Greg Jackson is literally on top of the world.
Recent Daily Interviews
AOL Time Warner's
Invesco Leisure Fund's
As the co-portfolio manager of
Oakmark Global, Jackson, along with Michael Welsh, runs the top-performing global fund of the past 12 months and for the year to date. While the typical global fund is down an average of 15% this year, Jackson has returned 13.6% for his shareholders, according to Lipper. For the trailing 12 months, his fund is up 23.8%, while his peers are
an average of 22.2%.
Unlike other value investors who concentrate on price/earnings ratios, Jackson focuses on companies that are either reinvesting aggressively in their businesses to expand them, or returning value directly to shareholders through dividend payouts or stock repurchases. While he doesn't anticipate a rebound in the economy until the second quarter of next year or later, he is already stocking up on companies that he believes will benefit when the U.S. and international economies begin to show signs of life again. (If you're interested in reading more about what Jackson thinks, check out the 10 Questions interview TSC's Fund Junkie, Ian McDonald, did with Jackson in February.)
TSC: Is hunting for value the only way to make money right now in the U.S. and abroad?
Jackson: I guess the way I would phrase that wouldn't be as value hunting but as fundamental investing. Literally paying attention to a company's fundamentals is the only way to make money right now. The momentum fad is over. Whether you are a growth investor or a value investor, fundamentals are going to be the key driver here, both domestically and abroad, for the next three to five years.
TSC: Where do you see the greater growth -- abroad or in the U.S.? And what percentage of your portfolio is currently in foreign stocks?
While the question of when the U.S. economy will be coming back still looms, there are always opportunities to invest in the stock market. And when you're looking internationally as well, the opportunities increase. We've shifted more assets internationally recently. We've been doing that probably since the June time frame. Right now we're about 54% international, and in March we were about 42%. So, we've increased our international holdings by 12%.
The U.S. fell off earlier than the overseas markets, and we obviously had more money here because the valuations were much cheaper here. Since that time frame, some of the international markets have also moved down and some of the really good businesses internationally have moved down, and that's given us an opportunity to move some of the assets there.
TSC: So do you think the U.S. economy will improve ahead of the rest of the world?
We led this whole trend downward. Clearly, the world economy cannot recover until the U.S. does, so that's why countries abroad are looking to us, to see how we try to shore up our economy. I don't think anybody starts on a major uptick without us.
TSC: Are there any sectors or stocks that look especially intriguing to you right now?
We are more stock-by-stock, bottoms-up stock pickers. However, in the U.S., what we are finding is information services, while a pretty broad category, is an interesting area. One company we have been buying recently is
Learning Tree International
. They are a technology training company that contracts with various corporations to offer 350 different seminars, be it on Windows 2000, Windows XP or Oracle. Even with the tech meltdown, the number of students per class only went down from 16.2 to 14.7, so the business has held up pretty well. Revenues are not nearly what they were last year, but the stock price has fallen from $75 to $22, so we think it's a pretty good time to be buying this one.
TSC: Why are information services companies holding up well in this economy?
Information services companies like
are not countercyclical, but they are not as heavily impacted by the economy as other companies. For example, right now people are still buying homes or refinancing homes with interest rates where they are. Equifax is benefiting from the fact that people need credit reports in order to refinance their mortgage.
With Ceridian, a payroll processing company, it's benefiting because in a downturn companies will outsource nonessential items like payroll processing. However, we do also realize that in a downturn there are layoffs, which causes attrition in these companies' customer base.
TSC: What kind of industries or stocks might you be looking for when the economy turns?
That's a great question. In fact, that's where we are positioning the portfolio right now. We just purchased three companies that I call early-stage cyclicals that will be beneficiaries when the economy turns up. One is the executive-search firm
Heidrick & Struggles
. It's down 52% this year. Another is the advertising conglomerate
. A third is a staffing firm called
in the U.K. I feel very good about those companies because the companies' stocks have been creamed with the overall market decline.
