The recovery has begun
Market analyst predicts rebound in second half
The US economy is building momentum for a long and deliberate recovery, according to Amy Croen, co-president and principal of Geneva Capital Management Ltd.
Geneva Capital, which is based in downtown Milwaukee, is an independent investment advisory company with $600 million in discretionary assets.
The company provides a mid-cap portfolio of medium-capitalization stocks, including Kohl’s Corp. and Fiserv Inc.
Geneva Capital contends "a new cyclical bull market has begun," and "the stock market appears poised to offer significant returns (25% to 40%) over the next two years."
Croen has 18 years of investment experience after earning a bachelor of arts degree from Princeton University and a master’s degree in business administration from Columbia University.
Croen recently discussed the national and regional economies in an interview with Small Business Times executive editor Steve Jagler. The following are excerpts from that interview:
SBT: So many local business executives are telling me that they believe the worst is behind them, that the slow climb of a recovery has begun. With your experience, knowledge and perspective, is that true?
Croen: I would agree. I think that the recovery is occurring. But we term it here at Geneva as a reluctant recovery. You look at the statistics, you look at the stimulus that is occurring, not only are we starting to see very slight inklings of light at the end of the tunnel, but we should be set up for improvement – pretty dramatic improvement – in the latter part of this year.
My colleagues and I, in the last few weeks, were at several seminars in which we were able to talk to the management of several publicly held companies. The consumer side of the economy is doing very well, in terms of sales and certainly mortgages and housing starts.
One company that we own (stock in) is a payroll processor. They track checks per client. Most of the companies they work with are small businesses, and they track the number of checks they process for each of their clients. For several quarters, it’s been down, down, down. And then this past quarter, it was the first one that was slightly positive. I think it was only .3%, but it was an improvement.
It speaks to your point. There is improvement in the top line, but in hiring, companies are really thinking twice about that.
SBT: In talking to some economists, many tell me that it’s almost getting to the point where you want to take manufacturing and put it in its own little petri dish. The rest of the American economy seems to be rising. But manufacturing, with global competition, tariff discrepancies and cheap labor, seems to be stuck in a quagmire. Wisconsin has lost 75,000 manufacturing jobs in the last couple of years. Do you see any chance of rebounding for the American manufacturer?
Croen: I don’t really have any magic answers. You talk to companies, and they are moving manufacturing overseas because of cheap labor, as you suggest. I don’t know if there’s an answer to that.
The best thing that companies can do is to keep an eye on productivity and invest in technology. That’s really the best you can do, is to take care of your own business. I really don’t have any answer.
SBT: It’s hard to be bullish about the manufacturing sector.
Croen: Yes it is, but think about what’s going on. You’ve got tax cuts. You’ve got the child care credit refunds. You’ve got low bond yields. It’s cheap to borrow money. … You’ve got faster depreciation (tax credits), so that companies can reinvest. We’ve started to see reinvestment in technology and other capital spending items increase because of that.
SBT: There’s a lot of pent-up demand?
Croen: Yeah, I think there is. The last time we had a technology upgrade cycle was Y2k. That should filter down to manufacturing. We’re hopeful that all the stimulus that’s going on will ultimately lead to a better economy in the second half.
SBT: Do you see the national gross domestic product growing in the remainder of the year?
Croen: Yes. Our expectation is 3% to 4% in the second half of the year.
SBT: What about the stock market? The Dow Jones Industrial Average has bounced back up over 9,000. Is it conceivable it could climb back to the 10,000 mark in the second half of the year?
Croen: Oh, yeah. Sure. It’s possible. The market is up, depending on the index you look at, a good 25% off its bottom. So, that’s encouraging, as well.
SBT: Are there a couple of sectors in the stock market that will be good investment bets in the second half of the year?
Croen: The stock market as a whole, in the disaster that we had over the last three years, really got undervalued, relative to the growth rate of the US economy as a whole, relative to interest rates and the rate of inflation.
So, we’re seeing a rebound, and the biggest rebound has already come in some of the sectors that were beaten down the most in this bear market – technology, manufacturing.
In some of the sectors that hadn’t been beaten down as much, like health care, like energy, like some of the service companies, the rebound isn’t as great.
