10 Questions With Janus Value Manager Jason Yee

It's been a rough year for most Janus funds, but Jason Yee is licking his chops because he thinks there might be some bargains out there.

Talking With: Jason Yee

Fund: Janus Global Value

Managed Since: July 2, 2001 (inception)

Return Since Inception: -0.9%

Sales Charge: None

Annual Expenses: 0.88% vs. 1.81% category average

Source: Janus. Returns through Aug. 28.

Yee runs the two-month-old Janus Global Value fund, and while he's not plowing money into stocks -- a little less than a third of the fund is in cash -- he says he is finding stocks that are trading for less than he thinks they're worth. He won't name names yet, and his portfolio's picks won't be public until later this year, but he walks us through his investment process and says tech and telecom stocks aren't screaming buys on the whole. That echoes his colleague David Corkins, who shared his thoughts with us on Monday.

How does Janus, best-known for high-octane growth investing, run a value fund? How does the firm hope to separate cheap stocks from true values, and what's the biggest mistake someone could make today? Read on.

1. How do you look at companies?

Like any value investor, I try to figure out a company's intrinsic value and buy when it's trading at, say, 60% of what I think it's worth. To figure out a company's intrinsic value, there are three metrics that I use.

I'm a tried-and-true discounted-cash-flow guy. That means I sit there and predict a company's [future] cash flows after expenditures and come up with a target [price for the stock]. I run that for what I think is the most reasonable scenario, as well as the best- and worst-case scenarios, so I can see what risks might be involved.

That's great on paper, but we try to bring that into real practice, too. Being a global investor, I look at the valuations of companies' global peer groups. You can also check your work by looking at private-market values in mergers and acquisitions. If company A gets taken out and it's in the same industry as Company B that I'm valuing, what does its price imply for my valuation estimate?

You look for reasons not to own a company, and if you don't find enough of them, then you know you're on to something.

2. It's risky to go strictly by the numbers, right?

I'm not a statistically cheap guy. I don't run screens and just say, let's look at everything with a P/E [price-to-earnings ratio] below 10 or everything under book value and see what I come up with. That might be a nice starting point. Sometimes if I'm going to Europe or Japan, I will do some screens just to start a list, but it doesn't stop there.

That's the proverbial value trap everyone talks about. I try to avoid that by looking at a company's valuation and also asking myself, "Fundamentally, is this a good business?" I tend to stay away from commodity-oriented businesses when companies don't tend to have much of a competitive advantage.

3. What kinds of companies are in your portfolio?

I don't think it will be too controversial when my holdings come out. I will be able to go right down the list of 40 to 50 companies and justify why I own them and what I think they're worth. When I look at the companies in my portfolio, they all have long histories of profitability. They're all cash-flow positive and have solid balance sheets. I'm not interested in taking balance-sheet risk in the companies I own, especially on the foreign side.

Born at the Right Time? Foreign markets have had a rough year, too, perhaps creating some bargains

Source: Morningstar. Returns through Aug. 28.

4. Where do you see value today?

There's nothing broadly speaking by geography or industry that stands out. In this environment the things I'm looking for are situations where a company is restructuring -- where there's growth if a company can execute. If you're restructuring you can create value if the world is falling apart. I'm looking at businesses that are more stable or predictable, where there's some visibility. I might be off a bit on my estimates, but I'm not looking at a 50% haircut to my estimates.

I'm having no problems finding good ideas in Europe. In Japan it's tough, mostly because the managements aren't in the same place as Europe in terms of disclosure and building shareholder value.

5. The tech and telecom sectors are way down, but many companies still look expensive because their earnings have come way down, too. Is there value in tech and telecom?

That's a good question. Am I more interested now in tech and telecom than I was a year ago? Sure. I will look there now. You go back a year or two and, for me, it was very difficult to justify owning those stocks without really stretching. But anytime there's a sector in wholesale crisis and stocks are down tremendously, it's at least an interesting place to look. I think that's where you start to sharpen the pencil.

