Good and Bad Everywhere

I had the pleasure of spending some quality time in Michigan over the holidays, staying with my soon-to-be in-laws in the town of Rochester, which is about one full marathon (26 miles) north of Detroit. Activities included lots of card games, mainly gin and Euchre (a Midwestern partners game that uses only 9’s through Aces), plenty of food (including a hearty tomato sauce yours truly helped concoct), and a few heavenly beverages (“just having a taste” as my future father in-law says).

But I also took a day trip into Detroit itself, to visit the new MGM casino, as well as to poke my nose around Eastern Market, the largest public market (think farmers and vendors getting together) in the U.S., Mexico town, for more yummy food. Of course, seeing as there were four guys in the car, we got a bit lost on our way … but that was actually a good thing, allowing me to see a little slice of Detroit for the first time.

Detroit: Boom and Bust

Detroit, as you know, used to be a boomtown–in the post-war years the city was surging thanks to the auto boom. Back then, most of the city’s (and the state’s) economy was tied to the auto industry, and as General Motors and Ford soared, so did Michigan’s economy.

Today’s problem: The city is still tied to the auto industry! And that has meant an ever-worsening economy, due to GM’s and Ford’s pension-related problems (both firms only recently began getting some traction on exorbitant health care costs) and competition from overseas automakers.

While all of Detroit isn’t in ruins, I saw many abandoned buildings, including what was surely a huge, bustling old factory during the boom times, and the now-empty Michigan Central Station, the place where families once said goodbye to their soldiers before they left for war.

That station, by the way, was heavily used by the military in World War II, but immediately saw a decline in traffic after the war ended. Amtrak gave it a boost in the early 1970s, but the station was closed for good in 1988. It looked like it would be renovated for police headquarters a couple of years ago … but a lack of will and money left that for dead. So now you have this formerly beautiful landmark sitting in the heart of Detroit, desolate and run down for nearly twenty years. Call it a sign of the times.

Development Outside Detroit

On the statistical side of things, the porous economy has contributed to a horrifying 11.2% decline in home prices in the metro Detroit area; I heard a few stories about people literally unable to sell their house for a year or two, with many moving out of town while their houses were still for sale.

All told, while Boston (my home) is far from perfect, and Detroit still has plenty of great areas, it was definitely eye-opening to see a big city in the grip of a big decline.

Outside Detroit, however, where I spent most of my time, the story is very different. True, the housing market still stinks, but that goes for the entire country.

What I saw was land … lots and lots of land. And that land isn’t just sitting there; since I last visited one year before, there are a few new housing sub-divisions, a couple of new super-sized grocery stores, and more. I later learned that when my fiancé’s parents moved to Rochester a few years ago, all that existed were a couple of subdivisions and the center of town.

Nowadays, the town has spread out in a big way, with the aforementioned grocery stores, sports bars, strip malls and restaurants (both chains and family run joints). And more building is going on! Being from Boston – where the only time something new comes in is after something else goes out of business – it’s impressive to see a different landscape every time I go back.

So what does any of this Detroit-Rochester talk have to do with the market? Plenty.

Good and Bad Everywhere

If you’re in Detroit, especially the “wrong” part of Detroit, your mind is fixated on recessions, old industry, unemployment … problems of one sort or another. If you’re in Rochester, you’re thinking about opportunity, new jobs, new buildings … generally good things. And these places are just 26 miles apart!

The moral of this story: There is good and bad everywhere–which one you see depends on what you’re looking for. If you’re the mainstream media, you focus on anything negative; your job is to sell papers so big, dramatic headlines sell. If you’re an investor, however, you must stay optimistic–not pie-in-the-sky thinking, but you need to keep your eyes on the prize.

And the prize for investors is, has been and always will be companies that possess new, revolutionary products, serve mass markets, have big barriers to entry, and sport huge sales and earnings growth. The stocks behind these companies can deliver triple-digit gains to your portfolio … when the market environment is ripe.

Personally, I am worried about the market’s course in the weeks ahead–it appears that the Dow and S&P 500 have traced out a huge head-and-shoulders topping pattern (I’ll discuss what that is another time), so if the market breaks down from here, we could be entering bear-market territory. But am I letting that possibility disrupt my usual treasure hunt for big-winning stocks? No way!

So, every time you read some negative story about sub-prime lending, or lower earnings, or possible inflation, remember that there is some good news out there, too. The market is going to do whatever it’s going to do, and thus your focus should be on preparing for the next strong bull move … whenever that’s going to come.

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My stock idea for this issue stems from the “you can find good news among a heap of bad news” theory. It’s a company whose entire business stems from the airline industry … probably the only industry that’s lost more money than the auto firms during the past few years. And today, the outlook would seem to be even worse, as businesses begin to cut back spending and oil prices flirt with $100 per barrel.

Yet despite these worries, BE Aerospace (BEAV) remains a port in the storm. This company’s business is as old school as you can get – it’s the world’s dominant supplier of cabin interior products for airlines, such as seats, cushions, arm rests, tray tables, coffee and beverage makers, ovens and more. All standard stuff, but in a consolidated industry, BEAV is the leader.

So why is the company raking in the dough? First and foremost, because there is a huge trend of retrofitting going on in the global airline industry – after years of flying with outdated interiors, companies are upgrading their jets en masse. Second, there’s a huge new-plane ordering boom as well (hence Boeing’s good performance the past couple of years), especially in wide-body aircraft, which require a slew of BE’s products.

All this has led to stunning performance for a firm in a crummy industry. Revenues have jumped 57%, 47% and 49% the past three quarters, while earnings are up 80%, 63% and 78% during the same time. With a $2 billion backlog, management is looking for earnings to jump 33% in 2008, 25% in 2008 and is already talking about another 25% jump in 2009! Historically, the firm beats estimates, so the future could be even brighter than that.

The stock itself is performing solidly, though not spectacularly, hovering just beneath its old peaks. While the occasional 10% to 20% drop comes along, I think BEAV stands to outperform the market, and that, my friends, is good news.

Until next time, all the best.

Mike Cintolo
For Cabot Wealth Advisory

Editors Note: Mike Cintolo is Vice President of Investments for Cabot Heritage Corporation, and also serves as the editor of Cabot Market Letter. While the topsy-turvy market environment has most investors scared, the Cabot Market Letter’s time-tested market timing indicators have guided the Letter’s Model Portfolio to superb gains – it was the #6 newsletter in the country during 2007, with a gain north of 35%, vs. less than 4% for the S&P 500. Mike’s specialty is finding young firms with revolutionary new products that are under-owned by the big mutual funds. If you want to stay in gear with the market, and uncover 2008’s big winners, give the Cabot Market Letter a try.

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