Marketocracy CEO Ken Kam says there could be some bargains to be found in some energy and mining names. But he urges investors to rethink financials, which he believes are not operating in shareholders’ best interest.
Kate Stalter: We are speaking today with Ken Kam, who is the CEO of Marketocracy. Ken, thanks so much for joining us today.
Ken Kam: Thanks Kate, it is great to be here.
Kate Stalter: I wanted to begin by asking you your take on the market following the S&P downgrade and the subsequent sell-off, then rebound. And we’d seen so much volatility already, prior to that. Tell us how you see the market right now, and what you believe individual investors really need to know about at this juncture.
Ken Kam: Well, I think that the sell-off has created a tremendous buying opportunity for individual investors who have a little bit longer time horizon than Wall Street does. I think Wall Street’s time horizon is measured in minutes, and on a minute-to-minute basis, things can change rather dramatically.
But for investors who have a time frame of maybe one or two years, this sell-off—because it was really not driven by anything fundamental—is a tremendous opportunity to buy some great companies at much lower prices. In effect, you can take advantage of Wall Street’s short-term horizon.
Kate Stalter: What are some areas right now, Ken, that you see showing particular strength?
Ken Kam: Across the board for this earnings season, I think companies have exceeded expectations. People need to realize that the stock market rewards earnings, so as long as earnings are going up, people should have more confidence in the stock market, not less.
The reasons why the sell-off occurred, at least the reasons that have been given so far, have to do with a slowing down of the US economy and maybe the debt downgrade.
But the stock market does not reward employment. You don’t get a higher stock price because you hired more people. You get a higher stock price because you made more money, and on that metric companies have done exceptionally well this year.
In the longer term, the market does reward earnings, having a little confidence in that, and this is a great time to be buying. Now that is across the board.
Specifically, the areas that have been particularly weak, where I see very good value, are the energy and natural resource areas. Because when you look across the globe, where there really is growth, the things that they need all have to do with providing energy and natural resources to build up their economy.
So who knows what end-user products will be made with those raw materials. It is too early to tell, but you know whatever it is that they make or build, they are going to need energy and they are going to need a lot of raw materials to make it with.
Kate Stalter: What are some areas that you are putting clients into, or suggesting that clients might want to research?
Ken Kam: Well, specifically within energy, our biggest holding right now is Valero (VLO). The reason why I like that stock is because even though oil prices are dropping as people expect slower growth, refining margins—which is what Valero does—are close to all-time highs.
Really, it is the refining margins that will drive Valero’s earnings, and if you buy it today, after the sell-off, you are getting a tremendous bargain. So that is one specific company.
Other areas I would look at? There has been a lot of talk about buying gold. Gold is at all-time highs now but there are a lot of miners who stocks have not risen in proportion to the value of the ore that they have in the ground and so I think that is a good way to play the rising gold now because the miners have it; it is just in the ground.
So, you can buy stocks like Northgate Mineral (NXG) at a discount to what you could last week, and I think the potential is even better now than it was last week.
Kate Stalter: Any areas you believe investors should really steer away from right now?
Ken Kam: Well, I will tell you one area we are taking a second look at is the banking industry.
Following the 2008 crash, the entire sector has had a fairly good run, but when you look behind the numbers, it is hard to tell how improved their balance sheets really are, because they are not marking their portfolios to market anymore.
So, it’s possible that the problem really hasn’t gotten a lot better since 2008, even though they are reporting large earnings. I have noticed that even though things may not have gotten better on their balance sheets, they are using those earnings to pay out large bonuses to their executive teams, so that tells me that their management team and their board of directors don’t really have their shareholders’ best interest at heart.
I can’t trust them to do the right thing for their shareholders. So I am thinking of getting out of that area.
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