Analysts at Morningstar see few bargains

Fund managers are keeping their powder dry, saying "nothing is really cheap" right now.
JUN 29, 2007
Fund managers are keeping their powder dry. “They [fund managers] are saying they're not finding a lot to buy and are indeed holding cash,” said Christine Benz, director of mutual fund analysis for Chicago-based Morningstar, speaking at her company’s annual conference in the city this week. “It feels like nothing is really cheap.” Both equities and fixed-income securities seem to have lost their luster. “One of the things we're hearing from managers is they're not seeing many opportunities,” said Scott Berry, associate director of fund analysis at Morningstar. Pat Dorsey, director of stock analysis at the company, noted that investors tend to follow the market rather than take a chance on a new direction, which potentially could be more profitable. He suggests that investors look for businesses with low costs that have protection from competition, and recommended Fastenal Co., (NYSE: FAST) based in Winona, Minn. The company sells bolts, nuts, screws and other industrial fasteners. Mr. Dorsey pointed out that this is a niche market with few competitors, but products are always in demand. Morningstar analyst Toan Tran agreed that competitive niches are important. He recommended Fuel-Tech, Inc. (NYSE: FTEK), because the Batavia, Ill.-based maker of control systems is one of the few providers of a technology that helps reduce air pollution at coal-powered electric generating plants. He also likes International Game Technology (NYSE: IGT), a slot machine manufacturer based in Reno, Nev., because major casino companies usually purchase new slot machines every 18 months. Another company Morningstar analysts believe to be insulated from competition is Buckeye Partners LP, (NYSE: BPL), a pipeline transporter of refined petroleum products based in Breinigsville, Pa. Looking at the bigger picture, Russel Kinnel, Morningstar’s director of mutual fund research, said “the dollar may be near the bottom.” Analysts currently are divided over the direction of interest rates, said Mr. Berry, especially in light of the problems in the sub-prime mortgage market. Jeffrey Gundlach, chief investment officer of Los Angeles-based The TCW Group Inc., said the sub-prime market is a mess, and will get worse, pointing to the record number of residential houses on the market. But Mr. Berry pointed out that bond managers, for the most part, don't hold much sub-prime debt. "The sub-prime damage has been limited," he said.

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