Skip to main content

Value Investor Has His Own Magic Formula

Teva Pharmaceutical and Vodafone meet fund manager Terry Diamond's criteria.

BOSTON (TheStreet) -- Teva Pharmaceutical (TEVA) - Get Teva Pharmaceutical Industries Ltd. Report, the world's largest generic-drug maker, and wireless company Vodafone (VOD) - Get Vodafone Group Plc Report share at least one trait, according to Terry Diamond, chairman of Talon Asset Management.

They both have a high chance of rising and a low likelihood of falling, which fits into his stock selection criteria. Minimizing downside is as important as maximizing upside, Diamond says, and finding stocks with an upside-to-downside ratio of about 3 to 1 is critical.

The formula "has served us very well, especially in weak markets when we have not gotten hurt as much as the market," he says.

Terry Diamond, co-founder and chairman, Talon Asset Management.

Talon Asset Management, based in Chicago, has $1.1 billion in funds under management, with about $650 million in equities. Money management has been more difficult this year, as the benchmark

S&P 500

has seesawed, having tacked on about 9% this months after slumping during the summer. Persistently high unemployment and slow economic growth have dimmed the allure of equities and driven investors to bonds.

Diamond says his firm, which he helped found, takes a value approach -- joining investors including

Warren Buffett

and

Bruce Berkowitz

-- though he concedes there may not be a difference between value and growth.

"Growth is just one element of value. It depends on what you pay for it," Diamond says. "We love growth, and we like to get it when we can buy it cheap. I don't believe we can predict markets, so we always tend to look for great companies with good balance sheets, good management and good business models that generate cash flow."

Recent fears of a double-dip recession have pushed down some stocks, like Teva and Vodafone, to attractive prices, Diamond says, noting that some "very fine companies" had fallen to historical lows.

"We're not traders, but when things like that happen when the market goes down significantly on fear of a double dip, that gave us an opportunity," he says. "If someone put a gun to my head, I'd say we're not going to go into a double dip. But prices got to a point that I almost didn't care if it went into a double dip. As long as we didn't get to a point where there were two wheels off the cliff like in 2008, there were a lot of stocks I was licking my chops to buy."

Still, a risk of value investing is buying a cheap stock that won't rise -- a so-called value trap.

Scroll to Continue

TheStreet Recommends

"Every once in a while, you'll fall into a value trap, where something is down and you buy it but it turns out there is more reason for it to be down than you thought," Diamond says. "But that comes with the territory. For every time it causes us to miss something, five times it prevents us from getting into something emotionally and making a mistake."

Even if the stock market remains stuck in a narrow trading range, Diamond says value investors are poised to reap rewards.

"The Dow couldn't get above 1,000 from 1966 until 1982, but there was a lot of money made during that period of time," Diamond says. "From our standpoint with our strategy, if the market were just in a channel for a long period of time, we'd make a lot of money."

For investors looking for value plays in an uncertain market, Diamond offers a list of five stocks owned by accounts managed by Talon Asset Management. Here they are:

Teva Pharmaceutical

(TEVA) - Get Teva Pharmaceutical Industries Ltd. Report

Company Profile

: Teva Pharmaceutical is a global company that makes generic drugs. Teva's multiple-sclerosis drug, Copaxone, had second-quarter global sales of $773 million, up 13% from a year earlier.

Closing Price

: $52.59 (Sept. 29)

52-Week Low

: $46.99 (July 29)

Diamond's Take

: "It's the largest global generics player. Teva is a play on near-term patent cliff, meaning that it's in a position to capitalize on the $235 billion worth of branded sales of drugs whose patents will expire between 2010 and 2015. It's trading at 10 times 2011 earnings and we think that's cheap. One of the reasons Teva is so cheap is the feeling that Copaxone may ultimately have competition, but the company is developing a pipeline to offset that. We've owned it for a long time, since the low $30s in 2006. But even for new accounts, we'd buy it today. We think the management team is great."

Analyst Consensus

: Teva has garnered 18 "buy" ratings from analysts. The other two research firms with coverage of Teva have a "hold" rating.

