Interview with a Value Advocate
SAN FRANCISCO -- I know the waiting has been torturous for some of you, but I can now (finally) deliver the
promised details on that interview with Dwight Anderson of
Before Anderson's rationale for why "it is different this time" and his top picks, I should point out the hedge fund manager acknowledged it's difficult to convince investors of the benefits of value stocks.
"There is a disbelief there," Anderson said. "Any thoughts of a secular upswing have been beaten out of you the last five years. The proverbial 'wall of worry' exists as in nobody's business in my industries."
A big part of that stems from the false starts the group produced in recent memory, most recently
last spring. As a result, even bellwether value stocks have not been ones investors can just buy and hold with confidence, as they could with myriad high-tech growth names.
Anderson used the example of
, one of the largest U.S. steelmakers, which he is currently long. Since 1995, investors have been "conditioned" to buy the stock on dips and sell it on any measurable upturn, he said. The result, as the accompanying graphic demonstrates, is a very ragged chart.
While Nucor fell 8% in the past five years,
climbed over 8000% (Tuesday's 12% decline notwithstanding),
rose over 6000% and
over 2700% (just to name a few).
Is it any wonder (fame, fame, fame...) investors are so enamored with tech stocks?
Unable to knock investors' love for tech, Anderson conceded not having "the imagination or whatever variable is necessary to understand how an
is valued," using the online retailing giant as a generic rather than a specific example. "I'm not betting against it, but I don't understand the valuation metric for new businesses."
Conversely, Tudor can use leverage to generate "competitive returns" in businesses whose "economics" he does understand. (Anderson declined to discuss the specific usage of leverage.) In the fourth quarter, Anderson's group at Tudor produce an (unaudited) gross return of 9%. Last month, Anderson began running a new, external fund for Tudor called
The Ospraie Fund
Which brings us back to value stocks. In this case, we're talking about those tied to basic materials vs. other areas such as consumer staples and, in some cases, drugmakers, financials and small-caps.
Anderson's argument that this time is different -- which he admits "scares the bejesus out of me" to say -- is predicated on several factors.
First, "for the first time in a generation" most "Western" companies "actually do care" about return on equity and return on capital, the hedge fund manager said. That is, executives at basic-materials companies realized it is cheaper to buy existing assets than build new capacity.
At the same time, the "devastation of commodity prices" and "banking collapses" in 1997 and 1998 led to "a complete cut off of credit" in most emerging markets, he notes. As a result, it's hard or impossible for firms in those regions to borrow money to build new plants.
That's of paramount importance to the value-stock argument because it takes a long time -- generally between two and five years -- to build a new steel mill or pulp-processing plant, or to get a mine up and running.
The environment "has led to the lowest capacity growth across multiple industries that we've seen in 20 years," Anderson said. "Yet the publicly traded equities do not, in general, reflect this halcyon outlook."
From Anderson's vantage, the prospects are further enhanced by the fact most basic-materials industries are running at peak capacity. Thus, it would take a "material downturn" in economic activity to hamper prices.
With the U.S. economy showing little signs of slowing, economies in Europe and Asia heating up, and many stocks trading at relatively cheap levels, it's not so difficult to understand why Anderson is so bullish. You don't have to agree to understand his P.O.V. (But you got to have a J-O-B.)
Which brings us to the specifics.
As was the case in
August, Anderson is long and optimistic about
"We were intelligent enough to start buying at a price above today's," Anderson said. "We did average down" to buy more.
Sacrasm aside, the fund manager's group hasn't sold "a single share" since it first started accumulating AK Steel. He again lauded the company's management team and its prospects to generate over $3 of free cash flow in 2000 and $4.50 in 2001.
Another favorites and a long position is
, which is trading just over 10 times the $3 per share he sees the company earning next year.
Some other picks (and longs) include energy plays
; specialty packing company
; chemical concern
, the U.S.' largest hog producer, which recently warned of disappointing fiscal third-quarter profits.
The aforementioned are just examples and (as always) I urge you to do your own homework.
Meanwhile, Anderson believes the best time to buy basic-materials stocks is when earnings are rising, utilization rates are going up, and there's no capacity growth.
In other words, now.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at