Click on the company name to jump to a fund manager's comments on the stock.
Readers of last week's
10 Questions with Larry Pitkowsky and Bruce Berkowitz of the
Fairholme fund might have been intrigued by the co-managers' discussion about
and its budding interest in
Three days later, WilTel shares surged 37% on word that Leucadia made an offer to buy the 53% of the company it didn't already own. Impressed by Pitkowsky and Berkowitz's savvy stock-picking, we decided to revisit some recent 10 Questions interviews published so far this year to see what other well-regarded fund managers have been scooping up during this topsy-turvy market.
The picks highlight just how the investing landscape has been turned on its head during this bear market. A Warren Buffett devotee warms to
. A gold-loving fund manager turns to
. A value-conscious small-cap fund manager unearths a biotech play for the veterinarian set in
Most of the fund managers interviewed hasten to add caveats about their stock selection -- do your own research, investors, and realize that the reasons for investing in a stock can sometimes turn on a dime. There isn't likely to be a stock poised to rise 30% over the next week among our crop. Nonetheless, the recent highlights should introduce readers to fund managers who have racked up top-shelf performance. If you want to read more, each section will include a link to the full interview. (Oh,
click here if you want to read more from Fairholme's Pitkowsky and Berkowitz.)
Lanny Thorndike: Idexx Labs
For Lanny Thorndike, co-manager of the $27 million-in-assets
Century Small-Cap Select fund, investing is all about the process: a methodical, in-depth analysis of the company's profitability, growth and valuation prospects. The process also includes talking with second-tier managers, competitors and vendors to make sure the company passes muster.
The process has worked: The fund, first offered to individuals in early 2000, has posted an average annualized return of 14.86% for the past three years. In a May 5
, Thorndike explained how the process led him to Idexx Labs.
In the biotech area, there's a firm that does veterinarian biotech and diagnostic services called
Two things we look for are high recurring revenue and high return on equity. Idexx basically is in a couple different lines of business. It has a veterinarian medicine business in Carolina. But it also has a veterinarian diagnostic and testing business where it sells not only machines, but tests for heart worm and Lyme disease and such. It is layering on new tests that pet owners are increasingly doing. By bundling those tests, it has just launched a new system that does it much more effectively.
Like the blades and razors business, it gets to sell both the test equipment and the test kits themselves. So there's a fair amount of recurring revenues there. Management's done a good job. A new team came in about a year ago and the new product seems to have gained some legs. From a valuation standpoint, we think that it's still attractively valued and the growth rates are going to look good for the next couple years.
Click here to read the entire interview
Jean-Marie Eveillard: Tyco International
There aren't many fund managers who can be described as strict Graham-Buffett adherents who like
and who think we are in the early stages of a bull market for gold. But then, there aren't many fund managers like Jean-Marie Eveillard.
The affable, quotable Frenchman runs four funds that rank in the top decile of their category peers. In a March 10
, the fund manager explained to us why Tyco looks like a value in a market that remains expensive to him.
Tyco is a perfect example of what we try to do. At $50 a share, we had no interest. It was in the paper every day --
former CEO Dennis Kozlowski. Koz. Koz.
We have been investors in the electronics business -- the connector business. We have a stake in Japan's
. Because of that investment, we were familiar with some of the business he acquired. Koz had flaws, but he acquired real business.
We also understand the health care business, because we used to own
Johnson & Johnson
. Tyco's main health care competitor is Johnson & Johnson.
We couldn't understand how Tyco could pretend it was growing at 20%. All its businesses were mature cyclicals -- highly profitable, but mature. We knew this was impossible, but these were industries that we usually like at the right price.
Think about the business. If we heard the corner of Wall Street was for sale, people might bid it up and then realize, it's not a growth business. The mere fact that it's not likely to grow doesn't mean it's worth zip.
We had no interest when
it was flying high. Then it got into trouble, then much greater trouble. Then, Koz leaves. I asked an analyst to look at it. This analysis is where you have to be careful. Wall Street is nothing but a vast promotion machine. They give bad advice nine times out of 10. Because what's in best interest of Wall Street is often antagonistic with what's in the best interest of the individual.
Our analyst understood -- don't do it from an earnings point of view because that's what Koz manipulated. When it was $40-$50, every firm covered stock and was positive. When it got under $20, we did a sum-of-the-parts review. Look at the electronics business. What would
pay today? Look at the health care? What would a reasonable buyer pay today? They made so many acquisitions; we only looked at the major businesses.