Carnival Corp.

(CCL) - Get Carnival Corporation Report

Company Profile

: Carnival is a cruise company.

Closing Price

: $38.78 (Sept. 29)

52-Week Low

: $28.71 (Nov. 3, 2009)

Diamond's Take

: "The market has discounted the consumer too much. We bought Carnival about a month ago at $31 and we think it could be a $50 stock. It operates in a duopoly. It pays almost no taxes. It has the benefit that it can move its business and its assets anywhere in the world. If it's weak in one place, they can move to another place. Cruising is underpenetrated. It's a growing form of leisure that's gaining popularity among the world's middle class. We think management is superb, and it owns 30% of the company. It trades at a very small premium to its replacement value."

Analyst Consensus

: Twelve analysts following Carnival have a "buy" rating on the stock. The other four analysts covering it have a "hold" rating.

Vodafone

(VOD) - Get Vodafone Group Plc Report

Company Profile

: Vodafone is a wireless company with a significant presence in Europe, the Middle East, Africa and Asia. Verizon Wireless, the largest wireless provider in the U.S., is a joint venture of Vodafone and

Verizon

(VZ) - Get Verizon Communications Inc. Report

.

Closing Price

: $25.19 (Sept. 29)

52-Week Low

: $18.21 (May 20)

Diamond's Take

: "We bought it at about $21 a share when the dividend was 7%. Now it's a 5% dividend. But we like it because it's well-run. We wouldn't buy this for just the dividend. That's a dangerous game for people to play. If the company isn't growing and you're only buying it for the dividend, that dividend won't be protecting you if interest rates go up at some point. But we think Vodafone is a unique story. It owns 45% of Verizon Wireless. Verizon Wireless borrowed a lot of money to buy Alltel and they've been paying that debt off. At some point, that cash flow will go somewhere. I'm not suggesting that Verizon will buy out Vodafone, but if it did, that would give a significant amount of dollars to Vodafone. Or if Verizon needed the money because it wants to maintain its dividend, then that will enable Vodafone to raise their dividend higher. We think the stock is worth $32 a share."

Analyst Consensus

: Seven of the eight analysts covering Vodafone have a "buy" rating on the stock. The other research firm recommends that investors hold the shares.

Energizer Holdings

(ENR) - Get Energizer Holdings, Inc. Report

Company Profile

: Energizer makes batteries, flashlights and personal-care products.

Closing Price

: $67.43 (Sept. 29)

52-Week Low

: $49.25 (July 1)

Diamond's Take

: "We think it has fine management and it's at a very reasonable price. It has a good balance sheet. It has moved on us from $55 to $70 in a couple months, but we still think there's room to run. We think it can be in the high $70s or low $80s. We're very disciplined and we liked that for a while; we were just waiting for the right price."

Analyst Consensus

: Eleven of the 12 analysts covering Energizer suggest that investors buy shares of the consumer-goods company. The other analyst has a "hold" rating on the stock.

Laboratory Corp. of America

(LH) - Get Laboratory Corporation of America Holdings Report

Company Profile

: Laboratory Corp. of America, or LabCorp, offers a range of medical-testing services.

Closing Price

: $78.15 (Sept. 29)

52-Week Low

: $63.81 (Oct. 2, 2009)

Diamond's Take

: "This is a play on employment. It's a play on health-care reform. It's a secular story of the growth in esoteric testing. It has a 9% free cash flow yield, so it has enough cash flow to repurchase a significant amount of shares or pursue acquisitions. As there are more insured lives because of health-care reform, it should boost the volumes of this company. We've liked LabCorp for years, and we've owned it for quite a while. "

Analyst Consensus

: Ten analysts with coverage of LabCorp rate the stock "buy." Another seven analysts have a "hold" rating. One has a "sell."

-- Written by Robert Holmes in Boston

.

>To contact the writer of this article, click here:

Robert Holmes

.

>To follow Robert Holmes on Twitter, go to

http://twitter.com/RobTheStreet

.

>To submit a news tip, send an email to:

tips@thestreet.com

.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.