barrons 2012 investment roundtable - part3

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FEATURE I SATURDAY, JANUARY 28, 2012

Yielding to RealityBy LAUREN R. RUBLlNWith interest rates near zero, our panelfavors stocks withjuicy dividendyields. Brian Rogers, Abby Cohen, Scott Black and Fred Hickey offer theirinvestment picks this week.

Barron's 2012 Roundtable Part 1Barron's 2012 Roundtable Part 2Tireless as well as prescient, Marc Faber has warned Roundtable readers repeatedly that the FederalReserve would keep interest rates unnaturally low" as far as the eye can see." Well, the eye has justseen to the end of 2014, given the Fed's disclosure last week that it will pin short-term rates near zeroat least until late in that distant year, in its anxious attempt to juice the laggard economy.What isbad for savers, however, is manifestly good for gold, and great for shares of companies thatpay fat and rising dividends. And, as luck would have it, both get top billing in this week's third andfinal installment of our 2012 Roundtable, which took place Jan. 9 in Manhattan. Sure, our 10 expertshungered for grub by the end of our 10-hour session, but that's nothing compared with investors, whoare starved for yield.Up first this week isBrian Rogers, a Roundtable newcomer, though he is a familiar presence at T.Rowe Price, where he serves as chairman and chief investment officer, as well as manager, for nearly27 years, of the $23 billion T. Rowe Price Equity Income Fund. As Brian tells it, he looks forcompanies whose success has gone unnoticed by the market. Plenty fit that bill these days, especiallyfinancials such as JPMorgan Chase (ticker: JPM).

Abby Joseph Cohen, the learned head of GoldmanSachs' Global Markets Institute, deftly grabs the batonnext, to show how dividends and stock buybacks intandem can deliver effective yields of 7% or 8%. That issurely the case with ExxonMobii (XOM), one ofGoldman's top picks, and several other stocks belovedby the bank's analysts and illustrative of her point.
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Brad Trent for Barron'sFrom left, Fred Hickey, Abby Joseph Cohen, BrianRogers and Scott Black.

Scott Black, the boss at Boston's Delphi Management,always burns the midnight oil boning up on hisRoundtable picks. And it showed, once again, in this

year's masterful analysis of four big-cap stocks with puny price/earnings ratios, and two intriguingand high-yielding real-estate plays.Fred Hickey, down from New Hampshire and up on all things tech, closed the proceedings with arousing endorsement of gold, and the cheery news that the 12-year bear market in technology stocksis coming to an end. Microsoft (MSFT), he predicts, will finally get the respect it deserves, as willsome lesser-known names in tech land.

Tables:2011 Roundtable Report Card2011 Mid-Year Roundtable Report Card

To learn why, please read on.Barron's: Brian, you seern to be surviving wellso far. What do you make of the mar-ket thesedays?

Rogers: I now realize why I didn't have as much fun last year as I thought I would. As Bill describesit, due to near-zero interest rates, I have been suffering from financial repression, which I didn'trealize was an affliction. But now I have come to view it as such.That's the next step.Rogers: And the step after that ismedication. Everything I see tells me the U.S. is getting a bit better.Last year we had a sloppy market globally. The U.S. was a nice place to be. India, China and someparts of Europe were rugged places to be. The asset class that outperformed all was 30-yearTreasurybonds, which very few people foresaw 12months earlier. Even within the U.S. market there werepockets of relative strength, and pockets of weakness. Almost anything with cyclicality was penalized.Now it is early 2012, and I look at the carnage that has hit some good companies in the past 12 or 18months. Companies have performed better fundamentally than they have been rewarded in themarket. I look for situations in which there is a disconnect between a company's performance and themarket's response. Emerson Electric [EMR] isan example. It is a great American company.

I E nla rg e 1 ma geJennifer Altman for Barron's

Brian Rogers (left): Companies have performed betterthan the stock market has acknowledged.

are good.

Whatlllakesrrso?Rogers: You have to love a company that states onthe cover of its annual report, in bold letters, that ithas increased dividends for 55 years. Its stock wasdown 18% last year despite the fact that earnings werepositive in the fiscal year that ended in September. Thestock yields 3.5%-not as much as some of thecompanies in Singapore and Hong Kong that Marcmentioned, but a healthy yield in today's world. Also,when a company says it has raised its dividend for 55years, the odds it goes up in years 56,57 and maybe 58

Emerson is a leader in electrical equipment, factory automation and climate technology, or air


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conditioning. It earned $3.27 a share in fiscal 2011. It will probably earn something in the $3.50-ishrange for the year ending this September, and on the order of $4 for fiscal 2013. In a year whenearnings, the dividend and cash flow were up, and the company bought back a ton of stock, you paid amultiple of tq times earnings. The stock trades today for $47, and we see it in the high $50S in thenext year. Add a $1.60 dividend and the total return could be attractive.

