Red Tape As A Stock-Picking Tool

WASHINGTON, D.C. – For the past two years, the World Bank and its private-sector lending arm, the International Finance Corp., have scanned the globe to measure the extent and economic impact of business regulation. Their latest study, titled “Doing Business in 2005,” no doubt makes great reading for the policy wonk set. We think it has some merit for stock pickers too.

Why’s that? For one, the notion of a country’s “business climate” may sound a bit fuzzy, but it certainly carries weight in the markets. Look at the 163-point jump the Dow took last week once it appeared President George W. Bush had his reelection wrapped up.

Also, at the very least, knowing the best and worst locales for business can help you narrow your choice of overseas investments. On U.S. exchanges alone you can find 2,000 non-U.S. firms hailing from 70 countries.

Full story at Forbes.com

The Best Analysts: International Bets

WASHINGTON, D.C. – If you’re looking to invest outside the U.S., here’s one way to go about it. Start with international stocks listed on U.S. exchanges. Then tap into the expertise of Wall Street’s most accurate analysts.

The first part of the equation is easy enough. You can buy shares of foreign corporations traded on U.S. exchanges via American Depositary Receipts, which are certificates issued by U.S. banks acting as the depositary for shares in the non-U.S. companies. Although ADRs don’t eliminate currency risk, these securities are as easy to trade as shares of U.S.-headquartered companies. Dividends from some issues may be subjected to a foreign withholding tax, but U.S. investors receive net distributions in American currency.

And the accurate analysts? For that we turn once again to our friends at San Francisco’s StarMine. Since 1998, the firm has specialized in identifying brokerage analysts with track records for correctly forecasting profits. The technique enables StarMine to create a “SmartEstimate,” or an estimate that is weighted to timely calls from accurate analysts.

Full story at Forbes.com

De-Sprawling The Highway Bill

WASHINGTON, D.C. – Among the big-ticket items it didn’t get around to this fall, Congress failed to finish work on a six-year transportation spending package. Even a $299 billion compromise between House and Senate versions, 37% bigger than the 1998 highway bill and reportedly backed by the White House, fell short of coming to a vote.

Good riddance, according to Don Chen, executive director of the anti-sprawl group Smart Growth America. “We prefer extension of the debate to passage of a bad bill,” he says. “We’re still looking to see a bill that actually carries out the wishes of the American people.”

For Chen and colleagues, those wishes are embodied in the goals of the “smart growth” movement: to reduce traffic, preserve open space and develop communities where people can get to work and leisure without their cars. In policy terms, that means favoring repair of existing roads over new construction, creating incentives for transit-oriented real estate development, and more funding for mass transit and programs to encourage walking and biking.

This is no easy agenda to push at the federal level, especially given legislators’ historic fondness for laying pavement. But as far as the highway bill goes, smart growth proponents at least have some time to press their case. Two weeks ago, President George W. Bush extended existing transportation spending laws through the end of next May.

Full story at Forbes.com

Plucking Flowers From the Wall

John Keeley, manager of the $170 million Keeley Small Cap Value Fund, likes being a value guy: “You probably make fewer mistakes than you do in the growth area,” he muses. “There are fewer moving parts.”

Here’s how Keeley, 64, keeps it simple. First, he largely ignores technology and health care stocks. Second, he limits his buying to five kinds of companies: those coming out of bankruptcy, those looking very cheap relative to book value (excess of assets over liabilities), spunoff subsidiaries, utilities, and converted thrifts and mutual insurance companies. These days Keeley’s fund, a Forbes Honor Roll member (see Sept. 20) holds 114 stocks. Not quite half fall into the spinoff category.

It has been a winning formula for Chicagoan Keeley. The University of Chicago business school graduate began his career in 1966 as a financial analyst in the pension department of Standard Oil of Indiana (now part of BP). After three more jobs in the investment business, he founded Keeley Investment Corp. in 1977. Keeley Asset Management, started five years later, now manages $1.2 billion. The Keeley Small Cap Fund has returned 14% annualized since its launch in October 1993, versus 10% for the S&P 500.

Full story at Forbes.com

Gold Mine On The Gold Line

Just over a year ago, Los Angeles residents took their first rides on the Gold Line, a spiffy new trolley route meandering 14 miles from L.A.’s Union Station out to Pasadena. At the new line’s last stop in Pasadena, passengers were greeted with a large banner saluting none other than Booz Allen Hamilton, the McLean-Va.-based consulting firm, for its work on the project.

“We paid for that sign, I think,” confides Gary Schulman, a Booz Allen vice president and co-leader of its transportation practice.

Booz Allen can be excused for patting itself on the back when it comes to public transportation, a specialty that has helped its overall transportation business grow at a five-year, annualized rate of 17%. That outpaces the five-year revenue growth rate for the firm as a whole by seven percentage points. Of the 500 employees in Booz’s transportation practice, half now work on mass transit matters.

And the way ahead looks golden. Why? There’s demand here for one of Booz Allen’s foremost specialties: updating technology. Ghassan Salameh, another Booz VP at the head of its transportation practice, says transit agencies are now getting around to overhauling technology that in many instances hasn’t been touched in 20 or 30 years. Half of the firm’s mass transit consulting revenue comes from technology-related jobs.

Full story at Forbes.com

Airlines: Too Much Security?

