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Tuesday, March 18, 2003

Investor Profile: Salomon's Levkovich bets on US victory

www.forbes.com Reuters, 03.18.03, 1:31 PM ET By Per Jebsen

NEW YORK, March 18 (Reuters) - In September 1997, Citigroup Inc.'s (nyse: C - news - people) Tobias Levkovich downgraded 18 of the machinery and engineering/construction companies he covered in one day, concerned over the impact from the Asian financial crisis.

Back then, such audacity was far more likely to get an analyst fired than praised.

"It was my 'three V' call," Levkovich said. "I was viciously attacked by competitors, vilified by management and ultimately, vindicated by what happened in the markets."

Levkovich brushed off the brickbats to become senior U.S. institutional equity strategist for Citigroup's Salomon Smith Barney banking unit. And now he is making another big call -- a bullish wager on the impending conflict in Iraq.

In several essays since late summer, he has expounded upon his thesis that such a conflict is likely to prove to be quick and, from an investor's point of view, beneficial.

Indeed, a swift resolution will enable stocks to move sharply higher, he predicts. The Standard & Poor's 500 Index <.SPX>, trading in the mid-800s, will rally to a year-end target of 1,075, a gain of 25 percent or more, Levkovich expects.

"Investors have been clearly paralyzed by Iraqnophobia," Levkovich said. "Yet our base case is for a relatively quick war with a non-tumultuous aftermath."

Barring extreme events, such as searing terrorist attacks, Levkovich expects toppling the current Iraqi regime by the United States and its allies to have positive effects, including reduced energy prices.

Uncertainty from the crisis, along with a recent national strike in Venezuela that lasted for two months, has created a $10 to $15 premium in the per-barrel cost of oil. Once hostilities conclude, much of that premium will likely dissipate, boosting economic growth, he said.

A successful resolution on American terms would, moreover, reduce the uncertainty that has hamstrung U.S. executives and dampened spending, Levkovich said.

"Decisions at the corporate level would be made as opposed to keeping everything in abeyance," he said.

After "three years of everything going wrong," the stock market is undervalued. Money managers worry they could lose their jobs by taking undue risk, Levkovich said.

Equities are cheap when analyzed in terms of various valuation criteria -- and especially so in comparison to fixed-income securities, he said.

"Stocks are screamingly more attractive than bonds," Levkovich said. "Earnings yield gap analysis" indicates a 98 percent chance stocks will perform better than bonds, he said.

In the last week, investors have embraced the bullish case, sending the S&P 500 up about 8 percent.

BEAT THE MARKET

Before he became Salomon's stocks guru in 2001, Levkovich spent 13 years covering companies such as heavy-equipment makers Caterpillar Inc. (nyse: CAT - news - people) and Deere & Co. (nyse: CAT - news - people).

The lengthy stint prepared him for his current role because such businesses are both global and "thematic," in that their shares may respond to current investment notions, he said. Also, he honed his ability to ferret out facts, he said.

"I just love beating the market. I get a real kick out of that," Levkovich said. "It's the joy of discovering things before others do. You don't have to use inside information, you need to use insight ... the data that's available."

Levkovich often arrives at the office between 6:30 and 7 a.m., and leaves as late as 9 p.m. He devotes his weekends, from Friday evening to Sunday morning, to his family. His hard work has paid off: He was ranked the No. 1 analyst by Institutional Investor magazine for machinery in 1998-2000, and No. 1 for construction/engineering in 1998 and 1999. In 2002, he was named runner-up in the portfolio strategy category.

"Tobias produces some of the more unique work put out by the Street. It's not your usual pedestrian stuff," said Joe Rosenberg, chief investment strategist at conglomerate Loews Corp. (nyse: LTR - news - people).

"I genuinely enjoy having him come in and sitting down with our group," said Will Braman, chief investment officer at John Hancock Funds, which has about $25 billion under management.

Levkovich provides a broad overview in give-and-take sessions that John Hancock fund managers, who may focus on a narrower slice of the market, find helpful, Braman said.

Last year, Levkovich dropped now-bankrupt telephone and data services company WorldCom Inc. <WCOEQ.PK> from his recommended list when it was still highly rated by former colleague Jack Grubman.

"He did it in the face of his firm being the investment banker and the analyst being the leading analyst on the stock," Loews' Rosenberg said. "It takes a lot of courage to do that."

"He's not prone to hyping situations or being overly pessimistic," said Bob Turner, chairman and chief investment officer of Turner Investment Partners, which has about $8 billion of assets.

Levkovich's insights are particularly useful at a time when stocks are apparently in a trading range, Turner said.

LOVE OF POLITICS

Levkovich, who is Canadian, graduated from Concordia University in Montreal with a degree in commerce, and attended Boston University's Graduate School of Management.

In 1988, he joined Smith Barney, which ultimately became a part of today's Citigroup. This week, he picked up what he describes as a "very pointy" Lucite paperweight marking his 15 years with the firm.

"Management has treated me fairly over the years," he said. "I've had some wonderful relationships with people whom I've worked with and that's worth more than the extra bucks" he would have made by jumping ship, he said.

Levkovich, 41, is married, and has two teen-age daughters, as well as a 9-year-old son. He lives on Long Island, commuting by car to Salomon's downtown headquarters. The Levkoviches have family in Israel and often spend their vacations there.

A fan of Tom Clancy and Robert Ludlum spy thrillers, Levkovich says a long love of politics animates his work.

"I have a strong interest in politics and the impact of politics on today's environment," he said. "I grew up sitting on my father's knee watching the Democratic and Republican conventions," he said.

(The Profile column appears weekly. Comments or questions on this one can be e-mailed to per.jebsen(at)reuters.com.)

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