You probably don't know the name Tim Quinlisk, but you will someday.
He's the youngish manager who's been at the helm of the
(TAGRX Quote)John Hancock Large Cap Value and
(SPVAX Quote)John Hancock Small Cap Value for a couple of years -- minus a brief fling with
Westcore Funds in the first quarter. In that time, he's trounced his peers and shown an uncanny knack for digging up unloved stocks before the market loves them again.
Unlike strict or pure value investors, tech stocks aren't off his menu and given the beating many big tech outfits have taken lately, now is a good time to pick his brain. Unlike a lot of pros, he likes
Lucent Technologies(LU Quote) and he's also bullish on telecommunications behemoth
Verizon Communciations(VZ Quote). And he's not too cool to admit he missed the boat on health care this year -- how refreshing.
Tim Quinlisk |  |
Fund
(TAGRX Quote)John Hancock Large Cap Value |
Managing Fund Since
March 1998* |
Assets
$1.7 billion |
1-Year Return / Rank in Category
45% / Top 2% |
3-Year Return** / % Rank in Category
20.6* / Top 11% |
Load / Annual Expenses
5% / 1.17% (class A shares) |
Top Holdings
ACE Limited (ACL Quote)
Tyco International (TYC Quote)
Lucent Technologies (LU Quote) |
Also Manages
(SPVAX Quote)John Hancock Small Cap Value |
| Source: Morningstar. *Departed temporarily in January 2000 and returned in March. **Annualized. |
1. The definition of value investing varies greatly. How do you define it? Tim Quinlisk: We have a fairly simple philosophy as it relates to value investing. It centers around the idea that buying cheap companies isn't a strategy that we deploy.
What we try to do ultimately is find great companies when they go on sale. So we're really focused on looking at undervaluation in companies, but, most importantly, we really want to own the great businesses when they go on sale.
What we would focus on are typical valuation metrics such as price to cash flow multiples, a company's ability to generate high returns on invested capital and its ability to generate substantial free cash flow.
So, it's a little different, vs. your traditional or deep value manager in the sense that we really want to own only companies that have the ability to grow and create value, fundamentally, over a longer period of time.
One, it's got to be undervalued, but there are other components. Two, it's got to be a good business; and three, it's going to have to have a catalyst that's going to get other people excited about what we have identified. Our investment process looks at both valuation and fundamental momentum in the business. So we're trying to pick up catalysts several ways.
One type of catalyst is exceeding expectations, which I call fundamental momentum. We also look at catalysts that are very specific, either on a micro or a macro level. It could be a new management team, a new product cycle or a change in industry regulation. Those items that will help other people, or help us better time the inflection point of when that value is recognized.
2. Within these parameters, would you name a few sectors that look promising, and perhaps a few stocks specifically? Tim Quinlisk: Two areas that we're really focused on heavily are the telecom services area, and also some business services companies.
The market has been almost indiscriminate in the telecom services area, in terms of taking down the valuations of the group. As value managers, we've found some pretty good opportunities within that space.
In the large-cap area in the telecom services, we like Verizon Communications, one of the leading regional Bell telephone companies, but also extremely well-positioned on the wireless side, selling at a very attractive cash flow multiple.
We're also looking selectively in other areas -- names like
Centurytel(CTL Quote).
On the business services side, there's a couple of stocks that I really like a lot. One would be
Waste Management(WMI Quote), which does waste collection. Clearly undervalued, a catalyst in place is the fact that the new management team has been in place for roughly a year plus, is executing on its plan, and is delivering, fundamentally, earnings that are exceeding expectations.
We think there's a significant amount of operating leverage as they continue to improve internally, some of the operations there.
3. Value investors always warn investors, don't get caught up in value traps -- stocks that look cheap that are touted as undervalued but that might not be the case. What are one or two sectors that look like value traps to you? Tim Quinlisk: We have really stayed away from the retail area. We've been extremely and very much underweighted that group all year long. In fact, even the exposure that we have there involves stocks that we think are less sensitive to decelerating consumer spending trends.
So we've really stayed away from the retail area -- given the macroeconomic environment that's out there, those could be conceived to be value traps. So we stay away from retail, some of the other consumer-cyclical-type areas -- homebuilders, the auto parts guys, or even the big autos, for example, or the airlines. We've just really stayed away from those businesses. They're classic value traps.
The valuation case is based on earnings that you know are most likely going to decline pretty dramatically in an economic environment that decelerates. Even more than that, we really believe you've got to buy businesses that create economic value, and for some of these businesses you can't make that argument. A lot of them you can't.
4. One thing that folks will find interesting is that you're a value manager, and you have a significant part of the portfolio allocated to technology. Where are you finding value in the tech sector? Tim Quinlisk: We think technology is an area that value managers cannot afford to overlook. In our assessment, it has been and will continue to be the capital-goods driver of this -- and the next -- economic cycle. I don't think many people would dispute that.
The orientation that we take in technology is valued-based, hence, a big position in Lucent Technologies. Lucent, at these levels, is trading at roughly 23 times next year's earnings, so roughly a discount to the market.
Lucent is in an industry where you've got very solid, secular growth, probably north of 20%, as the telecom infrastructure is built out. There are some management execution issues but we believe they'll get resolved. Lucent's probably trading on most metrics from a valuation perspective at a third vs.
