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The Rukeyser Interview

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Posted 9/14/2010 8:36 AM by 0 from Rukeyser.com=20 in Investing, Stocks =

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Referenced Stocks: REE,=20 TEVA=20

Although you should be leery of stock tips overheard at a = cocktail party,=20 there's value to information gathered from a long-standing network of = research=20 analysts and industry contacts. Marshall Berol and Malcolm Gissen, = co-managers=20 of Encompass (ENCPX), aren't afraid to apply a = little=20 elbow grease to the tips they glean from industry experts. The duo = thoroughly=20 vets these recommendations and will continue to add to positions, = provided their=20 investment theses remain intact. This strategy propelled Encompass to = the top of=20 Morningstar's World Stock category in 2009. Berol and Gissen spoke with = us about=20 their market outlook and favorite sectors. -- Benjamin=20 Shepherd

Courage of Conviction

What's your read on the US economy?

Gissen: The recovery has been much slower than most = people=20 anticipated, including us. There are many uncertainties hanging over the = market=20 right now: the election, income and estate tax policies, and whether the = Republicans will gain control of Congress. The mortgage foreclosure = issue still=20 hasn't been resolved, and the housing situation doesn't look attractive, = particularly until we see an improvement in unemployment. On the other = hand,=20 corporations are reporting decent earnings and sitting on enormous = amounts of=20 cash, though they're reluctant to hire. We expect this to change = gradually.

We look to add exposure to the superior growth prospects offered by = emerging=20 economies by focusing on companies that provide resources and consumer = products=20 to those markets.

China is an obvious example of a market we like. We think India and = Brazil=20 will do well over the next several years, and Turkey is attractive. = There are=20 concerns about the Chinese real estate market and that GDP growth may = fall from=20 10 percent to 8 percent. That's still very substantial growth, mostly = because=20 China has a very large population. India's the same sort of story.

Berol: There's no question that it's a global = economy and=20 investment world these days. We look worldwide for companies that will = fare well=20 even in a slow economy. We're invested in companies doing oil and gas=20 exploration and production in South America. We hold mining companies = operating=20 in South Africa, South America, the US, Canada, Mongolia and China.

Your portfolio is extremely heavy on gold miners. What's your = outlook=20 for the sector?

Gissen: The price of gold should head higher, though = it's=20 difficult to say exactly when gold will hit $1,500 an ounce. A variety = of=20 factors contribute to this trend: the economy, inflation worries, = terrible=20 municipal and federal debts, and the possibility of wars and terrorist = attacks.=20 These threats help boost the price of gold.

And the easy gold has already been mined. Marshall and I have toured = South=20 American properties that contain enormous amounts of gold, so a handful = of=20 bonanza properties are left. But we've talked to a lot of mining = executives who=20 tell us how difficult it is to find and extract gold, so we think there = will=20 continue to be a lot of mergers and acquisitions in the sector.

All of this suggests that gold prices will probably rise; we want = to have=20 significant exposure to gold.

Berol: The price of gold should continue to rise, = leading to=20 questions about whether there's a bubble. We don't think so. Gold prices = haven't=20 gone parabolic. Sure, it's gone up over the last 10 years, from around = $275 to=20 $1,250. But gold has suffered corrections and consolidation along the = way, and=20 if you look at a chart, it's risen on a reasonably steady basis over = that=20 ten-year period.

A bubble occurs when everybody regards gold exposure as a must-have, = but many=20 investors still dismiss gold's future. On any given day, the media will = say that=20 gold prices rose or fell because of the dollar or profit taking, but the = role of=20 supply and demand is not as well recognized as it should be. It is far = more=20 difficult, expensive and time consuming to find gold or any other = commodity=20 these days. And environmental and social concerns mean that extraction = takes=20 longer and is more costly.

Why do health care names figure so prominently in your=20 portfolio?

Berol: The health care industry benefits from = extremely=20 favorable demographics. The population's getting older, there's more and = better=20 health care available, there are new drugs and procedures, and life = expectancies=20 are improving. These factors drive the need for health care.