Brian Rogers' Picks

Company / TickerEmerson Electric / EMRIngersoll-Rand / IRJPMorgan Chase /JPMThermo Fisher Scientific / TMOMicrosoft / MSFTJuniper Networks /JNPRSource: Bloomberg

Price1/6/12$47.1532.0235.3647.6228.1120.43

Where does Erner-sorr's output go?

Rogers: The majority of sales are outside the U.S.One reason Emerson's order activity slowed was dueto the impact of flooding inThailand. About 45% ofsales are in the U.S.Cohen: U.S. companies have been affected bysignificant shocks to their supply chains overseas,including the floods in Thailand and the earthquakeand tsunami in Japan. With lean inventories almosteverywhere, supply disruptions have caused a rethink

by companies that are now relocating some manufacturing back to the U.S.Rogers:I'd like to tell David Farr, chairman and CEO of Emerson, that he can open a big plant inBaltimore and attract a lot of workers.Youjust did.Rogers:Emerson has been penalized because it is a cyclical company. Ingersoll-Rand's [IR] stocksuffered last year because of cyclical concerns. Its shares were down almost 40% last year. Itis insome of the same businesses as Emerson. Ithas abig climate-solutions business, and makes Schlagelocks and Ingersoll-Rand tools. The yield is a little light at 2%. The balance sheet is good. The stock is$32, down from a high of $52, and we estimate the company bought back about 30 million shares lastyear. They should buy back more in 2012. The stock sells for 10 times 2012 earnings, so the selloff haswrung a lot of excess valuation out. Ingersoll could earn $3 a share or $3.10 this year, and as much as$5 two or three years out. Put a 10 multiple on it, which isn't heroic, and you have a $50 stock.Black: The company bought Hussmann, a refrigeration company, at the top. They took a major lossyears later because it wasn't strategic. They destroyed a lot of capitaL Also, earnings are untaxed.Ingersoll-Rand is run from New Jersey but is registered in a tax-free zone [Dublin]. The P/E[price/earnings ratio] isn't real, if you apply a 35% tax rate to earnings.Rogers: The guy behind the Hussmann deal has left the company. Now there is a slightly differentcast of characters. But it isn't without controversy, which often creates opportunities. Ingersoll hasreal snapback potentiaLFinancials were the worst-performing market sector last year, in the U.S. and probably globally. Onehas to look at companies that have been hit hard in that sector but will be around for a long time, andwhere you can believe in management. That is the case with JPMorgan Chase, which is selling around$35 a share. It was down 20% last year. It performed as weakly in 2011 as it did in 2008, which reallysurprised me, because 2008 felt like a much more difficult period than 2011. The company raised its


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dividend last year and yields 3%. It also bought back about $9 billion of stock.It is tough being a financial-services company now, because you need Federal Reserve clearance to doanything. But the Fed will approve JPMorgan's capital plan, and they may raise the dividend againthis year and buy back more stock. The financial sector has been the most traumatized in the past fewyears, and you might as well bet on the strong horse in a field of weak ponies. Sentiment is so bad thatyou can't find anyone looking at financial stocks. But the headwinds are well known, so you have toask, what isthe stock price? JPMorgan's tangible book value is $34 a share. Stated book is $46. Someday they are going to earn between $5 and $6 a share.What do you think they'll earn this year?Rogers: They will probably earn $4.50 to $4.75 a share in 2012, versus $4.50-ish for 2011.[JPMorgan reported on Jan. 13 that it earned 90 cents a share in the fourth quarter, below analysts'estimates, and $448 per share for the full year.] No one hit me for recommending a bank stock, sothat is a good sign.Witlner: You're new.Rogers: 'I'hcrrno Fisher Scientific [TMO] is a combination of the old Thermo Electron and FisherScientific, which merged in 2006. The stock is at $47.60, and it was down about 20% last year. Thecompany serves just about every pharma and biotech company, every life-sciences research instituteand governmental agency involved with health care. They provide the guts of everything that goes intomedical and scientific research. Whether it is a simple microscope used in high-school biology or afancy molecular spectroscope, they make it.Thermo was hit hard in the fall amid Washington's budget debate and fears that funding for theNational Institutes of Health would be cut. This is a clean company financially. Itshould be ahigh-return-on-capital business when you look at what they make and who they sell it to. Itis a prettygood company from a cash-flow standpoint. They bought back about $1 billion of stock last year. Themarket capitalization is roughly $18 billion, and they will buy back another $750 million of stock thisyear. Balance sheet is pristine. You just have to make a bet that long-term health-care research will bea fertile field.Schafer: The large pharmaceutical companies are merging because they don't have much growthbecause of generic competition. After merging, they reduce duplicative research and development.These companies are buying bio-technology companies and will then cut R&D, as well. So it ispossible Thermo's end markets aren't expanding, but shrinking.

