With a new stock blowing up almost every day, Wall Street has gone from equity market to mine field. Five-star fund manager Warren Koontz says investors can steer clear of trouble by focusing on a company's debt obligations and cash generation. "We don't want any debt to be rolling over in the near term, so we are looking at debt expiration," says Koontz, who oversees the $430 million ( LSGIX) Loomis Sayles Value Fund. "We also like cash. Not only cash-flow generation, but net cash on the balance sheet." Like most mutual fund managers, Koontz has been hit hard by the bear market, down close to 37% year-to-date. Nevertheless, he is still beating the S&P 500 by 4.7 percentage points over the past five years. The fund holds nearly 70 stocks and has turnover of 41% per year. One of his favorite stocks right now is pharma giant Wyeth ( WYE), which he says has strong defensive qualities in a difficult environment.
"It's a very good cash flow generator," says Koontz. "The dividend yield certainly is not as high as some of the others at just over 3%, but it has a very good balance sheet and within the pharmas we really like their pipeline." Outside of health care, Koontz likes McDonald's ( MCD) balance sheet, as well as its prospects as more people trade down from restaurants like Applebees or Ruby Tuesdays ( RT) to fast food or quick service restaurants. "Their same-store sales and their growth has been stellar, particularly in this environment," says Koontz. "And the idea that customers are trading down is not only a domestic phenomenon but it's an international one. And they have strong international sales."
Perhaps surprisingly, Koontz has been buying shares in Pulte Homes ( PHM) lately, despite the continued devastation in the housing market. Koontz, however, says Pulte is a more conservative choice than one might think due to its hefty cash position. "Pulte will probably exit 2008 with close to $2 billion of net cash on the balance sheet due to their ability to generate cash and they have no debt rollovers," says Koontz. "We believe they will be a survivor in the business and will emerge from the downturn in a few years in a very attractive situation."