Thoughts on the market--Green, Global Infrastructure, Tech and CAPM

Insight believes the green movement is an important and durable market theme. We initially tried to benefit from this theme a few years ago by going long Whole Foods Market. It worked for awhile until the markets began to see that while eating green is a real consumer interest, Whole Foods competitive position is not unassailable. And so the stock has weakened (and Insight is in fact short Whole Foods basically because of its valuation). But we still think green is a real theme. It's one reason why we own Weyerhaeuser, with its large ownership of forestland (In the end we believe wood is going to play an important role in biofuels). It's also why we won Bunge, with its agribusiness, and Cresud with its cheap Argentinean farmland. We believe that by using the Capital Asset Pricing Model (CAPM) to value companies, the market may be seriously understating the proper discount factor for technology companies, and overstating it for companies like Bunge and Weyerhaeuser, because we think these latter companies are strategically in a much more powerful position (sitting as they are at the crossroads of the green movement and the global infrastructure buildout), than is a tech company where competitive position is continuously up for grabs. It may well be that the outperformance by the natural resources sector this year is due to the market's belief that due to the above themes, and the fact that emerging market economies which are so dependent on natural resources for their growth, coupled with geopolitical tensions leading to immense competition for natural resources, natural resources stocks need to be revalued higher. And with many PEs in the group in the 10 range, compared to an overall market PE of 15, it could well be argued this revaluation is not over. In our model portfolio, Insight owns Bombardier, a Canadian airplane and transpiration infrastructure maker. Sitting in a New York City subway car, I wondered if Bombardier made the car, and lo and behold there was Bombardier's nameplate in the corner of the car. The multiyear construction of the Second Avenue subway in Manhattan should be a huge revenue opportunity for Bombardier. This dovetails nicely with the theme of global infrastructure buildout, which Insight is also trying to benefit from with investments in companies like Cummins Engine, Honeywell, Manitowoc, and Grainger. The corollary of this is my developing view that technology companies with high PEs like Google are very difficult to value. Last I looked, to justify Google's valuation you have to believe that in 30 years time it will have almost 10X as much a percentage of GDP as it has now. Maybe Google will be successful, and it certainly has the potential to be. We are in fact long Google in our model portfolio. But it seems to us that there is greater risk in a Google than would be suggested by CAPM. Therefore we have reduced our exposure to Google while buying beaten down tech companies like Dell, Level Three, and Motorola. The margin of safety there seems much higher, and the investor also benefits from regression to the mean.

 Philip Frank, PhD
President and Portfolio Manager
Insight Asset Management LLC
 e-mail: insight-asset@earthlink.net