We're on the cusp of a new investing year -- thank God.
After three years of negative market returns, fund managers in recent weeks have been sounding notes of cautious optimism -- if not about the broad market, at least for certain pockets. Since many investors are taking part of this holiday week to hunker down with their portfolios, we decided to revisit some highlights from our weekly 10 Questions of the past few months.
In these interviews, we talked with some of the sharpest mutual fund managers in the business about where they think the markets, the economy and certain stocks are heading -- and how they are investing. Readers sampling the following excepts will have plenty of stock tips to chew over. But do your research first; don't just take a fund manager's word. More important, readers might want to take a closer look at these funds: All of them have managed to outperform their peers over the long haul.
Ralph Wanger, skipper of the top-shelf (ACRNX) - Get Columbia Acorn Inst Report Liberty Acorn fund since 1970, has amassed a phenomenal record by spotting small-cap companies poised for growth, scooping them up early and letting them ride. In our 10 Questions -- click here to read the entire Dec. 2 interview -- we asked Wanger for his thoughts on the market generally and the tech sector specifically.
I believe we are in one giant trading range. The
can trade as low as 600 on the downside and as high as 1500 on the upside. I think we will be in this trading range for a minimum of another five years. Along those five years, we will experience lots of vigorous swings, but no particular overall trends.
This market reminds me of two other periods. One was 1969 to 1981, in which the market made a lot of moves, but ended up pretty much where it started. The other was 1930 to 1954, which was marked by similar swings. In this market, it will be a little more difficult for amateurs to make money, but good companies will continue to perform well.
It's tough for technology because it was the favorite sector during the bubble. I don't know of any exception to the rule that says the subject of the bubble lags behind the market for years after it bursts.
had a big run-up in the past month or so. But it has had five moves of more than 20% to the upside over the past three years. There's nothing sharper than a bear-market rally. That's what I believe we're seeing.
Despite these 20% gains, the broader trend for the Nasdaq has been a downward slide for nearly three years.
We were eager to talk with Robert W. Smith of the (PRGFX) - Get T. Rowe Price Growth Stock Fd Report T. Rowe Price Growth Stock fund because he has taken a more conservative approach than his growth brethren -- click here to read the entire Nov. 18 interview. We noted that he had been getting more aggressive recently, scooping up the likes of Cisco (CSCO) - Get Cisco Systems, Inc. Report. We asked, why is now a better time than later to buy Cisco if there's no promise of near-term growth?
Good question. First, the hard part with the market is knowing when it's going to discount a stock and when it's going to close the gap. Two things led me to be a Cisco buyer at this time: It looked to me like it ran its business exceedingly well in the downturn. Second, it created an earnings floor on the downside that supported the price at current levels.
Whenever you look at most companies, a lot of it is decision tree analysis. You look through and say, "X could happen, Y could happen, Z could happen. What are the probabilities and what does it give me?" The bottom end, you have Armageddon, of course. But in terms of the floor underneath Cisco, the earnings went up a lot. In a sense, the downside was limited.
Why buy it today? Because, as we discussed with Tyco, the market is an anticipator. The market will anticipate the turn before Cisco turns.
So my view is that Cisco, which is now in the $12-$13 range, has the ability to earn 70 cents to 80 cents a share a couple years out. It's a company that should be able to do low double-digit growth, great free cash flow. It has $20 billion cash on the balance sheet. I think the stock can get back up to the $17-$18 range. It could over the course of months, but it can also happen over the course of a week. That's a lot of upside.
Another thing with Cisco: If you have a portfolio, it's a bit like having a baseball team. You want to have different talents. You have stocks that you feel comfortable on the short term and some that will work on the long term. You have a mix. The ones that are short term might already be discounted; you just don't always know. And the ones that are long term, you don't know when it's going to be put in the price. Very few people are good at figuring the timing of when everything works.
When we spoke with John P. Calamos of the stellar-performing (CVGRX) - Get Calamos Growth A Report Calamos Growth -- click here to read the entire Nov. 4 interview -- he touted stocks such as eBay (EBAY) - Get eBay Inc. Report and Weight Watchers( WGT). However, when we asked the skipper if there were any stocks he felt comfortable "letting it ride," his answer was telling.