WASHINGTON, D.C. – Just after the 9/11 Commission released its final report at the end of July, the House Transportation and Infrastructure Committee issued a press release touting security-related legislation it had promoted since the 2001 terrorist attacks.

Under the heading of “aviation security,” the release cited the laws that created the Transportation Security Administration, as well as those that armed commercial and cargo pilots. The Committee also mentioned bills that would protect aircraft against shoulder-fired missiles and mandate uniform biometric identification standards for law enforcement and airports.

“This Committee will continue to move legislation and improve our ability to secure the traveling public,” Chairman Donald Young (R-Alaska) promised.

Last week, the airlines’ industry group dispatched a representative to testify at the House Aviation Subcommittee’s hearing on the 9/11 Commission’s recommendations. The message: let’s not get carried away.

Full story at Forbes.com

Shopping Retail Stocks

WASHINGTON, D.C. – High energy prices, terrorism angst and wobbly consumer spending make a toxic combination for retailers. Maybe that’s why many retail stocks, down significantly from their 52-week highs, look cheap.

Giants like Wal-Mart Stores, Home Depot, and Lowe’s popped up on our fairly tough stock scan of the retailing sector. Among other criteria, we required that current ratios of price to book value, earnings and sales all stand below their five-year averages.

We also consulted with two money men, and both agreed there are investment opportunities in retail. One is Robert Straus, portfolio manager of the $201 million Icon Consumer Discretionary Fund. Straus thinks fear and uncertainty have soured investors on stocks, particularly small caps, despite recovering earnings.

“We’re seeing a disconnect between economic fundamentals and actual sentiment in the marketplace,” Straus says.

Full story at Forbes.com

Highway Lobby: Smooth Operators

WASHINGTON, D.C. – Despite Congress’ fitful efforts to renew a multiyear federal transportation bill, the highway lobby has once again proved its reputation as one of Washington’s most effective operators. How effective? Think $52 billion.

Since 1991, funding for highway and mass transit has been rolled up into a giant package reauthorized every six years. The existing law, a $218 billion program known as Transportation Equity Act for the 21st Century (TEA-21), was enacted in 1998. It expired last September.

Things haven’t been pretty since. Congress has sent President George W. Bush no less than five extensions of TEA-21 to keep money flowing to federally funded transportation projects. In February and April, respectively, the Senate and House passed their differing versions of the reauthorization bill. Members of a conference committee charged with reconciling the House and Senate bills have been at work since early June.

The big holdup: money. In November, the House Transportation and Infrastructure Committee proposed a generous package totaling $375 billion, with a hike in fuel taxes as a possible way to pay for it.

But the tax-averse House ultimately settled on a more modest $275 billion version of the bill. The Senate came in at $318 billion. The Bush Administration, smarting from charges of fiscal profligacy, was the stingiest, with a $247 billion proposal–and it backed that lower number with a rare veto threat.

Just before legislators left for their August recess, however, a flurry of negotiations took place. Sen. James Inhofe, R-Okla., chairman of the Committee on Environment and Public Works, offered up a $301 billion compromise. Two days later, House Ways and Means Committee Chairman William Thomas, R-Calif., offered a $299 billion proposal, which he said had White House backing. The conference committee adjourned for the break without acting on either arrangement.

But the highway crowd can tentatively declare victory: $299 billion is a long way from the $247 billion line in the sand that the Bush Administration had originally drawn.

Full story at Forbes.com

Demography Plays

William sterling has been a big-picture guy on Wall Street for 18 years. Ask the man, a self-described “recovering economist,” about the case for international investing, and he will bend your ear with a barrage of opinions on everything from America’s external accounts to Japanese real estate prices. So how does Sterling, 50, who oversees $5.2 billion as chief investment officer of New York’s Trilogy Advisors, zoom in on a list of stocks? Demographics play a key role.

Demographic information comes with a comforting level of certainty, no matter what the market. If you know the number of 15-year-olds alive today, it’s not too hard to guess how many 25-year-olds will be around a decade hence. “There’s almost nothing else you can say about ten years from now with that amount of confidence,” Sterling says.

Since 1998 Sterling has put that certainty to good use in the CI Global Boomernomics Sector fund, an $814 million portfolio he manages for Canada’s CI Funds. The fund’s mission is to invest in sectors that Sterling believes will be most affected by population trends, especially the aging of the baby boomers, or those born between 1946 and 1964. The fund has returned 6% annualized since its launch, versus 1% for the MSCI World Index.

One way Sterling digs into demography is to identify”longs” and “shorts” via consumption survey data from the U.S. Bureau of Labor Statistics. A sector the numbers favor: medical devices, especially implants and prosthetics. In 2011 the first wave of baby boomers will hit 65, and failing joints will be a big problem for this group.

Other demographic longs are cruise ships, recreational vehicles and low-end real estate. The latter category plays more off the “echo boom,” or the children of the baby boomers, now headed into their twenties. An example of a demographic short would be winter sports. “Not good,” Sterling chuckles. “Fifty-year-olds might like to think they’ll do a lot of skiing, but they’ll probably take a cruise instead.”

Full story at Forbes.com

In Search of Fair Business Climes

If you are going to own a share in a business, buy into a business in a country that likes business. You’ll probably do better that way.

Some countries bury their entrepreneurs in red tape. Others welcome job creators and foment economic growth. You can find out which is which–which countries, that is, are best for business–by looking up data from the International Finance Corp., the World Bank’s private-sector development arm.

Full story at Forbes.com