsareleveraged,andin-

vestorshavebeenafraidtoownthembe-

causetheyfearthattheFedhaslauncheda

tighteningcycle.Also,basedondailydata

goingback20years,theyhavetradedata

2%discount,onaverage,tonetassetvalue.

Recently,however,thesectortradedata

10%to12%discounttoNAV.Ithastraded

atsuchasteepdiscountonly5%ofthetime.

Inthepast20years,thediscounthasbeen

widerthanthatonlyduringthefinancial

crisisin2008-’09.

Rogers:Areyoureferringonlytofixed-in-

comeclosed-ends?

Gundlach:Yes.Ifhistoryisanyguide,dis-

countswouldwidenfurtheronlyina2008-

typescenario,whichispossible,although

doubtfulsosoonafterthepriorcrisis.Un-

dercurrentcircumstances,youhaveabout

twopercentagepointsofdownside,and10

pointsofupsidetoreturntothehistorical

discount.Thatmakesabasketofclosed-

endsattractive.Ifyouboughtajunk-bond-

orientedclosed-endtradingata12%dis-

counttoNAV,someofthebondswouldbe

tradingata15%discount.Thisisn’t

abadidea,butIpreferBrookfield

TotalReturnfund[HTR].Itis

tradingjustaspoorlyassomeother

closed-ends,butisvastlysafer.

Brookfield’sNAVis$25.75a

share.Itistradingat$21.77,for

abouta12%discounttoNAV.It

paysamonthlydividendof19cents,

whichithasn’tchangedformore

thansevenyears.Whileinvestors

havebeencrushinganythingthatis

interestrate-exposed,thereisalso

littleabilityintheclosed-endfund

marketforinstitutionalinvestorsto

arbitragethediscounts.Forexam-

ple,atDoubleLine,wemanage

$85billion.Youthoughtitwas$65,

huh?$85,bro.

Gabelli:Isaid$63.Myestimatesare

alwayslow.

Gundlach:ThereisnowayIcould

buytheseinstitutionallywithoutthe

discountsinstantlydisappearing,

becausethevolumeissolow,rela-

tivetotheamountIwouldhaveto

buytomakeadifferenceonDouble-

Line’s$85billioninassets.Closed-

endsareagoodopportunityforthe

retailinvestor.

BrookfieldTotalReturnyields

10.47%.Itisleveraged35%;hence,

theworryaboutinterest-raterisk.

Junkbondsandcommoditiesare

GroundZeroofthebondmarket’s

andtheeconomy’sproblem,butonly8%of

thisfund’sportfolioiscorporatecredits.An-

other2%ispreferredstocks,andtherestis

mortgage-backedsecurities.MBSareim-

munetotheproblemoflowercommodities

prices.Loweroilpricesactuallyhelphome-

ownersputextracashintheirpockets.That

makesitmorelikelytheywillmakemort-

gagepayments.

Gabelli:HavingseenTheBigShort,I’m

nervousaboutMBS.

Gundlach:Trustme,therearen’talotof

MBSfromNorthDakota[amajorshale-oil

region].TheMBSarenon-government-

guaranteed,sodefaultscouldbeanissue.

Yetwithhousingpriceshavingrisenfor

fouryearsandconsumersgettingabreak

onoilprices,thefundamentalsarefavor-

able.WhileIlikeHTR,aninvestorcould

puttogetherabasketofclosed-endsyield-

ing10%and12%andsellingata10%to

15%discounttoNAV.

Priest:Withrespecttoclosed-endfunds,if

youassumethatthemanagementfeeisa

perpetualclaimonnetassetvalue,the

presentvalueofthatstreamoffuture

claimswillalmostalwaysleadtoamarket

pricebelowthefunds’NAV.Historically,

thatdiscountcanvary,but8%to10%is

notuncommon.

Gundlach:Yourargumentmakesmathe-

maticalsense,buthistoricallythatdiscount

hasbeen2%.Areversiontothemeanisn’t

unheardof;basedonrecentdiscounts,it

wouldamounttoa10%gainintheprice.

Witmer:Withtheyield,thereturnwould

be20%.

Gundlach:Iwasgettingtothat.TheS&P

500yields2%.Eitherthecreditmarket

hastoimprove,orstockshavetofallfur-

ther,becausetherehasbeenayawning

gapintheperformanceofthesemarketsin

recentmonths.IftheS&Prises10%,

closed-endscouldreturn20%.Ifthestock

marketfalls30%,adeclineisalready

pricedintothesefunds.Ilookatclosed-

endfundsasagoodplacetoputyourrisk

money.

Whatisthebestwaytoassembleabas-

ketofqualityclosed-ends?

Gundlach:Youhavetodecidewhichsectors

youareinterestedin,andlookupthedis-

countstoNAVbecausetheyaren’thomoge-

nous.[Barron’spublishesweeklydataon

closed-endfunds;seepageM40,orthe

MarketDatasectionofBarrons.com.]

Priest:Inmypriorlife,weranmany

closed-endfunds.Wedecidedtoadopta

novelpolicy:Chargeinvestorsbasedon

marketvalue,ratherthanthenetasset

value.Yetthediscounttonetassetvalue

didn’tchangeatall.

Gundlach:I’mnotsurprised.Closed-end

fundsaren’twellunderstood.

Priest:Itseemslogicaltoinvestinliquid

fixed-incomeclosed-ends,ratherthanthose

equityclosed-endswithapreponderanceof

illiquidprivateplacements,wherevalues

aren’tdeterminedbythemarketoranin-

dependentthirdparty.Moreover,forsome

funds,frequentrebalancingoftheportfolio

maycauselargecapitalgains.Low-turn-

overequityclosed-endfundsmakesense.

Witmer:Wholendsclosed-ends

money?

Gundlach:Afundmanagercanes-

tablishabanklineofcreditordoa

reverserepo[reverserepurchase

agreement].

Black:Whathappenstothemort-

gageportfolioifinterestrates

rise?

Gundlach:Itisabondportfolio,so

itwillgodown.Butpricedata

12%discounttoNAV,itistrading

atwhatitwouldbeworthifrates

were150basispointshigher.

That’sthecushionofsafety.You

havetoaskyourself,inwhatcon-

textwouldratesrise?Theeconomy

wouldbedoingOK,andtheback-

dropwouldbelessdeflationary.

Thediscountwouldabsorbsomeof

theimpactofhigherrates.Thedis-

countisthesecretsaucehere.If

youcanacquirea$100billfor$85,

Irecommendthatyoudoso,as-

sumingyouconsidera$100billat-

tractivetobeginwith.

Itwasn’tsolongagothatpeo-

plewoulddojustaboutanythingto

geta7%yield.Thosewhobought

masterlimitedpartnershipslosta

lotofmoney.Nowthereisplenty

ofyieldoutthere,andpeoplesay

they’reafraidoftheFed.Fears

thattheFedwillraiseratessignif-

icantlyareoverblown.Thisbrings

Gundlach:“Eitherthecreditmarkethastoimproveorstockshavetofallfurther,becausetherehas

beenayawninggapintheperformanceofthesemarketsinrecentmonths.”

