Thursday, June 22, 2006


In every stock group, there is see-saw action. A frequent reader who enjoyed a recent visit to Myrtle Beach, said he had never seen such little traffic at the beach in the summertime. Another reader asked why airplanes and hotels are full when people supposedly cannot afford to travel. The phenomenon is explained in Ecclesiastes; "To every thing there is a season".

For many years, I have used the food business as an easily understood business in this regard. There are times to buy restaurant stocks and times to buy grocery store stocks. Those who beat the diversify, diversify, diversify drums imply that you should buy the best restaurant stocks and the best grocery stocks at the same time, but this is not the way to make serious money. When consumers are flush with cash they go out to eat. When times are tight, they go to the grocery store. The restaurants are high beta stocks; they soar in price when business is good and crash when business is bad. Grocery stores are not as volatile but they fight very small margins. Any grocery store chain that expands too far from "home base" finds the extra distribution costs can take away all profits. Huge money is made by buying grocery store stocks at the right time and huge money is made by buying restaurant stocks at the right time. In the past five years, DRI has done well and Wal-Mart has not; the previous five years, Wal-Martwas the better stock to own.

How can Hotel stocks be on fire while beach condos are going begging? There are a couple of answers. One relates to business travel versus personal travel. About half way through the business cycle, companies start "spending money to make money". In the first half of the business cycle, businesses typically try to "save money to make money". The consumer does almost the opposite. Most consumers are still employed at the end of a recession. These folks suddenly find that the price of travel is low. Businesses are not renting rooms, interest rates are down and consumers find themselves flush with cash. Hotel rooms are bargains as are beach condos. Consumers hop in cars, drive to the beach and rent a beach house or condo.

As the business cycle progresses, fuel prices rise, interest rates rise and consumers get squeezed. About the same time, businesses which have repaired their balance sheet are in expansion mode. They are looking at how to expand business and they are looking for ways to retain top talent. Companies offer business trips to keep employees happy. When a company calls to schedule a "business meeting" they do not call XYZ Vacation Rentals. They call the big hotel chains that cater to the business traveler.

The second reason focuses on the current fuel "problem". While the price of gas has doubled, the price of a plane ticket has gone up by 50% or so. Put another way, when one drives his 6,000 pound SUV to the beach, 90% of the fuel is being used to move the vehicle and only 10% to move the passengers. When the consumer decides to fly, he typically calls a travel agency and books a package that includes accommodations. Again, the travel agency is likely to compare packages available from major chains and does not call XYZ Vacation Rentals to get a quote.

Over-built beach condos will go begging for the next several years while airlines and hotels will see rapid growth in revenues and even more rapid growth in profits. In the same way, major pharmaceutical companies will do well while generic drug companies will generally under perform. "To every thing there is a season". In the past 6 weeks, a number of emerging growth mutual funds are down 30%. Last night, market mavens suggested that these stocks are now cheap; wrong! Just as spring turns to summer and summer to autumn, markets change seasons too. If you folks will hang with me, we should be able to buy a beach condo or two at bargain basement prices and achieve a very high rate of return on our investment. We need to have the patience to wait about 5 years until the prices bottom!

As a side note, our Stock of the Week added Interstate Hotels,(IHR) last September. Interstate Hotels,(IHR) operates Sheraton, Hilton, Holiday Inn, Radisson and more. The return added to our portfolio to date is 76%.