BUSINESSWEEK ONLINE : DECEMBER 18, 2000 ISSUE
BUSINESSWEEK INVESTOR Turning Value into a Gold Mine How PIMCO fund manager Schneider does it From tractor makers to insurers to hospital companies, John Schneider's stock picks have one thing in common: value. That has put the PIMCO Funds (PDLAX) portfolio manager right in the market's sweet spot this year, as investors move away from momentum moonshots and toward certifiably grounded stuff (table). BUSINESS WEEK's Robert Barker reached Schneider recently by phone at his Manhattan office. Excerpts of their chat follow. The full version is at Business Week Online's Daily Briefing. Q: What's working for you? A: Value stocks, and we've had some pretty good stock selection. Q: Insurance stocks among them? A: Absolutely. Property and casualty insurers. ACE, XL Capital (XL), Everest Re (RE), and Loews (LTR), which is a conglomerate, but it owns CNA. Q: Do you still own those, or are you taking profits? A: I still own them all. I think they've got quite a bit in front of them, but I've [trimmed] back a little. Q: You also have lots of health-care stocks. Which ones do you favor? A: In the HMOs, I own Aetna (APPAX) and Health Net. Aetna has been the laggard of the group. They are now in the process of trying to raise prices and cut costs. It's not going to be a quick turnaround. Health Net is actually doing things much better. They've been growing earnings by 20%-plus, and they're getting out of territories where they're a weaker player, like Florida and Nevada. There will be more earnings improvement as they exit money-losing businesses, such as Medicare. Q: Why are they cutting Medicare? A: You've had medical inflation in the high single digits, call it--7%, 8%, 9%. Government for the past couple of years has only been raising the price they give HMOs for the Medicare business by 2% or 3%. So the vise has just been getting tighter and tighter. HMOs have been able to offset that to some degree by reducing benefits, but everybody has been losing money. Q: I gather you also like hospital companies, such as Tenet Healthcare (THC)? A: It's an acute-care chain, the second-largest in the country. They're getting price increases. Q: You also own Healthsouth. Why? A: It's a little different. They are the largest in-patient and outpatient rehabilitation hospital in the country, with something like 30% market share. What's going on there is the government has been paying them for in-patient rehab services at cost. So, for Healthsouth (HRC), this is a pretty big part of their business, and they've been receiving no profit on it. Now, the government has just enacted a system where they pay a set dollar amount. Healthsouth is a quality provider but also a low-cost provider because of its scale, and they are going to be able to make a significant profit on this. Q: How significant? A: When fully enacted, this will add something like 20 cents [per share] to earnings, which is not in Wall Street's earnings estimates yet. Q: What other industries do you like? A: One area I'm warming to is agriculture. I own food-processing companies, such as Archer-Daniels-Midland (ADM) and Corn Products International (CPO), and tractor producers Deere (DE) and CNH Global (CNH). Q: What's happening on the farm? A: The farmer, after a number of years of being on his back, is now doing reasonably well. In the face of the economy weakening, agriculture is an area that's on its own cycle, and I think things are improving. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Turning Value into a Gold Mine TABLE: John Schneider: Value Seeker INTERACT E-Mail to Business Week Online

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