“Accordingtosomefixed-incomemanagers,the

declineinjunk-bondpriceshascreatedanover-

whelminglyattractiveopportunity.AtDoubleLine,

wearenotofthatopinion.”–JeffreyGundlach

CYAN MAGENTA YELLOW BLACK Composite P2BW025000-0-R00300-1--------XA

January25,2016

BARRON’S

R15

metoAnnalyCapital

Management[NLY],one

ofthelargestmortgage

REITs[real-estateinvest-

menttrust].Ithasan

$8billionmarketcapand

hasbeentradingata25%

discounttobookvaluefor

sometime.Itisprobably

riskierthanHTRbecause

itisleveragedaboutsix

times,sothereissignifi-

cantexposuretoborrow-

ingcoststhatcouldrise

overtime.

Schafer:Whatisthestock

price?

Gundlach:Itissellingfor$9.41.Afewyears

back,itsoldfor$18.Thesesortsofstocks

havestep-functionmoves.Theydon’tmove

byafewpercent;theygofrom$18to$12

andfrom$12to$9,andiftheyieldcurveis

inverted,andtheyhavetocuttheirdivi-

dends,thingsgetreallybad.Butadiscount

of30%tobookvalueisthewidesteverfor

Annaly,andhistoricallyverywidefora

mortgageREIT.Annalyispayingadividend

of30centsperquarter.Ityields12.75%.The

environmentforAnnalyhasimproved.

Schafer:Didn’tAnnalycutitsdividend?

Gundlach:Managementcutitin2013,butit

hasbeenatthislevelforawhile.When

ratesrosesharplyduringthe“tapertan-

trum”in2013,aftertheFedhinteditwas

goingtoreduceassetpurchases,Annalyap-

propriatelygotscaredandreduceditslever-

age.Whenyoureduceleverage,youreduce

yourearningspower,andthenyouhaveto

cutyourdividend.Annalyprimarilyowns

government-guaranteedmortgagesandtries

tohedgetheinterest-raterisk.Thisischal-

lenging,buttheysurvivedthecreditcrisis

bydoingso.Youhavetogivethemcreditfor

that.Thediscounttonetassetvaluegotas

wideas30%backthen,inafarmorechal-

lengingenvironment.Attoday’sdiscount,a

lotofbadthingsarepricedin.IftheFed

doesn’traiseinterestratesmuch,thestock

shouldgohigher.

Black:AtAnnaly,thereusedtobeamis-

matchbetweenfundingtheassetsandliabil-

ities.

Gundlach:Thatisalwaysachallenge.They

arebuyingmortgageswithaninstabilityas-

pecttothem,astheydon’tknowexactly

whenthemortgageholderswillpaythem

off.ThehedgesarelargelyTreasury-or

swaps-based[interest-rateswaps],andthey

don’thavethesameinstability.Thatiswhy

thesestockscanbevolatile.Buttherearea

lotofwaysforthistogoright,andifit

doesn’t,you’lljusthavetocryyourwayto

thebank,clippinga12.75%yield.

WhybuyAnnaly,asopposedtoanother

mortgageREIT?

Gundlach:Itishighlyliquid.Ihave

evenbeenabletobuysomeshares

inourinstitutionalbusiness.Also,I

knowthecompanyandhavetalked

tomanagementseveraltimes.

Athirdwayofgettingincomeis

prettyrisky,butIlikeitalot.I’m

talkingaboutPuertoRicoGOs

[general-obligationbonds]—the8%

GOsduein2035.Thegeneral-

obligationbondshavethehighestconstitu-

tionalprotections,whichmeansborrowers

mustbepaidfirst,aheadofothercommon-

wealthdebtholders.PuertoRicohasshown

awillingnesstodefaultonsomeofitsdebt,

butdefaultingonthiswouldbetough.

MythesisforowningPuertoRicodebt

hasalottodowithFlorida.Thereare

manyvotersinFloridawithtiestoPuerto

Rico,andFloridaisacriticalstatetowinin

thepresidentialelection.Istartedbuying

thebondsaround80,andboughtmoreat

71.Thebondsaretripletax-exempt,mean-

inginterestpaymentstoU.S.citizensaren’t

taxedatthefederal,stateorlocallevel.In

ahigh-taxstatesuchasCalifornia,an11%

or12%yieldisequivalentto23%,taxed.

MaybeIwon’tgetback100centsonthe

dollar.Maybethegovernmentwilllet

PuertoRicogo.ButPresidentObama

spokeinthePuertoRicostatehousewith

theU.S.flagsewntogetherwiththeflagof

PuertoRico.Itdoesn’tguaranteeanything,

butitisareasontotakeaflyer.Evenifthe

debtisrestructured,youmightget70cents

onthedollar,andyou’regettingeight

pointsofcouponperyear.Thisparticular

issueisafewbilliondollars.

Gabelli:Ifyouwererunningthecountry,

whatwouldyoudotohelpPuertoRico?

Gundlach:Iwouldextendthemtheabilityto

fileforbankruptcyprotection,andrestruc-

turewhattheycan.Imightextendthem

somesortoflifelineeconomically.Iamnot

advocatingthis,andIdon’tcarewhatshape

arestructuringtakes.Butat73centsonthe

dollar,you’regoingtomakedecentmoney,

particularlyifyou’reataxableinvestor.Itis

aspeculativeinvestment.

Next,investorsoftenusediversification

tojustifybuyingthingsthatareupalot,

butbondinvestorswhohaven’tdiversified

beyondtheU.S.mightconsiderdoingso.

TheDoubleLineCoreFixedIncomefund

[DBLFX]was100%dollar-denominated

since2011,whenthedollarwasatalow.For

thefirsttimeeverlastweek,Istartedto

buyadiversifiedbasketofnon-dollar-

denominatedfixed-incomeassetsofdevel-

opedcountries.Thedollarisovervalued.It

rose25%inayear.Peoplethinkastronger

dollaraccompaniesthestartofaFedtight-

eningcycle,buthistorysuggestsotherwise.

Itispossible,evenlikely,thattheFedwants

todialbacksomeofitsrate-hikerhetoric.If

thatisthecase,thedollarcouldweaken

about10%againstabasketofcurrencies.

Schafer:Beinglongthedollarisacrowded

trade.

Gundlach:Everyoneisononesideofthe

boat,andtheyjustifyitbysayingtheFed

isgoingtotighten.

Zulauf:Soyouarebuyingthecurrenciesof

otherindustrializedeconomies?

Gundlach:Yes—eventheCanadiandollar,

whichlookslikedeathbecauseofthedrop

inoilprices.Weareoverdueforacommod-

ityrally.

Whatisthebestwaytoexecutethisin-

vestment?

Gundlach:BWX[SPDRBarclaysInterna-

tionalTreasuryBondsETF]woulddothe

job.OnereasonTreasuryyieldsbottomed

inJuly2012wasbecauseEuropeanswere

buyingdollarslikecrazy.Theydidthatby

buyingbonds.Youhadamonstrousmovein

theU.S.bondmarketthattookthe10-year

Treasuryyielddownto1.38%.Nowitis

nearly100basispointshigher.Iamadvo-

catingdiversificationintodeveloped-coun-

trycurrencies.

Finally,whileIregardU.S.equitiesasa

muchbetterbetthanemergingmarkets,I

recommendbuyingtheIndiastockmarket

throughtheiPathMSCIIndiaexchange-

tradednote[INP].Indianequitiescould

haveahardtimeasemergingmarketssell

off,butthelaborforceisgrowing.Indiawill

betheChinaofthenextgeneration,in

termsofequityreturns.Thingsarebad.In-

diahasalotofcorruption.Thatmeans

thingsmightgetbetter.