Now I would agree with you that it's very difficult for me to say the sector is cheap. Not everything tech or telecom is going to work for me. Some companies look expensive because their earnings have collapsed, but that's why you have to look out a couple of years. There are things like the semiconductor capital equipment space, where it's a relatively consolidated business with a few major players who have long histories of profitability. Sure, they're volatile, as stocks and their cash flows can be a little volatile, but even through downturns these companies have consistently remained profitable and have no debt on their balance sheet. The growth rates in the business have been 15% to 20%. There are cycles in there, but for me, it's not a stretch to estimate their cash flows going forward because they have been fairly consistent.

Are they a value today? At today's prices I wouldn't say, "Let's back up the truck and go in there." But at the end of last fall when they were probably about 50% below where they are today, they started to look interesting. Good values don't stick around a long time. There're too many smart people out there looking at businesses.

Other Junk

The Big Screen: Our Favorite Value Funds

Ima Winner Fund Club: Dodge & Cox Stock Fund

I Own What!?: Value Funds With Huge Bets on Financial Stocks

10 Questions with Janus Growth & Income's David Corkins

6. How is the fund split between domestic and foreign stocks, and has your interest in the U.S. market grown over the past year?

To me, the U.S. is just another market. The information flow in the U.S. is clearly better, and for that better disclosure and management practices, you tend to pay a premium. It's natural. If a U.S. company is trading at the same valuation as a similar business somewhere else in the world, it's probably best to invest in the U.S. company you know a little better.

That being said, because there's sometimes less disclosure in foreign markets, that can lead to some inefficiency in the international markets. Adjusting for those differences, I'd say you can often find better risk/reward propositions overseas.

I'm primarily going to be in the international markets. If the U.S. is just another market, I don't see why it should be 75% of the portfolio. It's just going to be another market. Given my charter, I have relatively little exposure to emerging markets.

7. How can investors avoid value traps, and where do you see them today?

I think the way you avoid them is to buy good businesses. If a company is growing every year, that creates a cushion for you. Even if you're wrong on your valuation, things are moving in your favor. Even if your stock price stays flat, if it's a growing business, the discrepancy [between what it's worth and where it's trading] gets wider. That adds some upward pressure.

In terms of where value traps are, let's say I do a screen and I look at statistically cheap companies as a starting point. When you wade through those names, you find commodity businesses like a paper company or an airline. How much value have they created over time? I don't want to be picking cyclical businesses and thinking I'm smart enough to pick them up at the bottom of the cycle and watch them spring back up. I want businesses that create value over time. Commodity businesses typically don't cut it for me.

Another way you can avoid a value trap is to stick with your sell discipline. I keep a one-page summary with the statistics and the three fundamental reasons why I own a given company. If I look back and say wrong, wrong, wrong, then I sell it. You have to be your own best critic. I'm probably one of the more cynical guys in the shop. You have to always assume you're being lied to or are just wrong.

8. What's the biggest mistake someone could make in today's market?

I think you have to be very valuation-sensitive in this market. A lot of stocks are way down, so they seem attractive. But the stocks don't know where they've been. It's easy to be attracted to something that's way up or way down. You need to be objective and disciplined with target prices to keep you honest.

9. When do you see the economy recovering?

I don't really have a clue, and economists are probably wrong more often than portfolio managers. They're probably just ahead of currency speculators. I focus on how my companies are exposed to economic trends. You ask yourself, what happens to them if the economy slows? The key is to be conservative on your estimates to give yourself some protection on the downside.

I don't know if it will be six months or 12 months; it's still very unclear to me if it's the first or second half of 2002, or something in between.

10. Maybe the most controversial stock pick in the fund world right now is Bill Miller buying Amazon.com (AMZN Quote). What's your take?

Bill Miller is one of the smartest investors I've ever met. You read about his calls and you run the same numbers because you're curious about it. I've run the numbers [on Amazon.com] and I can't get there. It depends on what you think the profitability of the business is. To me, it doesn't make sense, but clearly to him, it's an interesting company, and that's what makes the world go round.