Now, we removed the debt and redid the income statement. Why? Because two, three years ago, the idiots on Wall Street say to Koz, "How about doing this convertible bond offering? Zero coupon, free money!" The investment banker says there's only one thing: The investor will not accept zero coupon unless you add in a three-year put. Nothing to worry about, though, your stock keeps going up. The put will never be exercised.
That $1 billion carries no expense because it's a zero coupon. However, in late 2003, Tyco will have to refinance. They will either issue high-yield debt or default on the banks. So you have to redo the income statement to include the interest expense that it will not realize until late 2003.
So, our analyst comes up with gross value for assets of say $45, then deducts the debt: $20. So, you are left with a $25 value. The stock at that time is between $15 and $20. We bought all the way down to below $10, now it's at $13 -- our average price paid for the shares.
So, that's not so great yet. However, we have seen a profit on the bonds. We bought on a 14%-15% yield-to-maturity basis. We own both the bond and the stock of Tyco for the Global fund.
Click here to read the entire interview with Eveillard.
Rich Eisinger: Ethan Allen
highlights unsung funds that merit investor attention. Our Feb. 24 interview with Rich Eisinger, co-manager of the
Mosaic Mid-Cap fund, is a good example.
Eisinger explained how following Warren Buffettesque principles enabled the fund to return a
8.36% on average the past three years, ranking it among the top 5% of all mid-cap blend funds. Below, he explains how his value discipline turned up furniture retailer
Ethan Allen is a very well-run furniture company, led by
Chairman and CEO Farooq Kathwari. They are also the cream of the crop in the manufacturing and retail side of the furniture business. They have the best margins in the industry. They have weathered the storms of the slowdown of the last few years much better than their competition, if you compare their numbers.
They have a very strong brand name, they are introducing new lines. A few years ago they were more of a traditional colonial-style furniture retailer. They have brought in more contemporary lines of furniture to appeal more to younger customers.
Kathwari runs a very lean organization -- there's very little inventory kept at the stores. Their balance sheet is pristine. Last time I checked, they had 1% or 2% long-term debt-to-total capital. And they have used the free cash flow to pay debt down in recent years.
This is a very fragmented industry. This is a company with a market cap of $1.1 billion; I see no reason why five years down the road Ethan Allen's stock can't double or triple in market cap and take more market share away from the industry.
The thing that's really unique about Ethan Allen is that they are vertically integrated, which creates a very strong competitive advantage. They have 15 or 17 of their own domestic manufacturing facilities, their own saw mills, their own designers and their own distributions and logistics network. They have a lot more of their business under their own control.
Click here to read the rest of the 10 Questions interview with Eisinger, including a chat on a tech stock that turns up in his fund.
Duncan Richardson: Disney
Duncan Richardson doesn't put all of his eggs in one basket. His Eaton Vance Tax-Managed Growth fund holds about 600 companies, none of them making up more than 2% of the fund. The stellar fund has the tax-efficiency of an
index fund without the concentration in the 10 biggest companies.
In an April 28
, Richardson explained that he avoids overexposure to one stock or one sector. However, he did mention a few stocks that looked undervalued to him, including the house that Mickey built.
We're building up
, down around the $15 level. We've been doing this for two years now. (Laughs.) But we think this can be a $30 stock in a few years' time.
Obviously, some cyclical things are working against it. A lot of that is being priced into the stock. The stock has been between $15 and mid-$20s over the past few years; we're buyers at these levels.
Click here to read the entire interview.
Mark Trautman: Microsoft and Intel
In a Jan. 27
, Mark Trautman, who co-manages the
MSB Fund, discussed his investment philosophy with us. It sounded strikingly similar to a certain sagacious investor from Omaha: Invest as if you're buying the whole company, stay within your circle of competence and buy companies that have a sustainable competitive advantage. In fact, Warren Buffett's
is Trautman's favorite holding, making up 6.6% of the fund's assets. What was more surprising was that he was also dipping his toes into
With Microsoft and Intel, it goes back to the whole sustainable competitive advantage. The government has essentially called Microsoft a monopoly. And Intel is basically keeping
around just to make sure that they're not a monopoly, in my view. (Laughs.)
has started to make a little bit of progress, we're at a point where Microsoft is the dominant platform. Intel's chips are the dominant platform. We think there is some sustainable competitive advantage for both companies. Certainly, they've got the capital structure to enable them to go through different technology cycles.