Youmadeahigh-profilenegativecallon

Apple[AAPL]afewyearsago.Whatare

yourthoughtsnow?

Gundlach:IrecommendedshortingApplein

April2012at$600ashare[priortothecom-

pany’s7-for-1stocksplit].Thestockroseto

$700.That’swheneveryonemocksyou.But

Iinsisteditwouldfallbelow$425.Itdid,

andweboughtitat$405.Thenwesoldit

toosoon.Idon’thaveapositionorastrong

viewnow.Thestockisn’texpensive,butI

haveanallergytohigh-market-capstocksin

general,becauseIdon’tunderstandhow

theycancompoundwhentheyarealready

sobig.[Apple’smarketcapis$533.9billion.]

Fairenough.Thanksforjoiningus,Jeffrey.�

Gundlach:“Idon’tcarewhatshapeaPuertoRicodebtrestructuringtakes.Butat73centson

thedollar,you’regoingtomakedecentmoney,particularlyifyou’reataxableinvestor.”

JEFFREYGUNDLACH’SPICKS Price/Yield

Investment/Ticker

1/8/16

SHORT

iSharesMSCIEmergingMarkets/EEM

$29.51/2.8%

BUY

BrookfieldTotalReturnFund/HTR

$21.77/10.5%

AnnalyCapitalManagement/NLY

9.41/12.8

PuertoRicoGOBonds(8%,due2035)

72.25/11.6

SPDRBarclaysIntlTreasuryBondETF/BWX

51.77

iPathMSCIIndiaIndexETN/INP

60.29

Source:Bloomberg

CYANMAGENTAYELLOWBLACKCompositeP2BW025000-0-R00200-1--------XA

Barron’s 2016 Roundtable, Part 3: 12 Stocks That Could Outperform

Scott Black, William Priest, Meryl Witmer like the undervalued, including Foot Locker, CVS Health, Axalta.

From left: William Priest, Scott Black, Meryl Witmer Photo: Brad Trent

While stock market selloffs are painful, there is an upside to all that downside: a fresh profusion of bargain-priced shares. Just ask the three top-notch investors featured in this final installment of the 2016 Roundtable—Scott Black, William Priest, and Meryl Witmer. Value investors all, they suddenly see ample opportunities that didn’t exist a few months ago to invest in companies with attractive prospects, strong financials, and invitingly cheap shares.

Scott, the founder and president of Boston’s Delphi Management, told our Jan. 11 gathering of Wall Street savants that he’s on the hunt for companies with accelerating earnings growth. He appears to have found them in multiple and diverse industries, ranging from semiconductors to sneakers to generic drugs. Scott builds financial models the way Gaudi must have built his architectural models: piece by exacting piece. One could learn a lot from his process about how companies prosper and grow.

Bill, a new face at our annual confab, captains New York’s Epoch Investment Partners, which he co-founded after doing time, and doing well, elsewhere on the Street. At Epoch, he’s all about free cash flow—how companies generate it, and how they return wealth to

shareholders. No raging bull, he recommends staying defensive in rock-solid issues, like CVS Health CVS 0.755771819028885% CVS Health Corp. U.S.: NYSE USD97.32 0.73 0.755771819028885% /Date(1454364153165-0600)/ Volume (Delayed 15m) : 3829640 AFTER HOURS USD97.32 % Volume (Delayed 15m) : 85603 P/E Ratio 21.89869714902905 Market Cap 106955746578.429 Dividend Yield 1.7468146321413893% Rev. per Employee 685032 More quote details and news » CVS in Your Value Your Change Short position (ticker: CVS), one of his four favorite picks for the new year.

2015 Roundtable Report Card

2015 Mid-Year Roundtable Report Card

Meryl, a general partner at New York’s Eagle Capital Partners, is hungry for knowledge and contrarian to the core. Once she finds a company, typically little-known, whose outlook is appealing and stock mispriced, she burrows into the business and its financials until she understands them better than the boss. That could well be the case with her current recommendations, including a specialty-coatings company and a Belgian industrial conglomerate. Want to know about liquid-fertilizer production techniques? You have come to the right source.

As readers of earlier Roundtable issues know, the focus this year was on disquieting trends in the global economy that could halt the bull market’s advance. In the dictionary, opportunity precedes trouble, but as this issue’s stellar stockpickers remind us, in markets the opposite pertains.

Barron’s: Scott, what appeals to you in this crazy, mixed-up market?

Black: I have five stocks whose underlying theme is sustainable earnings power—rising earnings power, in fact. We are deep value investors; all five have low valuations on an absolute, not a relative, basis. Townsquare Media TSQ 14.148936170212766% Townsquare Media Inc. Cl A U.S.: NYSE USD10.73 1.33 14.148936170212766% /Date(1454364004679-0600)/ Volume (Delayed 15m) : 168737 AFTER HOURS USD10.73 % Volume (Delayed 15m) : 194 P/E Ratio 29.22909289022065 Market Cap 167864854.644295 Dividend Yield N/A Rev. per Employee 154776 More quote details and news » TSQ in Your Value Your Change Short position [TSQ], based in Greenwich, Conn., sells for $10.48 [closing price on Jan. 8]. There are 27.4 million shares, fully diluted, and the market capitalization is $287 million. The company doesn’t pay a dividend. Townsquare is the third-largest radio-station operator in the U.S., with 309 stations in small markets. The company also has more than 325 companion Websites.

Townsquare bought North American Midway Entertainment, the largest runner of state and local fairs in the U.S., last year, for $75.5 million, or 6.7 times Ebitda [earnings before interest, taxes, depreciation, and amortization]. North American Midway runs 650 live-music and non-music branded events, with more than 16 million annual attendees. It is the No. 1

provider of rides, games, and food at fairs and festivals. Townsquare’s CEO, Steven Price, is a finance person

.

Your kind of guy.

Black: Townsquare had $478 million in revenue last year, including North American Midway. This year, with the help of $10 million in political advertising and 12% growth in live events, we estimate revenue will rise to $520 million. We foresee radio Ebitda of $121 million, based on 30% margins, and Ebitda of $22 million in the rest of the business, based on margins of 18.5%. If operating income is $90 million and interest expense is $30 million, profit before tax would be $60 million. Taxed at 39.6%—although it doesn’t pay taxes, due to net operating loss carryforwards [a tax benefit stemming from prior losses]—Townsquare could earn $36.2 million, or $1.32 a share. The stock is selling for 7.9 times this year’s expected earnings.

Witmer: How long does the tax shelter last?

Black: It lasts through 2018. Townsquare has $606 million in net debt. Free cash could total between $1.82 a share and $2.19 this year, well above reported earnings. The stock is selling for 6.2 times estimated discretionary cash flow.

Management is aiming to deleverage the balance sheet. Gross debt currently equals 5.7 times Ebitda, and the company plans to reduce it to five times Ebitda this year. The goal is to get down to four times Ebitda in the next year or two. In the latest quarter, the Ebitda-to-interest ratio was 3.9 times. Townsquare also has a $50 million bank line of credit, which it hasn’t tapped.

