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Is There Too Much Optimism in the Markets?

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    Delphi Management President Scott Black on the stocks to boost investors’ portfolios.

  • Duration 6:01
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That corporate earnings that you could argue one way or another hear that yes they've been a bright spot recently that fourth quarter numbers top diminished expectations.

By rising more than 7% but a lot of companies are saying you know what -- the current quarter were not sure we have -- downgrade any expectations.

That will really beat estimates.

Many investors expect the momentum though to continue in the new year are they right on that and how do you win with your portfolio my next guest says.

Too much euphoria built into 2013.

Hurdles to overcome but Scott -- you -- sell yourself because every time you come on the show.

No matter what you find names to pick case in point.

Bonanza bonanza creek was something that you pick back in October.

I as a pick out what bonanza did because of what you had picked and why you liked it -- -- up 51%.

How did you know depict this name.

What we do a lot of mathematics Australian lawyers and we finally -- it was selling at around four and a half times cash flow.

And they.

Production was up about a 150%.

And -- which flooding to the upside -- and reserves and production it was very cheap Bana.

Discretionary cash flow basis.

We call the company a couple times was one of the rules we call -- visit -- -- company and it seemed like it was a legitimately good business.

And nobody ever heard of but it just come public and we bought it because a lot of times it's easy to find companies that nobody ever heard of and to try to play -- overpriced market and a more efficient stock.

Right look look at just -- -- exists is this is an independent oil and natural gas company that operates in the US.

Acquisition exploration development there a lot of companies that do similar things.

But what they're have to have been one thing that grabbed her -- was at the cash flow -- you you had mentioned some of the other metrics to.

Yes the big thing was the explosion in the production if you look -- a barrel oil equivalent in its leverage more top oil and gas.

I mean it was up like a 150%.

Year over year -- -- if you look at big companies.

I -- happy if you get three to 5% drill bit growth this is unheard of even -- on the small base to have a 150% production growth.

China was statistically very cheap child it was a it was sort of a -- up from a lot of wineries as you type rightly point out the stock's up about 33 at 34 dollars a share.

Right before we get -- your next demand decree picks -- could you always have something new for us.

The big picture the big picture -- you say there's too much optimism.

-- -- set up for more than a year Scott.

Yeah markets dollar.

Well look it has because the valuations are still reasonable but if you look a bottom up basis most of the SMP estimates are like 110 -- 111 dollars a share.

And that's reminiscent of what happened last year and it really came in -- 9750.

Let's be realistic nominal GDP growth for that this year probably be for four and a half percent.

Margins peak on the SMP in the third quarter of 2011.

At nine point 51% it down over a hundred basis points.

Generously we think earnings this year might be a 103.

Up about 66 and a half percent.

But -- still puts the multiple pretty cheap it's a fourteen point seven multiple.

And by historic standards which is about sixteen its undervalued if you compare it to the alternatives in fixed thing com.

And the yields a ludicrous -- -- -- look at treasuries Holloway to the compression of the spreads against the current high Yale.

So equities offer much better opportunity.

And a 147 -- -- -- realist you -- trying to tell that to viewers of fruit for the past nine months every time we saw the treasury trade not -- we sit here and give advice but he he wasn't enough Smart people like yourself and you say.

Stop putting stuff under the mattress and yet as we we put up how you pick a stock and yet you don't just want to -- And be applied dog and meet house eating anything that you see whether we have despite the quality.

There are really important things that you need to look for and some of those things that we have just put up on our yellow legal pad -- to sort of educate viewers.

Really fit your next couple of picks and let's get to them your two picks for today biomed realty trust what do you love about this.

OK that's more of an asset -- -- -- about thirteen million square feet of space system RE IT based out of San Diego they do life science buildings they -- build to suit.

So if you have a a small spot up -- a big company like a vertex were Pfizer especially in Cambridge and Kendall Square.

-- out miss San Francisco area hot beds of Biotech.

They build they -- that operation it's a triple net lease.

I'm the net operating income is gonna grow at about 11% about 5% organic this year if you look at the implicit.

Cap rate which is cash on cash.

It accident the year at 7% pro forma based on this year is net operating income you -- about seven point 3% cash on cash.

I mean that's very good because most of the reached today -- -- somewhere between four and a half and 66 and a half percent handles.

And you got nice growth and you get paid while you wait you got a four and a half percent dividend you know like their dividend is.

That's good for people who are looking for rate come but they getting growth to -- where that.

And the dividends well covered about one and a half times and every interest coverage.

A big basically they eat -- barrel but interest to the operations about three and a half times such a bulletproof balance sheet it's a good operation.

In the life sciences it definitely -- growth area for the 21 century.

Your last pick and and we must go but I wanted to give it to people is man -- ticker symbol and neck and -- TX.

It's a Scott Black special and boy when you see what he did last time around giving you advice in October.

About.

You know some of these names that are just doing so well bonanza creek up 51%.

Manic -- is his second pick Scott nice to see you always a pleasure to have a business Barron's roundtable guy with us thank you so much.

Thank you for having me letters anytime anytime.

Scott -- -- with Delphi management the closing bell.

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