Rogers: Even in a shrinking market, they probablyearned $4.14 a share in 2011 and will earn $4.75 in2012. The stock sells for $47.62, or 10 to 11timesearnmgs.Witmer-a Did management pay a lot more than thecurrent stock price to buy back shares? Companiesbuying back shares at too high a price is a pet peeve of


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revenue is $4 billion a year. The balance sheet is good. Debt to total capitalization is about 13%.Juniper is best viewed as a little Cisco Systems [CSCO] in the type of networking equipment itprovides. It is a very important company to IBM [IBM].There is a chance a lot could go right here, primarily because a lot has gone wrong in the past year.The short term looks murky, but in 2013 they could earn $1.80. Put a 14 or 15 multiple on that andadd back the cash, and you could see the stock rising to $30 to $35. There has always been a smallchance Juniper would become an acquisition target. You aren't paying a lot for that possibility.Thanks, Brian. Let's go to Abby.Cohen: Economic growth in the u.s. will be OK but not great in 2012. We expect global GDP [grossdomestic product] to decelerate to 3.2% from 3.5%, owing to the recession in Europe and decelerationin China. In the U.S., momentum was good at the end of 2011, and we will be watching carefully to seewhether that continues. Even so, the market's valuation isn't unappealing. The S&P is selling today ata level that implies an annual 13% decline in the five-year path of earnings growth. Long-termvaluation is attractive, but we expect short-term volatility.

Last year we saw extremely high correlations. At year end, the correlation among sectors was 0.88 inthe u.s. Among stocks itwas 0.64, which ought to make any stockpicker a little concerned aboutdoing a lot of homework on companies and stocks and not getting the benefit from it. Despite thenear-term head winds, there is an opportunity later in the year for valuations to improve. Carefullyselected equities could generate good performance.

E nla rg e 1 ma ge

Abby Cohen: "The market's valuation isn'tunappealing."

What is the biggest risk to your view?Cohen: Will Europe have the political will needed toresolve the situations in the euro zone? In addition, arecession in Europe has a direct and negative impacton u.s. companies. Then there is political risk here.We talked earlier today about the inability of Congressto deal in a policy-friendly way with some of thedecisions that need to be made, instead of makingmore political decisions. This is a presidential electionyear, so it isn't likely this is going to improve beforethe end of the year.

Edwards Lifesciences [EW] isn't all that sensitive to the economy. Itclosed Friday [Jan. 6] at$72.88. The company designs and manufactures products that treat late-stage cardiovascular disease.It is the leader in heart valves, catheters, hemodynamic monitoring devices and so on, and recentlyreceived Food and Drug Administration approval for a product that will give it a commandingposition in the u.s.Can you give us some numbers?Cohen: We estimate the company earned $1.98 a share in 2011. This year they will earn $2.75, and in2013, $3.60. While the P IE is a high at 26 times 2012 earnings, this has been a fast-growing company.The expectation is earnings growth can compound by 25% to 30%. Margins could expand from 21% to


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My next two stocks are much more cyclical. Irecommended Boeing [BA] in the midyearRoundtable ("Buy Low, Stay Nimble," June 13,2011), and we still like it. Boeing trades for 14 timesour 2012 earnings estimate of $5.20, versus theconsensus of $4.95. Ityields 2.3%. The company isbenefiting from the end of the development of the 787Dreamliner. They are done with the R&D and otherspending, and they are seeing orders come in. We alsolike Brazil's Embraer [ERJ], a dominant maker ofregional jets. These are highly desired not just inNorth America, but increasingly in emerging markets

because many have short air routes. The ADR [American depositary receipt] trades in New York.

25% in the coming year.