Scott Black: 2016 Outlook, Plus 1 Stock Pick

The founder of Dephi management and long-time Roundtable member says analysts’ estimates are far too rosy, but he still sees a few opportunities for value investors.

Witmer: Has it been public for a long time?

Black: It came public about 18 months ago. Oaktree Capital Group OAK 2.2394881170018284% Oaktree Capital Group LLC Un U.S.: NYSE USD44.74 0.98 2.2394881170018284% /Date(1454364078195-0600)/ Volume (Delayed 15m) : 199770 P/E Ratio 24.053763440860216 Market Cap 6753152423.46283 Dividend Yield 3.576218149307108% Rev. per Employee 2573990 More quote details and news » OAK in Your Value Your Change Short position [OAK] owns 45% of the stock. Because Townsquare’s stock is so cheap, Oaktree is likely to hold it long term, which means more than two picoseconds.

My second stock, Foot Locker FL 2.2794552989934873% Foot Locker Inc. U.S.: NYSE USD69.1 1.54 2.2794552989934873% /Date(1454364080050-0600)/ Volume (Delayed 15m) : 2061939 AFTER HOURS USD68.6445 -0.4555 -0.6591895803183792% Volume (Delayed 15m) : P/E Ratio 18.62533692722372 Market Cap 9273419939.54591 Dividend Yield 1.447178002894356% Rev. per Employee 164154 More quote details and news » FL in Your Value Your Change Short position [FL], is one of the few bricks-and-mortar retailers doing well. It is a leading seller of athletic running gear and apparel. The stock closed Friday at $62.70; there are 140.9 million fully diluted shares, and the market cap is $8.8 billion. The company pays a dividend of $1 a share, and the stock yields 1.6%. The store count has barely increased in the past four years, and stands at 3,432. Earnings have grown in that period at a compounded annual rate of 35%, from $1.07 a share to $3.56. Sales per square foot are up 8%, compounded, to $490 from $360.

The company generates about 70% of its sales in the U.S., and 30% overseas, mostly in Europe. Online growth has run at 12% of revenue, but will probably trend higher. Nike products represent 70% of revenue.

What will drive growth from here?

Black: By adding some new stores and remodeling others, Foot Locker plans to grow square footage by 2% to 2.5% in the next few years. It has set a goal to lift revenue to $10 billion by 2020 from $7 billion now. It wants to take sales per square foot up to $600, and Ebit [earnings before interest and taxes] margins from 11.4% to 12.5%. Management’s stated objective is to grow earnings by 10% or more per year.

Enlarge Image Close

Black: “It is hard to believe that a company [Lam Research] with so much proprietary knowledge sells for only 10 times expected earnings.” Photo: Jenna Bascom

Foot Locker will finish the January fiscal year with revenue of $7.41 billion and earnings per share of $4.27. These are my estimates, not the Wall Street consensus. I budgeted for 4% same-store sales growth in fiscal 2017, and 2% square-footage growth. Ebit could total just over $1 billion. Taxed at 35%, the company could earn $658 million in fiscal 2017, or $4.75 a share. It plans to buy back $300 million of stock, or five million shares. The stock sells for 12.1 times fiscal-2017 estimated earnings, excluding $5.31 a share in net cash.

Operating sources of cash could total $838 million next year. We’ve got capital spending at $275 million, including $50 million in expenditures to relocate corporate headquarters. That leaves free cash flow at $563 million. Return on equity is 20%; return on capital, 20%-plus.

How is the competition doing?

Black: Finish Line FINL -1.2671594508975712% Finish Line Inc. Cl A U.S.: Nasdaq USD18.7 -0.24 -1.2671594508975712% /Date(1454364000034-0600)/ Volume (Delayed 15m) : 1301336 AFTER HOURS USD18.7 % Volume (Delayed 15m) : P/E Ratio 14.96 Market Cap 840121574.211043 Dividend Yield 1.9251336898395721% Rev. per Employee 151218 More quote details and news » FINL in Your Value Your Change Short position [FINL] has been struggling.

We have had few tech-stock recommendations today. One tech stock we like is Lam Research LRCX 1.1561498815991085% Lam Research Corp. U.S.: Nasdaq USD72.62 0.83

1.1561498815991085% /Date(1454364000289-0600)/ Volume (Delayed 15m) : 2610390 AFTER HOURS USD72.62 % Volume (Delayed 15m) : P/E Ratio 15.00413223140496 Market Cap 11406210399.9783 Dividend Yield 1.6524373450839989% Rev. per Employee 807999 More quote details and news » LRCX in Your Value Your Change Short position [LRCX]. The company is a semiconductor-equipment maker focused on front-end chip production. The stock is trading for $70.48. There are 174.4 million fully diluted shares, and the market cap is $12.3 billion. Lam pays an annual dividend of $1.20 a share, for a 1.7% yield. Lam is strong in two areas: wafer etch, where it has a 50% market share, and chemical vapor deposition, where it has a market share in the high-30% area. Lam also is involved in wet-clean and photoresist, another component of semiconductor manufacturing, in which it has a smaller market share. Lam is the only semiconductor-equipment manufacturer whose revenue and earnings grew last year.

Why was it such a standout?

Black: It serves faster-growing markets, and it has gained market share. The company is benefiting from 3-D NAND memory and finFET, or multilayer chip technology. Its current business mix is 72% memory, 18% foundry, and 10% logic. Lam reports in dollars, even though most of its sales are in Asia. In the latest quarter, Taiwan accounted for 28% of revenue; Japan, 18%; Korea, 17%; China, 16%; Southeast Asia, 8%; and the U.S., 9%. Lam struck a deal last year to buy KLA-Tencor KLAC 0.19405881474846992% KLA-Tencor Corp. U.S.: Nasdaq USD67.12 0.13 0.19405881474846992% /Date(1454364000087-0600)/ Volume (Delayed 15m) : 1988129 AFTER HOURS USD67.12 % Volume (Delayed 15m) : P/E Ratio 27.06451612903226 Market Cap 10427997567.7017 Dividend Yield 3.098927294398093% Rev. per Employee 477358 More quote details and news » KLAC in Your Value Your Change Short position [KLAC], a leader in chip-inspection tools.

Enlarge Image Close

In the year ended June 2015, Lam reported $5.26 billion in revenue. We expect revenue to rise 11% in the current fiscal year, to $5.86 billion. Operating profit could total $1.3 billion, and profit before taxes, $1.22 billion. The company has a low tax rate of 15%, yielding net income of $1.036 billion. Divided by 172 million shares, that’s $6.02 in earnings per share.

The company has $11.30 a share in net cash, although that will disappear when the KLA deal is completed. Lam sells for 9.8 times fiscal-2016 estimates. Pro forma return on equity and return on capital are 18.5%.

What is your earnings forecast for 2017?

Black: After adding deal-related cost savings, deducting additional interest expense, and adding another 80 million shares that Lam will issue, we get earnings power of $7.60 a share in fiscal 2017, a dollar more than Lam was projected to earn before the deal. This is a smart, highly accretive acquisition, in a complementary business. It is hard to believe that a company with so much proprietary knowledge sells for only 10 times expected earnings. Many of Lam’s scientists have ties to Stanford University. Lam funds all sorts of research-and-development projects at Stanford. The CEO, Martin Anstice, has done an excellent job.

