10 Questions With Eaton Vance Large-Cap Value Skipper Michael Mach

8. You've been adding utility FPL Group(FPL Quote) to your portfolio in recent months. What do you like about this stock?

It's a conservative utility. Their regulated utility dominates their business model. It pays a nice dividend yield. So we thought this was a relatively safe way to invest in the utility industry.

We thought that same thing about TXU, though. We started to get a sense of problems in Europe so we got out and, boy, has that thing unwound. So, even as I say FPL looks like a safe place, we watch that very closely. (Laughs)

Generally, I'm reluctant to talk about specific stocks because I'm concerned that some reader will say, "Gee, buy FPL, that sounds like a great idea."

I'm a great believer in diversification and also, any stock you own today, you really have to watch it. It's such a landmine out there.

TXU, we sold that when it dropped at 10%. But at the same time, we were doing a study on the exposure that utilities had to the European market. They had some exposure there, where prices were under tremendous pressure, so that raised a caution flag. In fact, our analysts had an intern working on that during the summer and we were getting some troubling signs. So even though we liquidated the position after it fell 10%, we already had been reducing our weighting.

How do you decide to pare back on a stock?

SunGard(SDS Quote) was a stock that we had bought in the low $20s last year. In early March, the stock had moved up to the mid $30s. When it was selling at those levels, it was at a 25% premium to the valuations on the S&P 500. Whenever it moves to that type of a valuation premium, we'll sell it. We do that for two reasons: First, to maintain our value style, and second, just to limit our P/E risk.

It looks like both of your funds are under about 15x on a P/E basis. Do you have a set P/E level?

That just kind of falls out, that average. The market P/E is about 16x now, our P/E is about 13x now, which is the way we like it. The P/E tends to be lower. We also like to keep our return on equity higher, reflecting our preference for strong business franchises. Our P/E and price-to-book are lower, reflecting our valuation discipline. Our growth rate on our stocks, based of First Call, has been in the 11%-12% range.

9. Are you concerned about companies' guiding lower these days?

Yes! (Laughs)

We try to avoid any unnecessary risk. If we have a sense that bad news is coming, we try to get to the sidelines and get out of the way for a little while. We try to be very careful.