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Jeff Saut Presents: The Conference


...proper sector and stock selection, combined with the ability to manage the risk...should continue to be the secret to successful investment results.


Editor's Note: The following article was written by Raymond James Chief Investment Strategist, Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

We are in
Orlando for the 27th Annual Raymond James Institutional Investors Conference, which begins today. First held in 1979, this conference is now one of the oldest, largest, and broadest conferences of its kind. Our first Institutional Investors Conference was comprised of a few companies and a handful of investors sharing insights and enjoying the sunshine in St. Pete Beach. This year we are pleased to welcome approximately 1,500 attendees, including executives from nearly 300 presenting companies, and approximately 600 institutional money managers, as well as analysts from the U.S., Canada and Europe .

We've designed our conference to provide an ideal forum for portfolio managers and generalists with presenting companies in the eight industry groups covered by Raymond James Equity Research: Business & Industrial Services, Consumer, Energy, Financial Services, Healthcare, Real Estate, Technology, and Telecommunications. We believe sound investing begins with access to insightful, reliable, and timely information, and we hope this conference provides an excellent forum for our clients, Equity Capital Markets professionals, and covered companies to exchange this informative information.

Equity research is the foundation of Raymond James' Capital Markets efforts, and thus this conference. Our research effort remains focused on providing coverage of high quality growth and value companies in our select industry groups. In recent years our expanding research coverage has taken a supply chain approach, as we seek to cover key suppliers, manufacturers, and distributors in each of our industry groups. In fact, our research universe has expanded from approximately 200 companies in 1996 to more than 600 companies at present. While our focus remains middle- and small-capitalization companies, our philosophy of covering each industry deeply has resulted in more than one-quarter of our current coverage universe being companies with market capitalizations greater than $5 billion.

We believe our evolving research philosophy has paid tangible benefits, and many recent professional accolades support that belief. For example, in both the 2004 and 2005 Greenwich Associates report, Raymond James Equity Research was named as the second most important research source for small- and mid-cap fund managers. Moreover, the overall performance of Raymond James' analysts in The Wall Street Journal's "Best on the Street" survey remains exemplary; we have ranked in the top 10 among all industry participants (more than 200 sell-side firms) in terms of the number of our senior analysts honored each of the last four years, which was ahead of numerous much larger firms. Additionally, a study conducted by Penn State University , and published in the Journal of Investing that analyzed the recommended stock lists of major brokerage firms over a 10-year period concluded that the performance by Raymond James' Focus List was first among all the firms surveyed. Raymond James remains committed to being one of the premier independent research providers serving both growth and value companies, as well as the institutional and retail communities that invest in them.

This year's parade of company presentations begins this morning and ends mid-day Wednesday. In an effort to focus, conference attendees and those non-attendees that will be viewing the webcasts, we asked our analysts for their "must see" companies. Said list can be found at the end of these comments. It should be noted, however, that not all of the "must see" companies are currently BUY ideas. Indeed, some of them are topical, or controversial, and thus intended to provide insights not only into the companies, but the attendant industries. For example, our growth airline analyst (Jim Parker) currently has a Market Perform rating on JetBlue (JBLU), yet Jim believes this "must see" presentation will provide some gleanings into what is currently happening in the growth airline industry. The same can be said about Market Perform-rated Quest Communications (Q).

As for the equity markets, we continue to embrace the strategy espoused by Charles Knott, eponymous captain of Knott Capital Management, who so aptly opines:

"With these concerns, our risk-adverse and conservative nature forces us to maintain a 'predominantly defensive' investment stance. Investors shouldn't have a highly optimistic or hardened pessimistic mindset. Proper sector-selection is the best tactic to achieve above-average investment results. We favor those industry groups where valuations are reasonable, pricing power is formidable and earnings growth seems assured. We continue to sell-on-strength and buy-on-weakness. This defensive tactic is flexible and adjusts to the market's volatility. It also allows gains to accrue as money is taken off the table."

And that mindset, ladies and gentlemen, is what this conference is all about. Manifestly, proper sector and stock selection, combined with the ability to manage the risk (read: don't let ANYTHING go very far against you), has been, and should continue to be, the secret to successful investment results.