Abby Joseph Cohen's PicksPrice

Company / Ticker 1/6/12$72.88dwards Lifesciences / EW

Boeing / BA 73.98Embraer / ERJ 25.99

85.12xxonMobil / XOMJPMorgan Chase /JPMAmerican Express / AXPDomino's Pizza UK & IRL /DOM.UK

35.3648.27437pence

Source: Bloomberg

Black: What is your assumption on the Brazilian real versus the dollar? Sales of Embraer jetsprimarily are denominated in dollars. Ifthe real goes up, they get killed on labor costs in Brazil.Cohen: The dollar will be a stronger currency in the next several months, in particular. The Brazilianmarket was down in 2011, which is one reason the stock's valuation is cheaper. Demand for regionaljets has been good. Embraer won almost every new order in the past two years. Ifyou compare themto their primary competitor, Bombar-dier- [BBDjB.Canada], Embraer has sold 200 planes versus 12for the Bombardier. The aerospace industry in general has record backlogs.We estimate Embraer earned $1.82 a share in 2011. We are estimating $2.70 for 2012, compared withthe consensus forecast of $242. Our S&P 500 earnings estimates are below consensus. Our GDPnumbers are below consensus. When we find companies about which our analysts feel better than theconsensus, we are increasingly comfortable with those names. In addition to a reasonable PjE of 9.6times 2012 earnings, Embraer yields 3%. The stock is $25.99.Black: There is another kicker for Boeing. It just made a huge sale of F15s to Saudi Arabia.Cohen: I recommended ExxonMobillast year and we still like it. Shares trade for $85.12. There issome question about aggregate demand for oil, given the deceleration in economic growth in Europeand China. But the supply situation is tight, and crude prices could rise. Brent crude could trade in arange of $120 to $130 a barrel in the next two years.

Our earnings estimates for ExxonMobil are above consensus, as is our crude-oil forecast. In 2011Exxon likely earned $8.75 a share, compared with a consensus forecast of $8.35. Our 2012 forecast is$9.60 a share. The consensus expects a decline in profits. As a consequence, the stock trades for 8.9times earnings. Ityields 2.2%. Much of Exxon's attraction, and that of some other stocks we like, hasto do with the way shareholders are treated and capital is allocated. If you look not just at thedividend yield but the yield in terms of a stock buyback, both contribute to shareholder return. If youadd back the cash returned to shareholders in the form of share repurchases, the effective yield wouldbe a much higher 7% or 8%. That is the right way to look at it.Exploration and production growth could be in the low single digits. Yet Exxon has new projects, and


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scale in terms of shale in North America. In choppy markets for equities and crude oil, we wouldrather stick with super-majors like ExxonMobil.That rrrakes sense. What else do you like?Cohen: JPMorgan, as it also is on my list. It will continue to return cash to shareholders in risingdividends and share repurchases. The dividend-payout ratio is 25% of earnings. The estimated payoutratio in terms of share buybacks is 28% this year, so the total payout to shareholders is 53%, for aneffective yield of7.8%. In addition, JPMorgan and some other major u.s. banks will benefit from thestress in Europe. As European banks shrink their balance sheets, well-positioned banks elsewhere willhave an opportunity to buy assets at a discount.There is a reason financial stocks are trading at a discount to book value. Investors are nervous. Thereare questions about the performance of equity and credit markets in the future, and some ongoinglosses from mortgage banking. But the valuation and the return to shareholders look good. JPMorganestimates that in the case of "disaster" in Europe, they stand to lose about $3 billion, which in thecontext of the size of the company ismanageable. The bank is doing well in private-client assetmanagement.Amer-icanExpress [AXP] closed Friday at $48.27. Likemany other u.s. financials, it looks good onBasel III Tier 1 capital requirements. [The Basel Accords are global regulatory standards on bankcapital adequacy.] Tier 1 is currently at 12% of total capital. They have a strong ability to do additionalbuybacks. The dividend yield is 1.5%, but they can add to that with share repurchases, which couldresult in an effective yield of 7.5% in 2012. American Express' credit losses this year are expected to be3%, well below peers'. They seem to be benefiting from improving consumer trends, especially amongthe relatively higher-end consumers they deal with. They are also experiencing good growth outsidethe U.S., with the exception of Europe. The credit losses are moving lower, and they are acquiringmore merchants. American Express will benefit from the convergence of online and offline markets.My last company isDorrriuos Pizza U.K. and IRL [DOM.U.K.]. That's Domino's in the U.K. andIreland. As a proud New Yorker, I always like the local pizzeria. But having traveled recently andtasted the Domino's product outside the U.S., it is surprisingly good.This is a new form of securities analysis.Cohen: Shares trade for 437 pence [4.37 pounds]. The Ll.K, economy will grow about 1%,which ismodest but better than Europe. In the Ll.K, there is a structural trend toward home delivery. We seethat in some other places, as well. Domino's has 48% of the U.K. pizza-delivery market. Since 1997there has been 20% annualized growth, half from new stores. We forecast 19.11Pin earnings for 2011and 22.35P for 2012, versus this year's consensus estimate is 21.38p. The stock yields 2.8%.Rogers: How big is the market cap?Cohen: It is 703 million [$1.1 billion].Gabelli: If the stock does well, which I expect, I also expect Abby to bring in Domino's Pizza for lunchnext year. You can have it delivered.Thanks, Abby. Scott, what did you bring us this year?


