It’s Probably Not The End Of The World

Today (Monday) I was watching the stock markets fall on fears about the financial system. I have been wondering why the problems in the financials have spread so strongly to other sectors where many companies are in good financial shape and continue to grow their businesses. An article by MarketWatch economist Irwin Kellner gives good evidence why the current problems are not a crisis, we are not in a recession and that the bailout is just a cash infusion for the economy to help it get over a rough patch. At this current point in time the over 400/500 comments lean towards the belief that Mr. Kellner should be tarred and feathered for uttering a positive opinion about the economy.

The current market environment seems to me to be the exact inverse of the Internet/tech bubble of the second half of the 1990’s. During that time it appeared that anyone with an idea for a web based business could go public for 1/2 a billion dollars without ever generating any revenues, let alone profits. Investors at all levels continued to buy the stocks of these companies right up to to peak in March 2000. At that time it was believed to be different and all of these companies would make their investors rich beyond imagining.

In contrast, we currently have established, profitable companies being treated like they will never earn another dollar. Companies that have no connection to the troubles on Wall Street are being driven to levels that would have not have been believed just one year ago. Internet pundits and commentators act as if the downturn will continue indefinitely and there is no hope, even as the government attempts to step in. Even the gold bugs can’t make money in this market. It is all Sell, Sell, Sell!

I have learned it is not good for your health to fight the trends and the supposedly smart people in the markets are primarily driven by the forces of fear and greed. Rationality has gone out the window, so rational analysis is of little use. Having said that, and having the purpose of this site to talk about stocks, I would like to point out a couple of companies that I believe have been unfairly beaten down.

Ship Finance Ltd. (SFL) has built itself up to be a very low risk cash cow. They have first call on the revenues of the vessels they lease out, they get their customers to take the majority of the credit risk and they keep the leverage under control. SFL has a paid a consistent, growing dividend and typically carries a stock price to yield 7.5% to 8%. At the current price SFL is now yielding over 11%.

KHD Humboldt Wedag (KHD) is an international infrastructure play that has been growing revenues and earnings at close to 40% per year. They also have a 2 year backlog of orders. At the current stock price KHD has a market cap of $630 million and the company is holding about $500 million in cash. This means the market is valuing $600 million in sales and $65-70 million in net profits at $130 million.

I write this not as a recommendation to buy these stocks, but to show the irrationality of the current market. Unfortunately, for shareholders anyway, there is a good probability these stocks will get even cheaper until the market sentiment switches from fear to greed.

Note: I have long positions in SFL and KHD.

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