No. I think the big disconnect with a lot of investors is this: Great companies are not always great investments. We're letting valuation drive our fund. I can be excited about management and performance; they can be a great company. But great companies can be overvalued.
Quite frankly, I don't think the buy-and-hold strategy works. Maybe it works for Warren Buffett, but he buys the whole damn company! Investors have to buy pieces. That's a little different. We're hoping we're buying some great growth companies, and once that growth is recognized in the market, we're looking elsewhere.
When you're in the mid-cap growth arena, there are thousands of companies. And this is the sweet spot of the U.S. economy. This is where jobs get created. This is where ideas are coming from. This is the most vibrant part of the marketplace.
In this arena, it's incredibly competitive. You have to keep the portfolio very fresh. The idea that I know which one of these 80 companies I own will become the next
is not realistic.
I can't tell you the one or two mid-cap stocks to own. But I can tell you which 80 stocks to own.
Michael Mach manages Eaton Vance's (EATVX) - Get Eaton Vance Tax-Mgd Value A Report Tax-Managed Value and (EHSTX) - Get Eaton Vance Large Cap Value A Report Large-Cap Value funds with a steady hand and a firm sell discipline. When we interviewed Mach on Oct. 21 -- click here to read the entire interview -- we asked him if he was having an easy time finding companies that meet his value criteria these days.
It's always very difficult (laughs). But that's what makes it exciting.
We like to buy stocks that are trading at about a 33% discount to our estimate of intrinsic value. And today the average in the portfolio is about 40%. My worry list is about as long as anyone else's right now.
But I think that as a result of the anxieties that are in the market, we are being presented with a lot of attractive long-term opportunities. Stock prices are much lower, expectations are much lower, so it sets up the potential for some earnings surprises. If you get some positive surprises in the context of inexpensive stocks, that sets the stage for some good stock-price performance. I think this is a good time to buy stocks if you have a three-year window -- maybe not if you're a speculator. I don't know what's going to happen in the next year or so.
The electronic manufacturing and service arena is a technology-oriented arena that's generated a lot of excitement over the past few years. Many of the companies that operate in that space aggressively went out and made acquisitions to grow quickly and provide good returns. As a result, when you look at the companies today, they have compromised their balance sheets -- they don't have much financial flexibility.
A company in that space that we think has done a good job of preserving the integrity of its balance sheet, maintaining positive cash flows and positioning itself for wonderful future growth, is
We look at how effective management has been in positioning the company to grow long term, how strong their balance sheet is, how strong the company's franchise is. Those are the items that enable us to differentiate one company from another. Celestica is strong in all of these areas.
We talked to erstwhile Nationwide Fund skipper Charles Bath after he jumped to run (DHLCX) - Get Diamond Hill Large Cap Fund C Report Diamond Hill Large Cap because we wanted to hear why he switched from managing a $1.5 billion fund to a $3 billion fund -- click here to read the entire Nov. 25 interview. We asked the value-oriented manager why he was so light on technology, whether the recent tech run was misplaced and why tech-oriented SunGard Data Systems (SDS) - Get ProShares UltraShort S&P500 Report turns up in his fund.
About a month ago, some of these stocks had been down so low that they were close to our target prices. But then the market took over so fast, we sort of missed them, but now they're up 50% (laughs). Yes, I think that's the case. I mean, 50%, if you think about it, maybe in the 1990s that was somewhat normal.
I think that if you can make 50% over four years, then that's pretty great. In tech, we've made that in four weeks now. I think that these stocks have gotten ahead of themselves now. They don't appear to be the market leaders to me. Bear markets tend to define changes in leadership. I tell people I don't know where the next leadership of the bull market is, but I think I know where it's not going to be (laughs). That's a group I'd like to participate in at the right price, like any other group. It never got to my price before it took off. So I'll be waiting again until it does get to my price.
Regarding SunGard, the best part of the business is the corporate security and data security. They provide off-site security systems for corporate-data centers. They're a leader in that business. It's a growth business and generates lots of free cash flow with the management's ability to manage that cash flow.
I owned the business in the past and I've liked it. The stock got very cheap in this most recent sell-off, but it's running back quite a bit recently.
