Dinakar Singh, founder of $4 billion hedge fund TPG-Axon Capital, spoke with Bloomberg TV’s Erik Schatzker and Stephanie Ruhle on “Market Makers” today, saying that investors are scared and are paying a lot for safety. Singh said that the commodities “super cycle” is over because of falling Chinese productivity and profits—and that profits are improving the most in Japan.
Singh went on to say that he sees growth in the chemical, health-care and aerospace industries and likes Sirius XM and W.R. Grace. He also said “we are bearish on some financials, U.S. regional banks especially” and that he is betting against telecom stocks.
Singh on Knight Capital Group Inc. (NYSE) and high frequency trading:
“All of these things — markets being skittish, having some moments where machines are driving the system as opposed to people for lots of reasons, liquidity being very patchy – means that things move crazily. That makes it both easier and tougher to make money. Easier because I do not think it has ever been simpler to look at something and say I cannot believe it is trading here. And at some point have a high conviction of that unless the world ends, I’ll make money. It is also never been harder to emotionally withstand what you have to withstand along the way. You might believe in great value for a stock when it is going down 15% in one day. You start thinking about all of the things that you might have missed. In some ways, the guts part of the business has gotten harder.”
On the current environment:
“For us, we pick stocks. That is how we make money. More and more, everyone has become more emotional in markets. We get scared by headlines and we all start acting the same way whether you are a CEO or a consumer. Jobs do matter. I think when you look at the U.S. in the last number of months, our view coming in this year is that people got too excited. There was a bounce back from last year and some good weather but it was going to be a slow gradual sloppy messy restructuring without a big recovery. Things have reversed. I think people are getting too pessimistic…I think ultimately consumers and CEOs are reading the same headlines and scared. I think you are seeing a cyclical or temporary step down. We do not think there one should expect a big bounce, but there won’t be much of a plunge either. It feels like the numbers are crummy but they will probably stay this way for a while. The fiscal cliff is a real issue. I think you’re seeing an impact right now.”
On how to play this market:
“People have gotten scared and they’re paying a lot for safety. On the safety side, people like dividends in safe industries. So Verizon Communications Inc. (NYSE:VZ) is trading 18 times earnings because people want safety and a good dividend. There are companies like Time Warner Cable that we think are just as defensive but they did not happen to pay a dividend, they have even better cash flow, but they traded as a result much less well last year. For us, big opportunity. So media and cable that’s very cash flow rich and where we think management is going to turn that spigot on and turn it into a dividend or buy back machine that makes sense. Sirius XM Radio Inc (NASDAQ:SIRI), Time Warner Cable, companies like that. On the cyclical side, not everything is terrible. There are some sectors where we think there is good structural growth and balance sheets will be put to work. Some chemical companies are very good restructuring candidates. Aerospace suppliers. Aerospace is in the middle innings of a very long term upgrade cycle.”
On whether financials are a good buy:
“We are bearish on some financials, U.S. regional banks especially. Not because they are bad but because they are not going to make a lot of money. I don’t think people have factored through how much their earnings will get hit with rates being so low. We see earnings going down sharply for regional banks. For the global money center banks and securities firms, they are going to be volatile, but the bad news is out there right now and there are some good things to look forward to. The old way of making money used to be mergers, advisory, underwriting. Markets are going up and down every 13 seconds. None of those happened, but they settle down and they happen again. If the market settles down, you will see a big wave of mergers pop up and that will help. I think people are overstating things right now on the bad side.”
“If you look at China specifically, multiples had really collapsed…You have two general types of companies. Big, state-owned companies that people don’t trust and private companies that people really don’t trust. There isn’t a lot that trades at big multiples anymore. I think if you can find cases where there is real growth and they can pay cash back to you, you’ll make money.”
On whether Japan is a better buy:
“Some of my favorite stock stories are in Japan. The Japan-China comparison is pretty interesting. The place where you have seen the best profit improvement in the world is Japan. China is the only index that has gone down. Profit margins are falling because costs are going up…In Japan, they’ve had a brutal headwind from the yen and yet they have restructured pretty aggressively so profit margins for the Nikkei have gone up and are now about there with the S&P. People do not expect that… Japan Inc. was a disaster 15 years ago. Today, there are stocks we like with low multiples that are paying out cash and growing.”
On what stocks he’s buying and selling:
“People are paying a lot for dividends in defensive sectors, but if the dividends are not there, they were not paying a lot before. There opportunity is to find a stock in a company where there is a lot of cash flow, people aren’t paying for it, but they will tomorrow. Sirius is an example of a stock that we love. The company nearly went bust a few years back, merged with a competitor and changed the dynamic of the industry. Take it as an example against Verizon. Verizon is a good company but trades 18 times earnings. They are paying out almost all their cash in the dividend. Sirius has double digit free cash flow yield. It is restructuring. It is going to grow its earnings because it is still recovering from a few years ago…This is a case where you are getting a much, much better deal for something that is growing and where the cash is going to turn from being in the company today and in your pocket tomorrow.”
“Health care was a terrible sector