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Bargains in Wall Street's Growth-Stock Rejects

Brett Arends

It's a tough gig, trying to find value in "growth" stocks. But that didn't hold back Michael Barish, and it isn't holding back his son Brian.

Between them, at their family firm Cambiar Investors out in Denver, they've beaten the S&P 500 in 26 of the last 34 years.

That includes the last eight years in a row -- and every year since Brian took the reins in 1999.

How does Brian explain his success?

Four words: "All value is relative."

Unlike many other fund managers, he doesn't waste much time trying to calculate an "absolute" or "intrinsic" value for growth stocks such as, say, Intel. It involves too many big guesses about the future to be meaningful.

Instead, he looks at what the market has tended to pay for the stock in the past. "What 'relative value' means is that certain businesses, certain industries, tend to be valued within a certain range," he says. He buys those stocks when they fall out of favor, betting they will, sooner or later, revert to the mean.

Hot picks: Intel, biotech company Amgen (AMGN Quote), Home Depot (HD Quote) and Archers Daniel Midland (ADM Quote).

They've all been out of favor on Wall Street recently. Barish believes that that has made them a bargain. He argues these all are terrific businesses whose profits, and shares, will in due course revert to their long-term averages.

In the case of Amgen, he notes that the stock is trading like a low-growth pharmaceutical company because of safety fears about its anemia drug. Barish thinks Wall Street has overreacted and is ignoring all the good prospects in the company's pipeline.

On Intel, he thinks Wall Street is overestimating the threat from smaller rival AMD(AMD Quote). Barish argues that Intel has been paying the price for strategy and design blunders made years ago under the last CEO. Those are fixable, he says, and he believes that the current CEO, Paul Otellini, has been taking the right steps. The fund manager thinks Intel's extraordinary engineering and manufacturing strengths will win through, and he expects the profit margins, and the shares, to bounce back sharply toward their historic ranges.

As for Home Depot, Barish thinks worries over the housing slump have left a great stock looking cheap on about 13 times "depressed" earnings. His bet: Those earnings rise to $4 by 2009, while the multiple recovers to at least 16 times.

Which could send today's $40 share above $60.

It's easy to be skeptical. By definition, if these were already popular stories on Wall Street, they would already be reflected in the share prices. But if you just want to go with the crowd, why aren't you in an index fund?

Barish's fourth pick, agri-giant ADM, is a little less contrarian. The company is right in the sweet spot, both for the biofuels boom and for soaring Asian food demand.

Yet the stock has come down sharply since the biofuels mania a year ago. It's just 15 times earnings.

The reason? Many on Wall Street think the real winners from the agri-boom will be small farmers. "I find that laughably simplistic," says Barish. "You're talking about the little guys doing dramatically better than the big guys. That just doesn't usually happen."

Cambiar Investments runs about $10 billion these days. Most of the money is institutional, which is where the firm began back in the early 1970s. Brian joined his father in the '90s, after a spell on Wall Street at the blue-blooded investment bank Lazard Freres.

Cambiar runs three funds open to retail investors. Flagship (CAMOX Quote)Cambiar Opportunity (CAMOX) has turned $10,000 into $29,300 since it opened in 1998, says Lipper. The comparable figure for the S&P: barely $15,000.

Cambiar's small-cap fund, (CAMSX Quote)Conquistador (CAMSX), has had a terrific start since it launched in 2004, beating the Russell 2000 and gaining 72% so far.

The (CAMIX Quote)International (CAMIX) fund has been more volatile. Naturally it is up with international markets, but after a great spell almost 10 years ago, it has lagged the indices over the past five years.

It isn't easy being a contrarian. And the biggest battles are emotional. "You have got to be willing to step into situations which make a lot of other people uncomfortable," Barish says. "You've got to be comfortable with anxiety."

And you need patience as well as nerves. Barish says that on his big bets he makes most of the money in the second and third years. These big ships take a while to turn.

And, of course, if you want to succeed, you have to do your homework. That's how you pick the oranges from the lemons.

Barish still tells the story of investing in Philip Morris (a.k.a. Altria(MO Quote)) back in 2003, when litigation panic had sent the stock into freefall. Barish studied the law in great detail -- and reached the conclusion that the company's legal defenses were "impregnable."

Profits since then: nearly 300%.

I asked him if he had any interest in the current Wall Street rejects: the automakers and the homebuilders?

In a word: no.

He thinks Ford(F Quote) and General Motors(GM Quote) "are probably, technically, bankrupt on a long-term basis when you include the contingent liabilities," such as pension and healthcare costs. And despite his remarks on Home Depot, he expects deepening misery among the homebuilders.

Barish calls Wall Street "fairly valued" right now in relation to earnings, although he concedes that those earnings are at record levels. If you believe in mean reversion, you would expect profits, and shares, to fall a long way.

Barish wouldn't go that far. Nonetheless, he believes that, after almost five unbroken years, the surge in corporate profits "is unsustainable, anyone can see that," and he suspects we may see a period of "anemic" profit growth over the next few years.

After watching March's weird selloff, he expects similar, or worse, ahead. "Would I throw a lot of fresh money into the stock market today? The answer is no. I'd wait for some kind of selloff. I think it's reasonable to believe something will happen over the next few months."