In the near-term, we think the equity markets are forming a "broadening top" that typically takes months to complete. This view is reinforced by the equity markets' weakening internals, the tightening mode of most central banks (read: higher interest rates), a cooling housing market, continuing high oil prices, flattening/inverting yield curves, waning economic and earnings momentum, and geopolitical concerns, and the list goes on. Moreover, we have had the envisioned pattern of a mid/late-January parabolic peak followed by the perfunctory quick/short pullback and then an attempt to re-rally. While in that re-rally the DJIA made the typical slightly higher high, most of the other averages did not (read: non-confirmation). Whether they do, or not, is of little consequence to us since we think the Fed is going to continue to raise interest rates until there is a financial "accident" and we don't think that degree of rate-tightening has been discounted by the markets. As the good folks at the GaveKal organization point out:

"The upshot could be pretty ugly situation for all cyclical assets, with statistics unexpectedly weakening, corporate earnings sure to follow, the Fed over-shooting and the bond market apparently pointing to recession. In our view, such anxiety about recession will turn out to be a head-fake, since the low level of bond yields and inverted yield curve will be a function of the Asian savings surplus, rather than cyclical concerns. . . . In short, the summer should present some excellent buying opportunities for equity investors, but first we expect to see some bad news on the economy, attacks on Bernanke for overdoing the monetary tightening – and a market correction of more than a few percent."

The call for this week: Since 2000 the month of March has been a turning point for the equity markets, both on the upside and the downside. Given our current mindset, we obviously think the markets are, or have, made a top. As for the inevitable question about value versus growth that we are certain to get at this year's conference, we leave you with the following Warren Buffett quote:

"Most analysts feel they must choose between two approaches customarily thought to be in opposition: 'value' and 'growth.' Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking. In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. In addition, we think the very term 'value investing' is redundant. What is 'investing' if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in hope that it can be sold for a still-higher price – should be labeled speculation."

Clearly, Warren's comments are in keeping with Benjamin Graham's in that, "An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." We continue to invest accordingly.

P.S. – Because of the conference, and the demands on our time at said conference, these will be the only strategy comments of the week.

The List of 'Must See' Companies

Arrow Electronics (ARW)
Avnet (AVT)
Insight Enterprises, Inc. (NSIT)
BioMed Realty Trust Inc. (BMR)
Kite Realty Group Trust (KRG)
Starwood Hotels & Resorts Worldwide (HOT)
Strategic Hotels & Resorts (SLH)
Williams Sonoma (WSM)
Home Depot Incorporated (HD)
Pier 1 Imports Incorporated (PIR)
Newell Rubbermaid Inc. (NWL)
La-Z-Boy Inc. (LZB)
Universal American Financial Corp. (UHCO)
American Equity Investment Life Holding Company (AEL)
Panera Bread Co. (PNRA)
California Pizza Kitchen, Inc. (CPKI)
Benchmark Electronics, Inc. (BHE)
Vishay Intertechnology, Inc. (VSH)
Celestica, Inc. (CLS)
Plexus Corp. (PLXS)
Qwest Communications Intl. (Q)
Time Warner Telecom (TWTC)
Knology (KNOL)
Nuance Communications, Inc. (NUAN)
Amdocs Ltd. (DOX)
WESCO International (WCC)
Briggs & Stratton (BGG)
Whirlpool Corp. (WHR)
The ServiceMaster Company (SVM)
CNF Inc. (CNF)
Heartland Express, Inc. (HTLD)
Republic Services, Inc. (RSG)
Investment Technology Group, Inc. (ITG)
IndyMac Bancorp, Inc. (NDE)
The First American Corporation (FAF)
American Tower (AMT)
JetBlue Airways (JBLU)
AirTran Holdings, Inc. (AAI)
Gol Linhas Aereas Inteligentes S.A. (GOL)
Covance Inc. (CVD)
IMS Health, Inc. (RX)
Emageon (EMAG)
ON Semiconductor Corporation (ONNN)
Intersil Corporation (ISIL)
Fairchild Semiconductor International (FCS)
Wells Fargo & Co. (WFC)
Wintrust Financial Corporation (WTFC)
PrivateBancorp, Inc. (PVTB)
Mercantile Bank Corporation (MBWM)
CheckFree (CKFR)
Fidelity National Information Services (FIS)
Online Resources (ORCC)
Alliance Data Systems Corp. (ADS)
iRobot (IRBT)
FLIR Systems (FLIR)
Argon ST (STST)
RSA Security (RSAS)
Blue Coat Systems (BCSI)
KVH Industries (KVHI)
EDO Corporation (EDO)
Intermec Inc. (IN)
Ultra Petroleum Corporation (UPL)
Range Resources Corp. (RRC)
Chesapeake Energy Corp. (CHK)
XTO Energy Inc. (XTO)
InterOil Corp. (IOC)
Brigham Exploration Company (BEXP)
Bois d`Arc Energy (BDE)


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