TOM HUDSON: Call it the goldilocks rally this year. Mid-sized stocks
have done better than small companies or big corporations. So not too big,
not too small — just right. Tonight`s “Street Critique” guest is looking
for opportunities in those midcaps. Mark Watson is back with us. He`s CEO
and chief investment officer of Keel Asset Management. Mark, welcome back.
What`s helped mid caps perform better as a group this year?
MARK WATSON, CEO, KEEL ASSET MGMT.: I think the consensus investor is
now moving back into risk. If you look at the fourth quarter, for example,
banks did poorly, industrial stocks did poorly. Mid cap sector has a
greater preponderance of financial stocks and this year on top of the jobs
number, housing numbers, et cetera, the consensus investor is moving back
into these sectors.
HUDSON: You`re taking a look at a couple of different ideas within
mid caps and financials, beginning with American Capital (NASDAQ:ACAS),
ticker symbol ACAS, essentially a publicly traded private equity firm. The
share price has performed well this year, but not so well last year.
WATSON: Absolutely. We think we are expecting recovery in the U.S.
market and certainly a private equity venture capital concern that focuses
on industrials and energy, particularly solar and liquid gas, is an
excellent way to participate in this recovery.
HUDSON: One of the problems that American capital had last year was
a big debt load and it`s had that for the past couple years, still a
billion dollars in debt. Does that concern you?
WATSON: It doesn`t. It actually went true a recapitalization program
which basically for us was a reset and so they now have the ability with an
improving market to monetize some of the successful investment they`ve
already made and make new investments that will provide good returns with a
very low cost of capital we`re seeing now.
HUDSON: Your other mid cap play is more traditional in finance. It`s
a regional bank play, City National (NYSE:CYN). Regional banks have done
pretty good, this one based in California and in southern California at
that. We know what the housing market is like in some of these sand states
like California, Nevada, Florida. Why take a chance with CYN?
WATSON: Well, City National (NYSE:CYN) is unusual in that it has a
very narrow niche in terms of loaning money to entrepreneurs who have been
successful. So their residential mortgages are tied to customers really
they know from many points of view. As a result, the dividend has been
safe, a 2 percent yield, close to a market multiple, but we think it has a
good growth potential in terms of earnings, with very low credit risk.
HUDSON: OK. How about for you and your clients, do you own
positions in both the stocks?
WATSON: Yes, we do.
HUDSON: All right. You can e-mail us if you have questions about the
pick, email@example.com and questions coming up in the weeks ahead.
It`s our guest this evening on “Street Critque,” Mark Watson of Keel Asset
Management. Thanks Mark.