The technology space has often led to the services business because they tend to participate in the growth of the industry, generate more free cash flow and more steady, less cyclical growth than, say, the hardware names. Plus, they're a very well-positioned and well-run company.
Last week, Jacob Rees-Moog, manager of the ( EMEMX)Eaton Vance Emerging Markets fund, offered a compelling argument for investing in emerging markets -- -- click here to read the entire interview. We asked him to elaborate on his outlook for the next year or so, and why things are looking up.
Emerging markets obviously have significant dependence on the major markets. What we're seeing is that domestic markets are strong, but that exports to the U.S. and Europe are weak. We are more invested in domestic consumer-based stocks rather than export-driven businesses.
Where we're positive and why we're very optimistic about emerging markets at the moment is on valuation grounds. I'm seeing many stocks with P/E ratios under 10 and dividend yields approaching 5%, which is almost always a good basis on which to invest.
The emerging markets went through a crisis in 1997-1998, and it was across the board -- Russia, the Far East, Latin America as well. Since then, there's been quite a lot of consolidation and reorganization, the banking systems have been reformed, credit has improved dramatically.
We've seen extremely low levels of earnings bounce back surprisingly quickly. I wouldn't categorize it as fundamental growth, rather a rebound after a couple of years of extremely difficult trading. In a way, we're back on trend.
That's one side of the equation. On the other side, there is domestic growth. Emerging markets have large consumer markets within them where the people are getting steadily richer -- a growing middle class, if you will.
In our 10 Questions interview with ( FOCTX)Legg Mason Focus Trust's Robert Hagstrom -- click here to read the entire interview -- he explained why he recently added headline-risk poster child Tyco (TYC) to his fund.
We think Tyco is a significantly underpriced stock. We bought it right when
new CEO Edward Breen showed up
With Tyco, you had two things to consider. First, you had to separate the accounting issues and put that in one box. In the second box, you had to look at the individual businesses and determine what their economic power was after removing the headline risks and Dennis Kozlowski. We assigned the worst operating margins and the worst growth rates for the businesses relative to their peer groups. It looked to us that Tyco's total earnings power was somewhere in the vicinity of $1.50 to $2 a share -- that's using conservative projections.
Now, when the stock starts getting down to $14, $13, $12, $11, you have a stock at five, six, seven times earnings! That's a pretty comfortable margin of safety, and you can use that to offset the risks of the accounting box.
Also, we didn't think the operating numbers were wrong -- we knew there would be charge-offs and the like. We thought liquidity would be fine after CIT got sold. The issues with Kozlowski were at the CEO level, not the operating level. Some people assumed, incorrectly, that if the CEO was corrupt, everything down to the last employee was corrupt. And that just did not happen.
We see this as a $22-$23 stock -- and that's being conservative, in our opinion.
There's not a great deal of mispricing in the markets -- the market gets it right more than wrong. As an investor, you have to go where there is mispricing in the extreme. This is obviously a company where mispricing is extreme. When you have headline risks and earnings risks like you had at Tyco, this is where investors typically make bad decisions. So we were attracted to this stock from a psychological standpoint, because psychological pressure invites mispricing.
Saul Pannell can "go anywhere" as manager of the (ITHAX) - Get Hartford Capital Apprec A Report Hartford Capital Appreciation fund -- big companies or small companies, growth or value, domestic or international companies. And he has performed quite well in good times and bad -- click here to read the entire Dec. 9 interview. We asked the fund skipper to offer an example of a growth stock he likes, as well as a favorite value stock.
An example of a value play in the fund is
, which is a manufacturer of DRAM memory chips, cell phones, flat panel displays and other enabling technologies.
As Samsung becomes increasingly recognized as a consumer electronics company, we expect its valuation multiple to expand. Samsung currently trades at only eight times earnings, with solid historical profitability and a relatively strong balance sheet.
An example of a growth play is
( NXTL), which is a provider of wireless communication services.
Nextel is exhibiting greater growth and lower subscriber "churn" then the other nationwide wireless providers. Nextel's service offering is differentiated by its "direct connect" walkie-talkie feature, which has gained traction in the business and government customer channels. Nextel's increasing exposure to the government channel makes it a beneficiary of recent homeland security legislation.