We like Teva Pharmaceutical Industries ( TEVA=20 ), an Israeli company that manufactures and distributes generic drugs = and a=20 small portfolio of branded drugs worldwide. Teva is an outstanding = company that=20 has grown both organically and by acquisition and operates in a = fundamentally=20 strong industry.

We also own Delcath Systems (NSDQ: DCHT), a drug = delivery=20 company working on a process for delivering chemotherapy drugs to a = particular=20 organ through profusion. This method delivers the drug in a more = concentrated=20 form but limits side effects. The product is currently in Phase III = clinical=20 trials, and we anticipate that the Food and Drug Administration and the = EU will=20 approve the treatment. We're looking to add to our position.

Did the US health care reform scare you off from investing in = the=20 sector?

Gissen: The companies we're looking at have enormous = potential, and the products they bring to the market are so necessary = that we=20 believe they should do extraordinarily well. Generic drugs should see = greater=20 utilization, which will be extremely favorable for the firm.

In the case of Delcath, one other crucial point is that the drug = delivery=20 system is believed to be effective with most organs and cancers. The = process=20 also prevents chemotherapy drugs from getting into the patient's blood, = thereby=20 lessening damage and side effects. The potential market for Delcath's = product is=20 enormous. Management is highly motivated to succeed and seems to be on = the right=20 path.

Why does so much of your research focus on rare earth=20 elements?

Gissen: Many new applications for rare earth = elements ( REE=20 ) continue to be found, and these compounds feature prominently in green = technologies. Hybrid cars use more than 20 pounds of REEs, and they're = also used=20 in windmill and solar installations. They're used in LED lighting, = rechargeable=20 batteries and many consumer electronics as well.

Until recently, approximately 95 percent of the world's REEs came = from China.=20 The price of these elements has increased because the Chinese announced = export=20 reductions and cracked down on a number of illegal mines.

We realized several years ago that demand for REEs would increase=20 significantly and invested in Avalon Rare Metals (TSX: = AVL;=20 OTC: AVARF), a Canadian company that has a world-class resource in the = Northwest=20 Territories at Thor Lake. Management expects the play to enter = production over=20 the next several years.

The company has solid financials and little debt. It's an attractive = bet.

Berol: We came across the rare earth elements = several years=20 ago. We come across a lot of these investments through conversations = with the=20 management teams at many companies, as well as a number of research = analysts and=20 other contacts.

We do an awful lot of reading and talk to a lot of people. Malcolm = and I=20 co-manage the fund, but we also have two analysts who work with us on = the fund=20 and our private accounts. When an interesting idea comes to us, we = follow up on=20 it because we're inquisitive about global trends and how they'll affect = the=20 investment world.

We saw that demand for and the use of REEs was growing and sought = companies=20 that would benefit from that growth.

Dacha Capital (TSX: DAC, OTC: DCHAF) = is=20 another company we invested in to leverage rare earth metals. Dacha = formed=20 earlier this year and has purchased rare earth elements in China. The = firm=20 exports them under license and stores them outside of China in = anticipation that=20 prices will rise over the coming years.

The company should profit from its inventory of these metals. The = stock=20 offers a way to play rare earth elements without being directly involved = in=20 their mining.

What's your best piece of advice for the next year? =

Gissen: I would be very cautious about the economy. = There's=20 a lot of information available and tremendous efforts being made by = sales teams=20 to attract people to hot investment vehicles.

Berol: Beware of the drive to fixed-income = investments.=20 Don't give up on equities. The statistics show heavy flows away from = equities=20 and into fixed-income mutual funds. That's likely to prove = disadvantageous over=20 the next several years. Interest rates are at extremely low levels, = depending=20 what you're looking at they could be at all-time low levels. There's = only way=20 for them to go: up. There are no ifs, ands or buts about that. When = rates go up,=20 bond prices will fall, fixed-income funds will drop in value, and total = returns=20 may be extremely disappointing.

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