Portfolio Manager Perspectives

Jeff Benjamin

Bull Path's Kaimowitz: Valuations will get squeezed

Nov 13, 2009 @ 10:21 am

By Jeff Benjamin

The strong likelihood that both interest rates and taxes are rising will soon put a squeeze on company valuations, according to Rob Kaimowitz, portfolio manager and chief executive of Bull Path Capital Management LLC.

“We've just gone through a 25-year easy beta trade, from 1982 to 2007, that included a rising-tide stock market driven by [a drop in] taxes and interest rates” said Mr. Kaimowitz, who manages the Bull Path Long Short Fund (BPFAX).

The fund, which applies a bottom-up research strategy, was managed as a hedge fund for seven years before it was converted to a mutual fund in June.

Mr. Kaimowitz thinks that the emerging economic cycle will be a direct result of the nation's overwhelming debt levels.

“From this point, interest rates and taxes have nowhere to go but up,” he said. “That means [stock] multiples go nowhere but sideways or down over the next several years until the economy reloads to a new cycle of lowering taxes and interest rates.”

With that in mind, Mr. Kaimowitz is homing in on a couple of cellular-tower companies as likely winners in a slower-growth economy.

American Tower Corp. (AMT) and SBA Communications Corp. (SBAC) are both large-share owners of wireless-communications towers that he thinks will benefit from the fast-expanding use of smart phones.

“Smart phones right now represent 10% of all cell phone use, but they make up 90% of the cell tower capacity,” Mr. Kaimowitz said. “There's going to be a need to increase the capacity of the cell systems.”

Also on the long side of his portfolio, Mr. Kaimowitz likes certain discount retailers, including Ross Stores Inc. (ROST), for its appeal to cost-conscious consumers. He also likes and owns The Direct TV Group Inc. (DTV) for its dependable income stream from 15 million subscribers.

Like most short-sellers, Mr. Kaimowitz isn't as open about discussing specific stocks he expects to decline in value, but he did say that he is shorting companies related to automobile dealerships and some cell phone manufacturers.

Even while he expects smart-phone usage to increase dramatically, he said that the increased competition in the market doesn't bode well for the ability of established firms to hold on to market share.

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