Looking forward, I actually think the performance of the stock market will broaden out, so that some of the sectors that were left behind will start moving along with the sectors that had started moving in the beginning of the year.
Of course, there are always things that can happen that would derail the improvement in the stock market, that could derail the improvement in the economy, (such as) another terrorist attack. But I tell my clients, "You can’t live your life worried about another terrorist attack, and you can’t live your investment life that way, either."
Spending on technology is improving, and we expect that sector to do OK. Health care is ongoing. We believe in it, longer term. Certainly, the demographics point to it.
SBT: We’re all getting older, aren’t we?
Croen: (Laughs) Yeah, there are always issues regarding reimbursement and the government, but longer term, we believe in that sector.
The consumer sector – the consumer has held up beautifully in this difficult environment. The consumer kept spending and held up the economy. And now we’re getting tax cuts and rebates. That should continue to help consumers.
Manufacturing – if you own the companies that know what they’re doing, that are willing to spend the money to invest in their plant and equipment, they’ll do well in the long run.
SBT: It has been difficult for publicly held companies to see the long-term picture, to make capital investments that will cause short-term pain, but long-term gain, hasn’t it? Those companies have to report their earnings by the quarter, and from a shareholder perspective, it’s, "What have you done for me lately?"
Croen: Yes. A privately held company can afford to take a longer-term approach. We like companies that continue to spend for the long term, that continue to spend on R&D, on engineering, even if it’s a little bit of a hit to earnings in a slow economy. The great managements are able to do that.
SBT: Business executives tell me all the time that two obstacles to a recovery are employee health care costs and energy costs. Is there any relief in site on those fronts?
Croen: And throw in insurance, as well. That’s tough. Every company is facing it. I don’t see any major changes, in terms of having those costs ease up dramatically. Companies are doing the best they can, kind of sharing the costs, which is painful for everybody.
SBT: Locally, do you have any thoughts on the importance of Midwest Airlines surviving?
Croen: I think it’s important. I really do, personally, as well as in my business. We fly fairly often, and I have family all over the country, so I’m flying all the time, and I try to use Midwest when I can.
I think it’s very important. Midwest IS the hometown airline. We know that if they survive, and I certainly believe and hope that they will, they will be here to serve us, and we just don’t know about other airlines.
SBT: Do you think Midwest Airlines will survive?
Croen: They’re giving it a tremendous effort to do so. Purchase of the newer planes is a good idea. I think they’re doing what they can do, given the realities of what the public wants.
SBT: And we want direct flights, we want it fast and we want it cheap.
Croen: Yes. Midwest, they’re focusing on their most profitable routes. They’re giving it a great shot. If US Air can make it, than Midwest can as well. But it’s not easy.
SBT: One other possible impediment to the economy is corporate scandals. Do you think corporate America has cleaned up its act, and the scoundrels have been weeded out, or is there another wave of scandals yet to come?
Croen: You know, I think that whole mentality that led to those kinds of activities has really changed, so I don’t see another wave. Certainly, people are people. We’re all human, and there are going to be some bad apples, and those are the folks that are going to get into trouble.
It kind of came out of that boom mentality of the 1990s. Things were lax, and it was awful, but I think it’s very different now. Certainly, if you look at the analysts on Wall Street, and I’m talking about the sell-side analysts, the analysts that work for brokerage houses, if anything, they are more negative.
SBT: They’re paranoid?
Croen: A little more paranoid and more willing to be more negative on a company than be positive, almost. It’s like the exact reversal of what happened a few years ago. And that’s not a bad thing, it’s just interesting to observe.
I think our industry in general is much more concerned about that issue, and I certainly think accounting firms are much more careful when they go into companies.
SBT: Do you think individual corporate board members are more diligent and take their oversight duties more seriously today?
Croen: I do. I think, as a whole, things are much better in that regard. From an investment standpoint, I feel that I can look at the balance sheet, income statement and cash-flow sheet of a company and feel more confident that it’s a true representation of what’s going on in the company than I’ve been able to in several years.
If investors feel confident that the quality (of the financial information) is better, that’s important for everybody.
July 11, 2003 Small Business Times, Milwaukee