I like the idea of buying early-stage cyclicals that are market-leading companies right now, given their valuation. Heidrick & Struggles is by far the No. 1 brand name in executive search. So you are buying this great business at a very depressed price. Interpublic Group is the world's largest advertising company. The stock price has come down over 50%. You just have to take advantage of these opportunities when the market presents them.
TSC: Earlier in the year, you were one of the few people to say that you didn't expect a recovery in the second half of this year. How were you able to make that astute call?
We come at this very much from a company-by-company basis, rather than looking at it on a macro view, and every single company we have been talking to between last spring and now have all said the same thing. Most of the executives of the companies we follow did not give us the sense that the economy was coming back anytime soon.
They don't see their business picking up right now, but some businesses have an idea for how things could be next year.
, which publishes the freestanding inserts in Sunday newspapers, books its business literally a year in advance. They have a pretty good idea of what it will look like next year. Valassis is now saying that its business has stabilized and its outlook for next year is stable to fairly up.
I think the economy as a whole isn't going to be anywhere near as robust as people are expecting, but I don't think we are going to go into a massive recession, either. If we are not at bottom, I think we are pretty much at bottom. When do we turn up is the next question. Will the economy turn up in the next six months? I doubt it. It may be some time second quarter or later next year. That's my best guess, based on talking to the companies we follow.
TSC: You've said that you are not like typical value investors who usually only concentrate on price/earnings and price/book ratios, but that you try to look at the characteristics of a business from a broader perspective. What are some of the things you look at?
We are not typical value investors in that P/E and price-to-book ratios really don't mean a whole heck of a lot to us. We consider ourselves business analysts first. We want to understand the dynamics of the business. We want to know where this business generates its returns, how it generates its cash, because ultimately that's what the stock is worth: the cash it can throw off. Return on capital is a way to determine what kind of returns they are getting on the incremental capital they put into the company.
To give you an idea, take a company like Michael Page. When you are a recruitment firm like they are, there's not a lot of physical capital required. All you need is a few buildings and a few offices around the world. What you are doing is leveraging the talent of your people. Such companies generate a lot of excess cash, so you are very dependent on what they do with that money. Do they go out and buy other companies for the sake of growing bigger? Or are they really thinking about shareholders' interest and trying to build the wealth of shareholders?
The best avenue might be to pay back the cash to shareholders via dividends or share repurchases, or to reinvest in their business. That's why we analyze the reinvestment opportunities. Even in this downturn, Michael Page has opened three new offices. They've opened one in Tokyo, one in Sao Paulo, Brazil, and a second office in New York. While this might cost them in the interim, they are building out their business for five years from now.
One thing we have learned is the market will not pay for companies that aren't growing. And if you are not growing, then you'd better be throwing off all this cash and returning it to your shareholders, rather than just trying to build for the sake of building. So that's what we're looking for from a business-analyst standpoint. We are trying to assess whether a company really has reinvestment opportunities at strong rates of return. If not, we want them to pay the money back to us. P/E ratio doesn't tell you that. Price-to-book ratio doesn't tell you that. You really need to understand the business and how the dynamics work and how the cash is generated.
The other thing we look for in our holdings is companies' balance sheets. Learning Tree has over $7 a share in cash with no debt on the balance sheet, so the company was able to buy back 15% of their shares literally in a one-month time horizon, again just leveraging the upside for those of us who are remaining shareholders. All we are doing is trying to take advantage of those price discrepancies that Wall Street is giving us.
TSC: Is the proliferation of low-priced stocks making your job easier at this time?
Not really, because it's not pleasant to come to work every day and watch the stock market come down in your face. But having said that, as a long-term value investor, I don't mind a stock market decline if it gives me opportunities to upgrade my portfolio or buy good businesses at very cheap prices, so I don't mind Heidrick & Struggles being down here at $20 or Learning Tree at $23 when it gives me these opportunities. But knock on wood, all of our funds are up for the year.