Like Abby, I like Mylan MYL -0.64528373505409% Mylan N.V. U.S.: Nasdaq USD52.35 -0.34 -0.64528373505409% /Date(1454364000054-0600)/ Volume (Delayed 15m) : 5021599 AFTER HOURS USD52.35 % Volume (Delayed 15m) : P/E Ratio 29.914285714285715 Market Cap 25915048731.604 Dividend Yield N/A Rev. per Employee 362068 More quote details and news » MYL in Your Value Your Change Short position [MYL], a generic-drug company. [Cohen recommended Mylan in last week’s Roundtable issue.]

Give us your thoughts on the company.

Black: The stock closed Friday at $49.42. There are 514 million fully diluted shares; the market cap is $25.4 billion, and there is no dividend. Mylan has approximately 1,400 products. It has 40 manufacturing sites worldwide, and has more than 260 ANDAs pending.

Translate, please?

Black: It stands for abbreviated new drug applications. Mylan plans to seek approval for a generic version of Advair [a GlaxoSmithKline (GSK) asthma treatment] and Copaxone [a treatment for multiple sclerosis sold by Teva Pharmaceutical Industries TEVA 1.9843851659076122% Teva Pharmaceutical Industries Ltd. ADR U.S.: NYSE USD62.7 1.22 1.9843851659076122% /Date(1454364121401-0600)/ Volume (Delayed 15m) : 4385251 AFTER HOURS USD62.7 % Volume (Delayed 15m) : P/E Ratio 31.892166836215665 Market Cap 61794794975.7732 Dividend Yield 2.1690590111642742% Rev. per Employee 444256 More quote details and news » TEVA in Your Value Your Change Short position (TEVA)]. Advair is an $8 billion drug; Copaxone is $3.3 billion. Mylan also sells the high-margin EpiPen [an epinephrine auto-injector used to treat life-threatening allergic reactions]. It has a 95% market share.

Last year, the company bought Abbott Laboratories ABT 1.5852047556142668% Abbott Laboratories U.S.: NYSE USD38.45 0.6 1.5852047556142668% /Date(1454364021438-0600)/ Volume (Delayed 15m) : 14129136 AFTER HOURS USD38.42 -0.03 -

0.07802340702210664% Volume (Delayed 15m) : P/E Ratio 21.688853790613717 Market Cap 56461598614.9293 Dividend Yield 2.7048114434330297% Rev. per Employee 265000 More quote details and news » ABT in Your Value Your Change Short position ’ [ABT] generics business, primarily focused on Europe, for $5.3 billion. The unit’s earnings are a bit of a black box, but here are the numbers. In the past four years, Mylan grew revenue at a compounded annual rate of 9.1%. Operating income grew by 17%, and earnings per share climbed 36%, to $2.34, from 68 cents. In August 2013, Mylan detailed a new five-year goal of 13% annual revenue growth. It expects to earn a minimum of $6 a share in 2018. The company generates 48% of its revenue in North America, 28% in Europe, and 24% in the rest of the world.

One question we ask is, Will the government reduce the price paid by Medicaid and Medicare for generic drugs?

Meryl Witmer: This Stock Could Rise 60%

The Roundtable veteran makes the case for Axalta auto paint and coating company, an undervalued spinoff that could prove recession-proof.

How do you answer?

Black: It is unlikely, but the company has built up a huge reserve in the event this happens. It was $592 million at the end of last year. We expect Mylan to report revenue of $9.67 billion for 2015, rising 10%, to $10.64 billion, in 2016.

Enlarge Image Close

Priest: “In general, I would stay away from materials and most energy companies, and be wary of the industrial sector.” Photo: Jenna Bascom

Schafer: On what basis do you make estimates like this? I have never owned these companies because it is too hard to figure out how they are going to grow.

Black: Historically, Mylan has grown annual revenue between 9% and 10%. It is filing for all sorts of new drugs, and management has run the business well. Gross margins this year could be around 58%, producing $6.17 billion. We model pretax profit at $3.02 billion. The tax rate is only 18% because the company redomiciled abroad; it is headquartered in the United Kingdom. But this gets you to net income of $2.48 billion, or $5.02 a share. The Street is at $4.95 to $4.96. The stock trades for 9.8 times earnings. Return on equity is 24%.

My last name, U.S. Bancorp USB -0.6490264603095357% U.S. Bancorp U.S.: NYSE USD39.8 -0.26 -0.6490264603095357% /Date(1454364020878-0600)/ Volume (Delayed 15m) : 5952479 AFTER HOURS USD39.7615 -0.0385 -0.09673366834170855% Volume (Delayed 15m) : P/E Ratio 12.555205047318612 Market Cap 69904702396.3928 Dividend Yield 2.562814070351759% Rev. per Employee 322008 More quote details and news » USB in Your Value Your Change Short position [USB], is based in Minneapolis. It is probably the most conservative big bank in reserving for loan losses. The stock trades for $39.70; there are 1.766 billion shares, and the market cap is $70 billion. The company pays a $1.02 dividend, for a yield of 2.6%. In 2014, U.S. Bancorp had the highest return on equity among the majors, at 14.7%. It had the highest return on assets, at 1.54%, and one of the best

efficiency ratios, at 53.2%. As of third-quarter 2015, return on assets was 1.44% and the efficiency ratio, 53.9%.

Where does the bank rank in asset size?

Black: It is No. 5 in the U.S. in assets. The bank is targeting 5% to 7% annual growth in net interest income, 7% to 9% growth in noninterest income, and 3% to 5% growth in noninterest expense. It won’t meet those targets this year, due to the low interest-rate environment, although for every 50-basis-point [half-percentage point] uptick in rates, net interest income will increase by 1.7%, because assets reprice faster than liabilities. The bank aims to grow earnings per share by 8% to 10% a year, with an efficiency ratio in the low-50% range.

U.S. Bancorp operates in four business segments. Payment services and credit cards account for 30% of revenue, wealth management is 11%, consumer and small-business loans is 42%, and the wholesale banking and commercial real estate unit is 17%. The bank operates in 25 contiguous states from the West Coast to the Midwest. Net interest margins have been stable at 3.04%. The bank’s Tier 1 equity ratio is off the charts, at 9.2%. The most impressive fact is that U.S. Bancorp has the best reserve for loan losses to nonperforming assets of any major bank in the U.S., at $3.965 billion. The nonperforming assets, including other real estate loans, are $1.525 billion. The coverage ratio is 2.6 times.

Priest: What is the book value?

Black: Book value is about $23 a share. I have modeled a 4% increase in net interest income for 2016, to $11.5 billion. After provisioning for loan losses, it is $10.3 billion. Noninterest income is $9.6 billion. Noninterest expense could increase by 3.5%, to $11.5 billion. Profit before taxes of $8.4 billion, taxed at 27%, gets you to $6.13 billion in after-tax earnings. We assume the bank will spend $2 billion to buy back 50 million shares, which puts earnings per share at $3.52. The price/earnings ratio is 11.3—low for a quality bank.

Thank you, Scott. Bill, are you ready?