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Black: I assume the u.s. economy will grow 2.3% in real terms, so there is no recession. Corporateprofits in the u.s. will grow only around 6.5%, but balance sheets will remain solid. Global growth isslowing to 2.7%. I have four stocks with sustainable earnings and real revenue growth, free cashgeneration and low P/Es. The other two are yield plays-REITs [real-estate investment trusts].Apache [APA] trades for $97 a share. There are 400 million fully diluted shares, and the market capis $38.8 billion. The company will have record earnings this year of $12.50 a share. Daily productionis about 750,000 barrels of oil equivalent, up dramatically year over year. Organic drill-bit growth[production gains from drilling] is 6% to 12%. Reserves are 70% oil, 30% gas. Apache is getting $444per Mcf [thousand cubic feet] for gas worldwide, and $101 a barrel for oil. Gas prices in the u.s. are$3 per Mcf, but the bulk of their production is overseas. Operating margins are 48.5% on projectedrevenue of $18.39 billion, giving you operating income of about $8.92 billion. Taxed at 44%, you getto $12.50 a share. Shares sell for 7.8 times earnings, which is cheap. Adding back depreciation anddeferred taxes gets you $26 a share of discretionary cash flow. Shares sell for 3.7 times discretionarycash flow.

Black: About 10% of reserves are in Egypt, which alsocontributes 25% of revenue. Investors are worriedabout political risk. Apache's return on equity is 16%.The ratio of net debt to equity is 0.24. The companywill step up capital spending next year from $8 billionto aminimum of $9 billion, and still will generate $1.2billion of free cash flow. Apache is diversified aroundthe globe, with 70% of reserves in the U.S. andCanada, some reserves in Australia and somedeep-water plays that could be home runs. Every onedollar change in the price of oil means an 18-cent change in earnings per share, and every 10-cent

switch in the gas price means a 10-cent change in earnings. Apache has a 12% hurdle rate [minimumreq uired rate of return] on proj ects, based on $80 oil and $3 gas. With oil around $100 a barrel, they

Jennifer Altman for Barron'sScott Black (left): "Some macro trends are working forFedEx. One is e-commerce."

have a margin of safety.

Why is that?

Next, CBS [CBS] doesn't get much respect, but Les Moonves, the CEO, has done a good job. Revenuein 2011 was an estimated $144 billion, and earnings per share were $1.89, versus $1.11 in 2010.Revenue is increasing by 3% a year, but there are some kickers this year. They will generate $200million from streaming content to Netflix [NFLX], Amazorr.corn [AMZN] and Hulu.Retransmission fees will total $200 million to $250 million, and political adverting on owned andoperated television stations will be another $180 million. Total revenue will rise 5.3% this year.Operating income is 19.1% of revenue, and earnings per share will be $2.25. The P/E multiple is 12.3.Margins are rising because streaming revenue is incremental and drops to the pretax line. The same istrue of retransmission fees.Witrn.er:What is the stock price?Black: The stock is $27.79. CBS pays a 40-cent dividend and yields 1.4%. The market cap is $18.7billion. The company will earn $1.5 billion this year and free cash flow could be $1.8 billion. Capital


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spending is mostly for outdoor billboards, including digital billboards. They also have a big presencein the U.K., home of this year's summer Olympics. The CBS television network has dominated in theratings. They have 20 of the top 30 shows. It looks like this will be a banner year for the network.Gabelli: Will Les monetize the outdoor business, or buy something?Black: He just got authorization to buy back an additional $1.5 billion of stock. That pushes earningsper share up. The bottom line is growing faster than revenue.

