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
Investors came to expect 40, 50, even 100 percent annual returns from their
investments. 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
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
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.