Priest: Sure! We put out a piece toward the end of last year, stating that we expect equity markets to struggle to post positive returns in 2016. Global growth is poor. There has been a modest tightening in monetary policy, which I don’t expect to last, and there is a real risk of a blowup in emerging markets, particularly China, which contributed 46% of the growth in the world economy in the past five years. Money managers focused on emerging markets are hemorrhaging assets, and the bottom in these markets isn’t near. Given this backdrop, investors need to be defensive. That means sticking with consumer-staples, health-care, and some technology stocks. In general, I would stay away from materials and most energy companies, and be wary of the industrial sector.

Enlarge Image Close

Our investment approach focuses on free cash flow. There are only five things a company can do with it: Pay a cash dividend, buy back stock, pay down debt, make an acquisition, or reinvest in the business. Most companies do a little of everything, but the key is generating a premium return in excess of your cost of capital. Companies that can do that usually trade at a premium. CVS Health is one we like.

Give us the details, please.

Priest: CVS sells for around $93. The market cap is a little over $100 billion. The company’s free cash flow and earnings are almost identical. CVS could report $5.20 a share in earnings for 2015, probably $5.80 in 2016, and $6.50 in 2017. Free cash flow could go from $5.30 to a range of $4.90 to $5.50. The company runs one of the largest retail-pharmacy chains in the U.S. Annual revenues are just over $150 billion. It is also one of the largest pharmacy-benefit managers.

2 Health Care Stocks for a Slow Growth World

Speaking at the Barron’s Roundtable, Epoch Investment Partners CEO Bill Priest makes the case for CVS and Teva Pharmaceuticals.

CVS is benefiting from several tail winds. One is the expansion of health-care insurance coverage under the Affordable Care Act, or Obamacare. Also, like many companies, it is benefiting from the aging of the baby boomers. Sales of specialty pharmaceuticals and generics are increasing, and, last year, CVS made two strategic acquisitions. It bought Omnicare, a leader in the institutional-pharmacy market, with a 40% market share; Omnicare probably took some business away from McKesson MCK -1.0622437569884458% McKesson Corp. U.S.: NYSE USD159.27 -1.71 -1.0622437569884458% /Date(1454364093202-0600)/ Volume (Delayed 15m) : 2597800 AFTER HOURS USD158.778 -0.492 -0.3089093991335468% Volume (Delayed 15m) : P/E Ratio 20.846858638743456 Market Cap 36797935187.3114 Dividend Yield 0.7032083882714887% Rev. per Employee 2673820 More quote details and news » MCK in Your Value Your Change Short position [MCK], which lowered its fiscal-2016 earnings guidance today [Jan. 11]. CVS also acquired 1,672 pharmacies from Target TGT 0.5661419497376415% Target Corp. U.S.: NYSE USD72.83 0.41 0.5661419497376415% /Date(1454364288053-0600)/

Volume (Delayed 15m) : 4371734 AFTER HOURS USD72.3416 -0.4884 -0.670602773582315% Volume (Delayed 15m) : P/E Ratio N/A Market Cap 44614484853.4204 Dividend Yield 3.0756556364135657% Rev. per Employee 212997 More quote details and news » TGT in Your Value Your Change Short position [TGT] for $1.9 billion in cash. That’s very cheap; they couldn’t build this business for that price.

Are you referring to the pharmacies within Target stores?

Priest: Yes. They will be rebranded as CVS pharmacies. CVS has provided 2016 guidance for revenue to be up more than 17%, and for adjusted earnings to come in between $5.73 and $5.88 a share. The company continues to return a large amount of free cash flow to shareholders. CVS generates close to a 6% shareholder yield if you combine a 4% yield from stock buybacks and a yield of almost 2% from a cash dividend.

Witmer: Do you mean the company is shrinking its share count by 4%?

Priest: On a net basis, yes, although this leads to another point. Some companies buy back their shares, but the impact on share count is offset by share issuance in connection with the exercise of employee stock options. That isn’t the case at the companies in which we invest. We are careful in measuring the net effect of buybacks.

My next stock, Synchrony Financial SYF 0.17593244194229415% Synchrony Financial U.S.: NYSE USD28.47 0.05 0.17593244194229415% /Date(1454364090115-0600)/ Volume (Delayed 15m) : 6573442 AFTER HOURS USD28.46 -0.01 -0.035124692658939236% Volume (Delayed 15m) : P/E Ratio 10.743396226415094 Market Cap 23696595716.6901 Dividend Yield N/A Rev. per Employee 989273 More quote details and news » SYF in Your Value Your Change Short position [SYF], was spun out of General Electric GE -1.5807560137457044% General Electric Co. U.S.: NYSE USD28.64 -0.46 -1.5807560137457044% /Date(1454364008810-0600)/ Volume (Delayed 15m) : 42302769 AFTER HOURS USD28.57 -0.07 -0.24441340782122906% Volume (Delayed 15m) : P/E Ratio 168.2726204465335 Market Cap 294178894676.682 Dividend Yield 3.212290502793296% Rev. per Employee 384872 More quote details and news » GE in Your Value Your Change Short position [GE]. It is the largest private-label credit-card company in the U.S. Synchrony has a little more than 800 million shares outstanding, and the stock sells for $29. Tangible common equity is just over $13 a share. The company could report $2.60 a share in earnings for 2015, and could earn $2.80 in 2016 and $3.10 for 2017. [Synchrony reported on Jan. 22 that it earned $2.65 a share in 2015.] Synchrony has a 40% share of the $100 billion private-label credit-card market.

Retailers like private-label cards because they bypass the networks and their costs are lower. They have access to more customer data than they receive from a general-purpose card used in their stores. Also, retail partners receive a portion of the profits of the card portfolio. Spending on Synchrony credit cards is growing at a faster rate than the industry. Account

balances are also growing faster. Synchrony receivables are growing by double digits compared to a growth rate of 4% for private-label cards and 3% for the industry in general.

Gabelli: The company has its own clearing network.

Priest: Private-label cards at large merchants account for 70% of Synchrony’s revenue. The company also has a consumer-credit business at smaller merchants, which contributes 20%. And it provides financing for elective medical procedures and veterinary procedures. Synchrony is a pure play on the American consumer. The most troubling aspect of these sorts of companies is the percentage of receivables tied to borrowers with low FICO credit scores. Throughout the industry, it is about 20%. We would like to think Synchrony has a good handle on its borrowers, but if credit risk increases among consumers, these companies might feel it a bit. In short, with Synchrony, one has a highly liquid, well-capitalized balance sheet and a motivated management. We expect a share-buyback program and a cash dividend later this year.

NorthStar Realty Europe NRE -0.9533898305084746% NorthStar Realty Europe Corp. U.S.: NYSE USD9.35 -0.09 -0.9533898305084746% /Date(1454364121260-0600)/ Volume (Delayed 15m) : 858409 AFTER HOURS USD9.35 % Volume (Delayed 15m) : P/E Ratio N/A Market Cap 594767183.645057 Dividend Yield N/A Rev. per Employee N/A More quote details and news » NRE in Your Value Your Change Short position [NRE] is a tiny company with a $680 million market cap, about $1.8 billion of debt, and $320 million of cash. There are 63 million shares outstanding, and the stock yields 5.5%. NorthStar is a New York Stock Exchange–listed real estate investment trust. It invests exclusively in European commercial real estate, nearly all Class A space in the U.K. and on the Continent. It is trading at a large discount to net asset value. This portfolio was assembled before the European Central Bank embarked on its current, expansive monetary policy, which means all the properties are likely going to be revalued upward, given the lower discount rate that now exists.