FedEx [FDX] is doing well, and earnings willaccelerate this year. The company will generaterevenue of $42.8 billion in the fiscal year that ends inMay. Operating margins are about 7.5%, and interestexpense is nominal as there is more cash than debt onthe balance sheet. FedEx is the only airline company inthe world that is essentially debt-free. Pretax profit of$3.2 billion, taxed at 36%, will translate into $645 ashare in earnings for fiscal 2012. For fiscal '13 we seerevenue growth of 6%, but profit growth ofto%.FedEx bought abunch of Boeing 767S, and will replace

their 727S and old MD 10 planes, which were energy-inefficient. Earnings could rise to $7.30 for the

Scott Black's PicksPrice

Company / TickerApache! APACBS! CBS

1/6/12$97.0427.79

FedEx! FDX 85.49Deere & Co. ! DEBioMed Realty Trust! BMRDigital Realty Trust! DLR

82.3018.1466.72

Source: Bloomberg

May 2013 year. The stock is $8549, and on a calendar basis, the company will earn $6.80 a share in2012. It sells for 12.6 times calendar-year earnings, and 11.7times fiscal 2013 earnings. Return onequity will be 13% for the next year, versus 17%to 18% at prior peaks. They think they can get back topeak levels.Will higher oil prices clip profits?Black: Fuel as a percentage of revenue has gone up this year. But they have more efficient planescoming on, and they impose fuel surcharges. They are strict on capital budgeting, with all projectssurpassing an 8.5% after-tax hurdle rate. And some macro trends are working for them. One ise-commerce. Also, companies likeApple [AAPL] that make high-value-added goods depend on quickmobility and global sourcing, which helps FedEx. United Parcel Service [UPS] is also a beneficiarybut shares trade for 15to 16 times forward earnings.What else do you like?Black: One of the few sectors that has done well and will see terrific long-term growth is agriculture.Deere [DE] is one of the few domestic companies still doing well in Europe. If Europe's economystays flat, Deere could have revenue of $33.6 billion in the fiscal year ending in October, up 14% fromfiscal 2011. The company could make $3.2 billion after taxes, or $7.80 a share, up from $6.63. Forfiscal 2013, assuming the world economy slows, we see a 5% increase in revenue and $8.30 inearnings per share. Based on calendar 2012 earnings, Deere has a P IE of 10.Free cash flow, excluding a financial subsidiary, will be $2.85 billion in the current fiscal year. Thecompany says it is hellbent on keeping its single-A rating, since it has an active commercial-paperprogram to finance customer receivables. Credit losses are a negligible .04% worldwide. Last yearDeere had a headwind on margins because it had to roll out more fuel-efficient engines. By next year,


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margins will improve. Also, they will be able to knock out a total $700 million of costs, with $300million already cut.Gabelli: Are there opportunities for Deere beyond construction and farm equipment?Black: Agricultural equipment is 71%of the business. Construction and forestry equipment is 18%,and commercial and consumer, 11%. The real opportunity is diversifying by region and selling to Indiaand China and Brazil, especially for the sugar cane harvest in Brazil.What are your yield plays?Black: Normally at Delphi we can't own biotechnology stocks. Someone once said there is never anearnings disappointment among biotech companies because there are no earnings. However,BioMedRealty Trust [BMR] isa surrogate play on the industry. It isbased in San Diego and tradesfor $18.14. There are 155million shares, and the market cap is $2.8 billion. The company builds suitesof biotech facilities. Its strongest aggregation is in the Boston-Cambridge area, which brings in 34-4%of the rent. San Francisco accounts for 16.2%; San Diego, 14.7%; Maryland, 15.1%, and so forth. Welook at the implicit capitalization rate [net operating income divided by total capitalization] based onnet operating income, not funds from operations. The run rate is $80.9 million in NOI per quarter.Annualized, that's $323.6 million. Enterprise value, including the market cap and net debt, is $4.189billion, so the implicit cap rate is7.7%.BioMed is growing same-store net operating income by about 10% ayear, so the cap rate is 8.5%based on next year's pro forma NO!. The trust pays an So-cent dividend and yields 4-4%. The stocksells for 1.16 times book. The companies they lease to are high-quality tenants-universities likeHarvard and big drug companies like Pfizer [PFE]. About 20% of their space is used by mid-sizedand smaller companies. Their average rent per square foot is about $38.28. These are triple net leases[the lessee must pay real-estate taxes, building insurance and maintenance]. In the next fiveyears,only 18-4% of rents will roll over. Biomed has almost $750 million of untapped credit lines. They arean investment-grade credit, rated triple-B-minus. It is an interesting play and you get paid while youwait.Schafer: If there is consolidation in the industry, what happens to the real estate?Black: Schools like MIT and Harvard are expanding. Companies are moving from Europe to the U.S.because of our research centers.Digital Realty Trust [DLR], based in San Francisco, is a play on hosting data centers. Itsells for$66.72 a share and has a $6.8 billion market cap. Itpays a $2.72 dividend and yields 4.1%.Eighty-nine percent of its space is in North America-in New Jersey, northern Virginia, Silicon Valleyand so on. Only 9% by square footage but 11%by rent is in Europe. They are contemplating movinginto Hong Kong and Shanghai. They have major customers like Facebook, Morgan Stanley [MS],AT&T[T] and Amazon. Their top 10 tenants pay 36% of the rents.Wibner: What is the price-to-book value?Black: It sells for 3.6 times book, which is hefty. But the implicit cap rate is 6.9%. Net operatingincome probably will rise 12% or 13% next year. The balance sheet is strong, and interest coverage is4.1. The dividend coverage is 1.32, and the payout has room to rise. They have $1.1 billion left in credit


