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Time to Switch Horses

Oil’s north of $60, yet ExxonMobil’s stuck in the middle of the pack. Dump your tired old blue chips and trade them in for newer, faster ponies.

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Nobody ever got rich betting that old nags can finish first at the track. But we can’t seem to get past that logic on Wall Street. We worship the broken-down, the ponies more fit for glue than roses. You might as well give us blinders, just to be sure that we miss the next Secretariat coming from behind.

To me, the hunt’s all about the darlings to be, not that have been. Which is why it was so delicious last week to watch the denizens of downtown fall all over themselves to lionize Lee Raymond, the departing CEO of ExxonMobil, at the exact moment when the next Exxon, Chesapeake Energy Corporation, was reporting a dynamite upside surprise. For more than a decade, Exxon’s just acted like a bank, taking oil out of the ground, refining it, and reinvesting the money on Wall Street in the form of increased dividends and buybacks. It’s so lightly leveraged to crude that you can hardly tell it’s an oil company. It just reported a so-so quarter to end Raymond’s reign. What an embarrassment, considering oil’s north of $60 a barrel! Meanwhile, Chesapeake, run by the young, hard-charging Aubrey McClendon, borrowed every penny it could get a hand on these past few years to prospect all over the country, making a huge bet on higher oil and gas prices. Now those prospects are coming in big, and McClendon’s making fortunes for his shareholders, who caught a double in just about a year’s time.

I think the difference is age. Raymond, 67, mastered the business in the eighties, when oilmen lost a mint gambling on higher prices that never came. Those who bet the ranch on dicey prospects in the Gulf of Mexico or on oil shale or tar sands never recovered from the collapse in oil that followed the eighties run-up. McClendon, 45, didn’t work through that traumatic era; he only knows that risk pays, and he’s risked everything—he has been buying stock throughout this rise and owns five percent of his own company—to prosper from the oil-and-gas shortage. Even after this huge run, I would buy Chesapeake, funding the deal with not just Exxon shares but also those of British Petroleum or Royal Dutch, which followed the Raymond model and mortgaged the future on low oil prices that are now a thing of the past.

Broadcom and Marvell remind me of TI and National Semi. Those two companies made fortunes.

It’s not just in oil and gas that the Street fawns over yesteryear. We keep holding out Pfizer and Merck as the great scientific-powerhouse pharmaceutical companies, the jewels of the drug industry. However, these companies haven’t invented a blockbuster since the eighties. They’ve become vast sales organizations, beholden to perennial price increases, not big-time cures, for their profits. Their fortunes depend on the latest jury verdicts or Medicare fixes, not breakthrough drugs.

Instead, consider Genentech, which seems to grow closer every day to actually curing cancer, with its breakout hit Avastin, a tumor-inhibiting drug that colon-cancer patients spend thousands of dollars a month on, because they wouldn’t be alive without it. And Genentech’s got more than just Avastin. It has Herceptin for breast cancer and Lucentis for macular degeneration, a formerly difficult-to-cure eye disease that causes blindness.

Or consider the medical-device world. It’s been dominated by the heart-valve work of St. Jude Medical, Medtronic, Guidant, and Boston Scientific. These companies have been warring for a decade, hurting profitability through competition. It’s become almost a zero-sum game among them. I say focus on young companies, like laser maker Syneron, which has a patent on a device that busts cellulite, or IntraLase, which has a new laser scalpel for eye surgeons that radically reduces the risk of blindness during Lasik eye surgery. Both of these companies have uncontested monopolies, the type that accrues only to the inventors, not to the staid competitors with etched-in-stone franchises. These companies could have years of growth ahead of them before they, in turn, get leapfrogged by something not yet invented.

Every industry’s got up-and-comers that are more attractive than the grizzled vets. Toys ’R’ Us, which just went private, was almost annihilated by Wal-Mart because Wal-Mart could offer hotter toys at cheaper prices. These days, though, kids want video games, not Barbies or Monopoly, and they want to be able to trade in their old games and their game hardware for new stuff. That’s why GameStop’s the next thing in the toy business. Come November, when Xbox 2 ships, kids will be lining up at its stores with their first-generation equipment, getting the next generation for less than Wal-Mart can offer.

People perennially predict a turnaround for the Limited and the Gap, but the smarter money’s buying Chico’s, with its innovative White House Black Market line of stores, and Urban Outfitters, with its exciting Free People and Anthropologie brands. These stores aren’t in every mall in America, but that’s a good thing. Once they are, their biggest gains will be in the rearview mirror.


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