market folly

Rich Pzena of Pzena Investment Management appeared on CNBC yesterday and said the market has divided into 2 groups: those that are in sync with the 'lower for longer' philosophy and those aren't cheap stocks, and those that are out of sync like financials/energy/materials that are selling for attractive valuations.

"Any stable, low volatility cash flowing stock" is basically overpriced he feels.

He argued financials were intriguing: "If interest rates go up, you make a fortune, but if they don't you make 10% a year." These companies are paying out their earnings.  He owns Citigroup (C) and Bank of America (BAC), among others.

On the market in general, he says that, "The steady decline in the 10-year is what's caused this whole market situation. And now, maybe it's bottoming."

He thinks interest rates will rise this year and then will go gradually higher.  He thinks his stocks are positioned well to weather downturns in the market or rising rates.

"As this interest rate bubble ends, I think we'll see a re-emergence of active management.  There's lot of interesting opportunities that's not in touch with where the money has flowed."

Pzena also preached what he thinks is instrumental to success:  "Volatility is the opportunity for every real investor.  What we do for a living is exploit other people's fear of volatility to be able to buy stocks at a low price.  Volatility has nothing to do with risk.  Volatility is just stuff going up and down.  And risk is losing money."


Pzena's New Pick: Hilton (HLT)

Pzena has also bought Hilton (HLT) and says that apartment REITs sell for twice as much as lodging REITs.  Hilton is splitting into 3 companies by year-end: a fee based management co, a lodging REIT, and a timeshare business.

"The company's depressed because it's in lodging and people are fearful that we're near the end of the upcycle in lodging."

He feels that it's not a spectacular value like the banks are, but for what it is (a leading franchise) it looks good. He notes HLT has 20% share of all hotel rooms under construction.

He thinks the spin-off in the near-term leads to 20% upside.  Post-spin, he hopes the management company would get a higher multiple than the REIT.  But he thinks that may take time to play out as the cashflow evolves.


On Seagate (STX)

This is one of Pzena's larger positions.  Seagate is in the middle of correcting the overcapacity it had.   They've had strong volumes on the enterprise side and he says that's the whole story:  "It's a replacement of storage in the cloud rather than in the device."


For more from prominent investors, head to David Tepper's recent interview, as well as Keith Meister's thesis on YUM and Barry Rosenstein's thoughts on the market.