David Hamamoto, the chairman of NorthStar Realty Finance NRF -1.5164279696714407% NorthStar Realty Finance Corp. U.S.: NYSE USD11.69 -0.18 -1.5164279696714407% /Date(1454364248804-0600)/ Volume (Delayed 15m) : 4098955 AFTER HOURS USD11.69 % Volume (Delayed 15m) : P/E Ratio N/A Market Cap 2176934179.60381 Dividend Yield N/A Rev. per Employee 9824280 More quote details and news » NRF in Your Value Your Change Short position [NRF], is the key executive behind this entity, as well. He is a smart guy who previously worked at Goldman Sachs. NorthStar Realty Europe is selling for $10.53 a share. Net asset value at cost is $16 per share, but at today’s value, it is closer to $20. One may receive meaningful price appreciation from the current price, plus a dividend.

Black: I owned NorthStar Realty Finance. It almost wound up in bankruptcy protection in 2007-08, due to a mismatch of assets and liabilities. How do you know that won’t happen again?

Priest: Hamamoto learned his lesson.

Rogers: A brush with bankruptcy is all it takes.

Priest: NorthStar Realty Finance spun off NorthStar Realty Europe last year. It has been transparent about what is happening at NRE.

Next, Vodafone Group ’s [VOD] Nasdaq-listed shares are trading around $32. The market cap is $85 billion. Vodafone is one of the top three wireless telecom providers. It is a low-risk, modest-total-return story, with upside of 10% to 12%. We don’t see much downside. The current yield exceeds 5%, and the company is transitioning from a negative free-cash-flow position to a positive one in the next few years. Capex growth peaked in 2014-15. It is going to trend down in the future. Growth, if it comes, will come from more 4G data consumption. Europe accounts for 70% of Ebitda, and the regulatory regime there is improving. India contributes 10% to 11% of revenue, and South Africa, 8%. Vittorio Colao, the CEO, owns 11 million ordinary shares, worth about 25 million pounds [$35 million]. Periodically, there are rumors they will link with another telecom company, which could produce significant synergies, depending on the terms.

Gabelli: Buying Liberty Global LBTYA 1.5693112467306016% Liberty Global PLC Cl A U.S.: Nasdaq USD34.95 0.54 1.5693112467306016% /Date(1454364000152-0600)/ Volume (Delayed 15m) : 1793032 AFTER HOURS USD34.85 -0.1 -0.2861230329041488% Volume (Delayed 15m) : P/E Ratio N/A Market Cap 30541165501.0345 Dividend Yield N/A Rev. per Employee 481474 More quote details and news » LBTYA in Your Value Your Change Short position [LBTYA] would be a logical next step. Vodafone is a cheap stock and a good way to play currency movement between Europe and the U.S.

Thanks for your thoughts, Bill—and Mario. Meryl, we know the wait will be worth it.

Witmer: The market has fallen sharply and quickly, creating some good opportunities for us. Axalta Coating Systems AXTA 3.4019319613607726% Axalta Coating Systems Ltd. U.S.: NYSE USD24.62 0.81 3.4019319613607726% /Date(1454364101348-0600)/ Volume (Delayed 15m) : 3082812 AFTER HOURS USD24.2039 -0.4161 -1.690089358245329% Volume (Delayed 15m) : P/E Ratio 111.9090909090909 Market Cap 5663089352.04201 Dividend Yield N/A Rev. per Employee 332595 More quote details and news » AXTA in Your Value Your Change Short position [AXTA] is one. It trades for $25 a share and has about 245 million shares outstanding, including options. The company manufactures specialty paints for cars, trucks, and industrial machinery. The management team, together with Carlyle Group, bought the business from DuPont DD 1.023502653525398% E.I. DuPont de Nemours & Co. U.S.: NYSE USD53.3 0.54 1.023502653525398%

/Date(1454364058909-0600)/ Volume (Delayed 15m) : 4341984 AFTER HOURS USD53.52 0.22 0.41275797373358347% Volume (Delayed 15m) : P/E Ratio 25.023474178403756 Market Cap 46239230921.5581 Dividend Yield 2.851782363977486% Rev. per Employee 398889 More quote details and news » DD in Your Value Your Change Short position [DD] at the beginning of 2013, and took it public in the fall of 2014 at $19.50 a share. Our investment thesis begins with management, which has done an exceptional job in continuing to build the company. DuPont milked it for cash, but Axalta’s chief executive, Charles Shaver, and chief financial officer, Robert Bryant, transformed the business by bringing in top talent, implementing accountability across the organization, and investing for growth.

Enlarge Image Close

Meryl Witmer: “Different things spur us to look at potential investments. One is the sale of a company by DuPont.” Photo: Jenna Bascom

How fast is Axalta growing?

Witmer: Ebitda has increased by more than 30% since 2012, to an estimated $865 million last year, even with flattish revenue due to currency head winds. Management has undertaken initiatives to add another $100 million to pretax earnings in the next two years. The crown jewel is the automotive-refinishing business, which is No. 1 globally with a 25% market share. Barriers to entry are large, given its distribution, scale, technology, and relationships with key customers. Axalta provides both the paint and color-matching

technology, and works with body-shop owners to move vehicles through quickly. It helps the owner manage productivity and profitability.

The auto-refinishing industry is consolidating in the U.S., and Axalta is well positioned, with a 44% share of the market supplying the top multisystem operators. As these operators buy more body shops, Axalta gets more business. The refinishing business is driven by collisions, which tend to increase as more miles are driven and more cars are on the road. It is an annuity stream.

The light-vehicle paint business has a 19% global market share. Since the LBO, the company has invested in new plants in Germany and China to expand production. It has won more than 30 new contracts with barely a loss. The contracts will continue to drive revenue in 2016 and beyond.

What do you figure Axalta is worth?

Witmer: We assume modest top-line growth of 3% to 4%, with profit-margin expansion just from cost-savings initiatives. We also assume most of the free cash flow in coming years is used to pay down debt, which enhances the value of the equity. We see earnings per share increasing from $1 a share in 2015 to about $1.95 in 2018. In addition, Axalta has $309 million in noncash depreciation and amortization expense. Capital-spending needs are about $80 million a year. The difference amounts to 94 cents a share, which we add to earnings, to arrive at $2.85 a share in after-tax free cash flow in 2018. A business of this quality deserves at least a 14 multiple of free cash flow. We have a target price of about $40 in two years.

Schafer: We also own Axalta. It has one of the best management teams I have ever seen. The company’s success also speaks to the poor job done by DuPont.

Witmer: Different things spur us to look at potential investments. One is the sale of a company by DuPont.

Gabelli: Ouch! In this case, management bought it for a cheap price and flipped it as an initial public offering.

Witmer: Management made a good return on the IPO because they increased profitability dramatically, not because they loaded the company with debt.

We started looking at my next recommendation, Tessenderlo Chemie, because it bought a small company from DuPont. It is controlled by an industrialist, Luc Tack. At the end of 2015, Tessenderlo [TESB.Belgium], based in Belgium, announced the acquisition of the industrial assets of Picanol Group [PIC.Belgium], another Belgian company controlled by Tack, for 26 million Tessenderlo shares. Pro forma, the combined company will have 69 million shares outstanding. At a current 25 euros a share, Tessenderlo will have a market cap of €1.8 billion [$2 billion]. Net debt is only €90 million, for an enterprise value of €1.9 billion. The combined company will have four segments. Agro will generate about half of

Ebitda. A weaving-machine business acquired from Picanol will account for 30%. The other segments are Bio-Valorization and Industrial Solutions.

