Pre-depression profit opportunities

Posted Mar 29th 2007 6:50PM by Peter Cohan
Filed under: Competitive Strategy, Circuit City Stores (CC), Goldman Sachs Group (GS), Toll Brothers (TOL)

Earlier today I posted on whether we're headed into an economic depression. But cheer up because I think it could be years before it happens. And in the meantime, the general economic trends will benefit some sectors and harm others.

Specifically, with Blackstone going public and Goldman Sachs Group (NYSE: GS) seeking to raise a $20 billion private-equity fund, investors will be able to profit by anticipating which sectors will soak up the private equity. These might include the following:

Supermarkets
Pharmacies
Health care
Electronics retailing
Software
IT services
Commercial real estate
Energy

Conversely, sectors experiencing a capital crunch will suffer, suggesting short-sale opportunities for firms in industries such as the following:

Mortgage banking
Mortgage-backed securities
Mortgage insurance
Home construction

Investors should look to profit from these trends by purchasing shares of companies likely to receive private equity capital and selling short shares of companies likely to suffer from the capital crunch.

I would evaluate these stocks based on their potential to go up regardless of whether a private-equity firm buys them. These potential buys include:

Circuit City Stores, Inc. (NYSE: CC)
AmerisourceBergen Corp. (NYSE: ABC)
XTO Energy, Inc. (NYSE: XTO)
C.B. Richard Ellis Group, Inc. (NYSE: CBG)
SuperValu, Inc. (NYSE: SVU)
Rite Aid Corp. (NYSE: RAD)
Ingram Micro, Inc. (NYSE: IM)
Computer Sciences Corp. (NYSE: CSC)
Unisys Corp. (NYSE: UIS)

I would apply the approach I used to evaluate the short sale of NovaStar Financial (NYSE: NFI) to determine whether to sell short these stocks:

Coast Financial Holdings, Inc. (NASDAQ: CFHI)
Seacoast Banking Corporation of Florida (NASDAQ: SBCF)
Luminent Mortgage Capital, Inc. (NYSE: LUM)
Capstead Mortgage Corp. (NYSE: CMO)
Toll Brothers, Inc. (NYSE: TOL)
MGIC Investment Corp. (NYSE: MTG)
The PMI Group, Inc. (NYSE: PMI)

A few weekends ago I saw Titanic on TV. It took about an hour between the time the ship hit the iceberg and when it finally went under. These trades might be profitable during the same interval for the market.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.

Print this