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Where Does the 'Smart Money' Hide
In Turbulent Times?

By Kenneth Hoffman, CFA   FOX MarketWire

The party is over for high-flying New Economy stocks.

 
The late 1990s was an investor's paradise, with every in-vogue name making huge returns, no matter what that company did, or how much money it lost.

Investors came to expect 40, 50, even 100 percent annual returns from their investments. The anticipation heightened as the Nasdaq soared 50 percent in value from October through February. Pundits gushed over the New Economy, while ignoring traditional market cycles, rising commodity inflation and the need for earnings.

As of April 25, however, more than 80 percent of mutual funds tracked by Bloomberg posted losses this year. Despite an obvious shift in the way the market is pricing stocks, especially in a move toward buying "value," pundits continue to urge investment in the recently trounced high-flying stocks.

But the untold story today lies in the Old Economy. Industries such as paper, steel and energy have strong valuation. They have rising earnings, and are trading at historically low price-to-earnings and price-to-cash flows. Most likely, they will prosper due to a robust world economy, much higher-than-expected inflation, and slowing growth domestically.

To illustrate, I recently attended a paper conference in New York City. I know the organizers of the event and asked how many people would be attending. I was told that since paper companies are the "oldest of the old economy," they anticipated that only 30-40 die-hard natural resource managers would attend.

I showed up early to speak to the CEO of Georgia Pacific, and then sat in the front to hear the company�s presentation. When the meeting ended, I turned around to see a sea of portfolio managers packed into the room, with dozens sitting on the floor and standing in the hallway.

These industries use excess cash to buy back stock, purchase competitors, or pay off debt. As a result, these stocks will soar as the high-flying money works its way into vastly sold-off groups such as steel and paper.

Another recommended area is the natural gas area. Due to the growth of the Internet, electricity consumption is soaring, and roughly 1,000 new power plants are being planned or are being built today. Due to the cleanliness of natural gas, 95 percent of these power plants will use natural gas. While demand for natural gas is surging, the domestic supply of natural gas is dwindling, as older wells in the Gulf of Mexico and Texas are running dry. In the 1980s, a new gas well in these regions often produced for over a decade. Today, a well may run dry in just a couple of years.

The key is to be ahead of the herd. Ignore the rosy pundits, and look for companies with strong earnings and low valuations.

— Kenneth Hoffman is the manager of Orbitex Strategic Natural Resources Fund (ONRAX). The Orbitex group of funds are managed by Orbitex Management, Inc., a global investment firm with offices in New York, London and Frankfurt.

 
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