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lines, and only 6.4% of their rents roll off next year. They seem to be disciplined on capital usage, andagain, you get paid while you wait for the stock to rise.Thanks, Scott. Fred, you're up, at last.Hickey: I remain overweight gold. The secular bull market in gold isn't over. A negative interest-rateenvironment isbullish for gold, and rates keep getting more negative as central banks keep cuttingrates that aren't yet zero-bound. Where interest rates are close to zero, as in the U.S., the U.K. andJapan, they engage in quantitative easing.Why have gold-rrrirring stocks been weak?Gabelli: Some governments expropriate lucrative mines. Also, mines are subject to strikes andfloods.Hickey: Newmout Mining [NEM], which I recommended last year, outperformed. [The stock rose5.5% through Dec. 30.] The driver is gross margin expansion. Gold prices are up by a factor of sixthrough this bull market, yet costs have roughly doubled. The company has had tremendous cashflow, leading to dividend increases. Newmont has tied its dividend policy to the gold price. Ifthe pricerises, you are guaranteed more dividends. The money won't be wasted on bad acquisitions. In 2008Newmont earned under $2 a share. It could earn $4.82 for 2011, and $5.96 in 2012. There's no reasonthese stocks should be so cheap.As Felix has said, owning physical gold is important. In addition, you can own gold through exchange-traded funds, such as the GLD [SPDR Gold Shares]. They are audited. The U.S. government's goldholdings haven't been independently audited in decades. The GLD charges fees of 0.40% of assets.The IAU, or iShares Gold Trust, charges only 0.25% of assets. Ittrades for about a hundredth ofthe price of gold, so it is selling for $15.76 a share. Ithas been around since 2005 and has $9 billion inassets and 171 tons of gold. Itstores its gold in vaults around the world. Last year I recommendedstocks. This year I like the GDX, or Market Vectors Gold Miners ETF. Itgives you diversificationwith 31names, including a few silver stocks. Barrick Gold [ABX], Newmont and Goldcorp [GG]account for 41% of assets. At some point gold stocks will outperform bullion.What do you favor in tech these days?Hickey: I have been bearish on tech for a long time, but the secular bear market has been very long. Ihave played the cyclical rallies, but now I want to be bullish in a significant way. Tech stocks arestarting to get attractive on a valuation basis. IfFelix is right, as I expect, the stock market could turndown sharply in the second half of this year, and that could be the bottom for tech stocks. We mightfinally get to the point of capitulation. We're almost there. I have started to add to some positions.Last year the Morgan Stanley High-Tech 35 Index dropped another 11%, and some stocks fell muchmore. At this point even the highfliers are having trouble. Salesforce. COllI'S [CRM] chart looksdismal. You want to see all the enthusiasm wiped out at the end of a secular bear move. I am pickingthrough the 52-week-Iows list every week and looking for solid companies I have known for years.Some are at multiyear lows.

For example?


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Jennifer Altman for Barron'sFred Hickey: As a value investor, "! am pickingthrough the 52-week-lows list every week."