A testament to their fortitude during this period: Just look at Microsoft's cash flow. It's phenomenal in a period when everyone else has fallen by the wayside. These two companies are in the fund because we think they have the ability to continue creating wealth and capital over the years because of their quasimonopoly, I guess you'd call it.
TheStreet.com: What do you make of Microsoft's "starter dividend?"
It's not much of a dividend. But they do need to address the amount of capital that they have. They have way too much capital for what they need.
They have a real dilemma. Their software -- especially the way it is being delivered today, which is electronically -- costs a lot to create, with the engineers that write it. But once it's created, the profit margins are phenomenal; they're not even packing it anymore. That was their biggest cost. They just zip it over the Internet and it's practically pure profit.
The question is, "How are you going to invest that capital in a business that's going to create a greater profit-margin?" The answer is, "You're probably not." They've been trying to do the Xbox and other things -- and they need to continue to invest. They can't say, "We're never going to find a business that's going to do better, so we shouldn't do anything else." But I do think they need to figure out a way to start returning capital.
If they do make dividends tax-free (which I don't think is the best approach), I think they should make them tax deductible, because then 401(k) plans and everything else will benefit, not just taxable accounts. It's an example of returning capital to shareholders.
Microsoft could have easily come out and paid a much bigger dividend, but they didn't want to have to retract that down the road, which is the biggest fear of any company. So they're saying, "Let's start with a small dividend, then we can move it up down the road." Meanwhile, they're buying back shares, as well.
It's a good situation to have, if you're in their shoes: "We take in so much cash flow, we can't spend it fast enough." But if you look at return on capital calculations, they have to start returning it. With the money sitting in their money-market accounts or short-term Treasurys, they're not getting the returns that they get from their business. The cash hoard is, in essence, reducing their return on capital by just sitting there.
Click here to read the entire interview, including the three stocks Trautman feels most comfortable holding.
Katherine Herrick Drake: A Different Take on Microsoft
When we interviewed Katherine Herrick Drake for an April 21
, the co-manager of the $14 billion
Dodge & Cox Stock fund was careful not to talk up the stocks in her portfolio too much.
However, Drake discussed how the fund's aversion to overpriced mega-cap stocks such as
has helped it trounce the slack performance of the S&P 500 -- it has returned 4.05% a year over the past three years, outstanding for a large-cap fund. Drake explained that Dodge & Cox is still gun shy on the two companies.
It's valuation, nothing more than that.
We don't particularly look at capitalization to determine how a company is going to perform. We look at fundamentals and price. Now, Microsoft is much lower than it previously was, but on a price-to-sales basis it's still enough of a premium that we're not intrigued with it as a long-term investment opportunity.
Valuation is causing us to continue to downplay many of the mega-cap stocks.
GE has come down enough that it's probably in a more reasonable position. But we're looking for undervalued companies, not just fairly valued companies. We still might think, for example, that GE is a reasonably valued company, but it needs to be undervalued for us to have some degree of confidence to repurchase it. We did own it for a while, but we sold it.
By the way, Drake did discuss some stocks that do turn up in the Dodge & Cox Stock portfolio. Click here to read the rest of the interview.
Ron Canakaris: Lighten Up on eBay
Time flies when you're on Internet time.
When we interviewed Ron Canakaris for a
the smart skipper of the $2.44 billion
ABN Amro/Montag & Caldwell Growth fund mentioned that he liked
By April, however, after eBay's stock continued to soar, Canakaris acknowledged the shares were getting a bit pricey for his blood in a
story on fund managers' piling into eBay and that he was lightening up on his stake.
"It's somewhat about its fair value at the current time," said Canakaris. "We had cut it back when it got to $90 and we're sitting still with our reduced position. Based on our valuation process, we think eBay is fairly valued in the low 80s."
Canakaris, whose aversion to frothy tech stocks in the late 1990s helped his fund largely sidestep the bursting of the bubble, remains high on eBay's growth potential. "It's doing awfully well -- it's a very well-managed company," he said. "Compared with
, it's more, I won't say reasonably priced, but let's say it's less fully valued."
Click here to read the rest of the story on eBay. Click here to read the 10 Questions interview with Canakaris.