Enlarge Image Close

What is bio-valorization?

Witmer: The Bio-Valorization business buys animal hides and bones and processes them to make pharmaceutical-grade collagen and food-grade collagen. Another part of the business processes animal fats.

In the Agro business, Tessenderlo produces liquid fertilizers, mainly in the U.S., and other fertilizers in Europe. It also has a niche crop-protection business. We are particularly excited about the liquid-fertilizer business. The company combines sulfur, often sourced from the waste stream of oil refineries, with either nitrogen or potassium to produce a liquid fertilizer.

Sulfur is a major nutrient required by crops. Historically, sulfur supplementation was unnecessary because gasoline and diesel fuel released sulfur into the atmosphere, and it was deposited onto farmland by rain. Government regulations taking sulfur out of fuel diminished the amount of sulfur content in the atmosphere. Also, less coal being burned by power plants; that’s contributed to sulfur deficiency in the soil. A field deficient in sulfur might yield a much smaller crop.

Gabelli: Is this the business they bought from DuPont?

Witmer: No, that is in the niche crop-protection business. Interestingly, in China, there is no need for sulfur fertilization.

Schafer: Who else is in this business?

Witmer: Kugler, a privately held company. Also, Koch Industries is probably going to add 10% capacity to the industry by getting the sulfur from one of its owned refineries. That is the best and cheapest way.

Gabelli: If this is such a nice business, why would Tessenderlo’s controlling shareholder add a more mundane business, diluting its impact?

Witmer: It is possible the deal will get voted down because he is valuing one business at more than people think it is worth and the other at less. But it is possible he is combining these assets because he has his eye on a bigger deal and wants critical mass. There are other ways to achieve that. The shareholders I know are voting against the deal.

Tack has an exceptional track record as an investor and a business operator. He became CEO of Picanol in July 2009 after a rights offering. In 2008, Picanol reported €282 million of revenue. Ebitda was negative, and the company had €40 million of debt. He quickly cut costs, invested in research and development to improve the product pipeline, and used free cash flow to pay down debt and build up cash. By 2010, the business was profitable, and it probably generated €450 million in revenue and €89 million in Ebitda last year.

When did he get involved with Tessenderlo?

Witmer: In November 2013, Tack acquired the French government’s 27.5% stake in Tessenderlo for €192 million. Through a rights offering and open-market purchases, he has increased his stake to 33%. He became CEO in December 2013 and he has been working to improve and grow Tessenderlo’s businesses by reducing operating expenses, making smart capital expenditures, and changing the culture of the company.

To value the business, we normalize 2015 earnings, adding back some one-time charges. Then we add Piconal’s earnings, to get €2.11 in fully taxed pro forma earnings per share. Plant expansions could add around 40 euro cents per share, which puts future earnings at €2.50. The company deserves a multiple of at least 13 times earnings, as it is essentially debt-free. The Bio-Valorization unit didn’t make money last year, but could be profitable in 2016, adding €3 per share of value. Net operating loss carryforwards are worth a few euros per share. Add it up, and we get a target price of €37, and growing from there. If the merger with Piconal is voted down, using the same valuation criteria, our target price for Tessenderlo is €40. We are voting no. [On Jan. 25, the exchange offer for Piconal was withdrawn by Tessenderlo’s board.]

Black: Have you met with management?

Witmer: I haven’t met them, but we have spoken with them. That wasn’t so easy to do; we e-mailed them requesting a conversation several times, and they turned us down.

But we are excited to find a business of this quality run by a great operator, with no debt, and in a nice niche business.

My next pick is Navigator Holdings NVGS 6.498194945848375% Navigator Holdings Ltd. U.S.: NYSE USD14.75 0.9 6.498194945848375% /Date(1454364064019-0600)/ Volume (Delayed 15m) : 750877 P/E Ratio 8.575581395348838 Market Cap 766777556.748581 Dividend Yield N/A Rev. per Employee 10859500 More quote details and news » NVGS in Your Value Your Change Short position [NVGS]. The stock is trading for $12 a share. The

company has 55 million shares outstanding and about $500 million of debt. It operates a fleet of 29 semi-refrigerated handysize ships [handysize vessels are of moderate size, with a capacity between 15,000 and 35,000 DWT, or deadweight tonnage], designed to carry cargo ranging from liquefied petroleum gases, or LPGs, such as propane and butane to ethane, ethylene, and ammonia. Compared with a large gas carrier, which is three times the size, a handysize ship is more flexible in terms of the cargo it can carry and the ports it can serve.

In addition to the high degree of technical competence required to handle its various cargos, Navigator has excellent operational and commercial capabilities, which allow it to run at more than 95% utilization and quickly adapt to changing circumstances. It has a great management team, with significant ownership of around 2.5 million shares, and discipline regarding capital allocation.

What drives the business?

Witmer: Navigator’s business is supply- driven. The more butane, propane, and such that needs to be moved over water, the more demand there is for its services. Drivers of supply are natural-gas drilling, which in turn is driven by U.S. gas fracking [hydraulic fracturing] and the global buildup of liquefied natural gas, and increased shipping of ethane and ethylene. The U.S. has access to extremely cheap ethane, which is used to produce ethylene. As the U.S. increases its supply of ethylene, and as the plants and ports required to move it come on-stream in the next few years, the opportunities for Navigator will continue to improve. Inexplicably, the stock trades with the price of oil. When oil was $80 a barrel, Navigator was generating about $1.60 a share in after-tax free cash flow and trading in the $20s. Since then, oil has fallen by more than 50%, and Navigator’s after-tax free cash flow has increased by more than 25%, to over $2 a share, and the stock is down, not up.

How do things look for the company next year?

Witmer: Navigator recently disclosed that it has already contracted a significant portion of its capacity for 2016 at rates higher than those in 2015. Navigator has nine ships ordered that will be delivered over the next year and a half. With those at current day rates, after-tax free cash flow could be about $3 a share. Even if shipping rates decline 20%, the company would still earn about $1.65, with all 38 ships. Based on announced export capacity expansions, we believe the supply of seaborne LPG, as well as ethane and ethylene, should keep the industry at a healthy utilization rate. We consider Navigator a real bargain, and have a price target of at least $25 a share.

Black: In the short term, the company will have negative free cash flow because it is spending $44 million per ship on new ships. Once they get to that steady state in a year and a half or so, they will generate free cash.

Witmer: They don’t have negative free cash from operations. It is because they are growing the fleet. To calculate maintenance capital spending, we take the replacement cost of the

entire fleet, less scrap value, and divide by the average life of the ship. In 2016, we charge them for $30 million of capital spending when actual spending for anything beside new ships is $5 million.

Black: To me, that is operational.

Gabelli: I don’t see it as operational.

Black: As Warren Buffett said, the tooth fairy doesn’t pay for capital expenditures.

Gabelli: The stock is cheap. Buy it.

Black: I already own it.

Gabelli: Buy more.

Witmer: I’m going to stop here.

That sounds like a wise decision. Thanks, Meryl–and everyone.