Hickey: BMCSoftware [BMC] could becomeatakeover target. It used to be a mainframe-softwaredeveloper, but now provides back-end systems-monitoring and performance-management softwarefor servers, networks and databases. It has alsobecome established in cloud computing. The stock washigher in mid-2011 on this notion. BMCoffered a pooroutlook in the latest quarter and blamed part of it onEurope. Also, government spending on tech was weakin the U.S., as Oracle [ORCL] noted when it issued itsshocking earnings warning in December. Oracle hasgrown through acquisitions and has been rumored as a

buyer for BMC. I don't want to wait for BMCto go lower. It is $32 a share now.What could it be worth in a takeover?Hickey: Itcould go out in the $40s, or higher. Cisco has a close relationship with BMCand has alsobeen mentioned as a potential buyer.Black:What could BMCearn this year?Hickey: Analysts are looking for $3.24 a share, so the stock is selling at 10 times estimated earnings.The forecast for the fiscal year ending inMarch 2013 is $3.50 a share. Utility-like, the companythrows off tremendous amounts of cash. It would have to be a pretty significant recession before theywould have any slips. They have been buying back shares over the years, and have $6 a share in netcash. Gross margins are high, ranging from 75% to 80% in the past couple of years. They had 241million shares outstanding in 2002 and now have 170 million, down 30%. They buy back shares everyyear. They have had one insider purchase recently, which is interesting, as welLOn the bombed-out list of semiconductor companies, I like Marvell Technology Group [MRVL].The stock was hit because of flooding in Thailand. They make hard-drive storage controllers andsupply the big disk-drive makers, which reported there would be a significant shortfall in the numberof drives produced at the end of the fourth quarter and in this quarter. Almost any company that hadanything to do with the disk-drive market got hit. In addition, Research In Motion [RIMM], aMarvell customer, isn't the best customer to have in the wireless-phone area. Marvell lowered revenueand profit guidance in both storage controllers and wireless, and the stock fell.

Fred Hickey's PicksPrice

Company/ Ticker 1/6/12iShares Gold Trust / IAU $15.76Mkt Vectors Gold Miners ETF/ GDX 53.35BMC Software / BMC 32.01Marvell Technology Group / MRVL 15.72Microsoft / MSFT 28.11Source: Bloomberg

Black:All the mixed-signal chip companies arerolling over. Itisn't only Thailand, but the businessitself is declining.Hickey: This is a second-half play. The disk-drivemarket will rebound in the second half.Marvell trades for $15.72, down from the 10w-20s andup from a recent low of $11 and change. It has amarket cap of $9 billion and is expected to earn $1.29a share in the year ending Jan. 28. It trades for 12


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times future earnings. The company generates a lot of cash. It doesn't have its own factories but usesTaiwan Semiconductor's foundries, so it has high gross margins.Black: Marvell historically sold for more than 20 times earnings, so this is the lowest multiple inyears.Hickey: Marvell is developing a semiconductor chip that will be used in the Chinese smartphonemarket. The acronym for the technology isTD-SCDMA. They just got a significant design win fromZTE, a major Chinese phone maker. The demographics in China are tremendous.Black: How does their chip compare in power usage and speed with the ARM chip used by Apple?Hickey: This is a lower-end chip.Finally, Brian recommended Microsoft, and I'm sticking with it, too. The stock has been penalizedbecause we are in a bear market, but there have been concerns about technological obsolescence, too.There have been worries that Office and Windows would lose share as wemoved into cloudcomputing. Microsoft Office 365 is the company's response to the cloud market. It was shipped inJune. EWeek, one of the premier trade magazines in the tech business, named Office 365 one ofthetop five new products in 2011. The iPad was No. 1.CRN Magazine named it the top cloud applicationof the year. Microsoft's primary competitor in this market is aGoogle [GOOG] app, but Googlesuffered a blow last month when LosAngeles abandoned plans to give 13,000 law-enforcementpersonnel access to Google's system software due to security concerns.Tell us about Windows 8.Hickey: The Windows 8 Metro interface has been well-received in the Windows phone world. It willbe on new ultrabook PCS, and drive an upgrade cycle late in the year.Toshiba and others are excited about Windows 8 on tablets. They think the Metro interface will allowthem to succeed against Apple. In the phone market, all the carriers would like to see a thirdalternative to Apple and Android. Lots of things are positive for Microsoft this year. The only negativeis the economy, and the disk-drive business at the beginning of the year.Gabelli: What is [Microsoft CEO] Steve Ballmer's status at the company?Hickey: Some people in the financial industry would like to see a change in management becausethey think the stock would rally, and it likely would. But Ballmer isn't threatened right now.

Thanks, Fred, and everyone.

E-mail: [email protected]

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barrons 2012 investment roundtable - part3

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