Nortel(NT Quote), which is in the same business, which is executed.
Other stock would be in the software area, where there's been a lot of carnage in technology, stocks like
Parametric Technologies(PMTC Quote).
Parametric is a CAD company, mechanical CAD company, it's extremely well-positioned, particularly as they launch a new, Web commerce-enabled product called Windchill. We believe that Windchill has a value that's worth more than the overall enterprise value of the company, and we're basically getting for free a mature mechanical CAD business. Expectations have been set low and we think the company is in position to now finally start to exceed earnings expectations.
5. Would you ever consider looking at some of the companies that have been hit hardest in the Internet area, or is that an area where you just don't see value? Tim Quinlisk: We'll look anywhere. But first and foremost, the business model has to work. So, what we try not to do is confuse significant price deterioration or price declines with value.
A 50% move down in the price doesn't necessarily mean value. We will look selectively at some of these stocks, but we want to make sure that we can make a value we can build, that the model makes sense fundamentally, and we know we're going to get paid from the business model.
6. You've got a significant weighting to financials. We've seen a lot of consolidation recently in that area, and that's a story that folks have been talking about for a long time. What do you see in financials? Tim Quinlisk: I still think financials are attractive, we're still overweight in financials. We've been pretty selective with regard to our positions there. We've been underweighted in the banks and overweighted either in specialty finance and/or specialty insurance. We like stocks like
Ace Limited(ACL Quote),
Ambac Financial(ABK Quote),
Associates First(AFS Quote),
Freddie Mac(FRE Quote),
Fannie Mae(FNM Quote),
Citigroup(C Quote) and
Progressive(PGR Quote).
We think it's more difficult now in financials than it was, say nine months ago, or a year ago. You have to be selective, given the economic environment that we're in, given those companies that are exposed on the credit side. We're certainly watching that. We don't have a lot of exposure there, and so we're really looking for financials that have decent growth prospects, the ability to grow and are still undervalued.
7. Your portfolio, at the end of August, had a modest weighting to health care stocks. It's been a good year for health care. What kept you out of there? What do you see going forward? Tim Quinlisk: Can I say stupidity? I missed it. Just, frankly, flat out missed it.
As a value manager, really the only space that was attractive was big pharma. And it was attractive for roughly a quarter or two last year, and we just didn't pull the trigger on it. I'll miss things from time to time, and I missed the big pharma move. I missed the health-services move, but fundamentally, again, that doesn't sit with my orientation toward great businesses.
These are tough businesses -- the HMOs, the hospitals. There are a lot of cost pressures on them.
With big pharma, at this stage of the game, I'm looking for the political uncertainty and hopefully all the rhetoric that's going on will give me an opportunity here to reload a little bit.
There are some stocks in the group like the
Abbott Labs(ABT Quote) of the world, and others that are kind of a little bit more product/pharma that have reasonable valuations selling at modest premiums to the market. I'm sensitive to health care/pharma valuations in that I don't want to pay too high multiples for growth rates that have decelerated off their mid-'90s kind of growth rates because of the generic exposure that we've got out there.
We probably wouldn't have had this discussion if we didn't have the carnage in technology because there would have been no migration to health care, but I missed it.
8. What are two or three companies that have the strongest stories you've come across in the small-cap area? Tim Quinlisk: There are two companies that I really like. One is called
Hain Celestial Group(HAIN Quote). It's a consumer-product company; they are a leader in the natural-foods product line.
Historically, they sold their product line through the natural, or whole foods, supermarket chains and are migrating that toward major food store chains. They're just very well-positioned, very solid top line growth, one of the few companies in this space that is actually seeing double-digit kind of revenue due to volume growth.
It's a very strategic asset. They did an acquisition, they're integrating, on the cost side there's cross-selling opportunities, just a very solid story.
And the other one that I would highlight is
ACNielsen(ART Quote).
This is a duopoly business in the U.S., where it's clearly the leading share. It's a great business, 65%-plus of recurring revenue, not very capital intensive, good return metrics, earnings have been under pressure here recently on a core basis, because they're spending on Internet and restructuring initiatives in Europe. The company is selling at roughly seven times cash flow, and I think, based on private market transactions for a sister company, which is
Nielsen Media Research, it's worth probably double what it's currently trading.
9. If you had to pick three stocks to hold for five years, what would they be and why? Tim Quinlisk: It's a great question. I didn't tell you what my top three holdings were, there's no doubt about it. Or they wouldn't be my top three. Ace Limited,
Tyco International(TYC Quote) and Lucent Technologies.
Tyco is probably one of the better-managed companies that I follow. It's a multi-industry company with a solid history of creating value for shareholders, primarily through a combination of internal growth plus very strategic acquisition capabilities -- not only the ability to acquire but then the ability to integrate acquisitions into the fold to create additional value for shareholders. It's just a premier company.
10. What are the most recent stocks added to the funds you manage, and what's the most recent addition to your personal portfolio? Tim Quinlisk: My own. I don't really invest on my own, because I buy the fund. I've got all of mine in the 401(k), my small-cap value fund.
For my funds, I've added a few, actually. The two names that I've added most recently to the large-cap fund have been
Gillette(G Quote) and
Albertson's(ABS Quote). And the most recent addition to the small-cap fund would be
Valassis Communications(VCI Quote).
