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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
Money Moves, 5/24: Chocomize Co-Founder Fabian Kaempfer talks with Bloomberg’s Deirdre Bolton about the business of customizing chocolate
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The Italian automaker and others are adding hybrid technology to elite cars
The storied bridge that links San Francisco and Marin County changed the face of California
Schools cultivate ties with startups before they're big successes
Dave McClure's traveling venture capital show scours the world for promising startups
Get Four
|  | JANUARY 25, 2005
Simple, Straightforward Investing [Page 2 of 2] Q: As a money manager, are you investing new money now or waiting for better value? A: I don't believe in market timing. I don't believe that anyone can judge where the market's going to move in the next 60 to 90 days. That we saw an 11% rally in the broad market from Oct. 15 through Dec. 28 was very unexpected. But sharp moves in share prices are always unexpected. Therefore my only approach is to stay invested for the long term and thereby garner the long-term average returns, and through careful stock selection it's our hope to try to exceed those returns. We've been able to do that over the past seven or eight years, and I hope we'll be able to continue. So if I had a new account today, I'd begin investing it today. It might take me a week or two, but I'd get it pretty fully invested pretty quickly. Q: Do you have any international picks -- stocks or mutual funds? A: About a third of the revenues in our core portfolio are generated by internationally based and denominated operations. We do have some companies that trade in ADRs, and we do own one foreign fund. Vodafone, of course, is one of those companies. Another is Nokia. We also own the Scudder New Asia Fund (SAF ), which trades in shares on the NYSE. As Asia continues to improve, I think it will continue to do well, but I don't think it's necessarily inexpensive at these levels. Q: What about the pharmas? Do you like Pfizer (PFE ) and Johnson & Johnson (JNJ ) for this next year? A: I like them both for next year. When the news hit about [negative medical findings linked to Cox-2 inhibitor drugs including] Merck's Vioxx, Merck's shares (MRK ) dropped from $46 to about $34. Merck lost 20% of its bottom-line earnings. Pfizer dropped from $36 to $28 because of its Cox-2 inhibitor drugs, Celebrex and Bextra. When Pfizer acknowledged that they may have to issue further warnings about their drugs, the stock dropped further to $24 a share. And yet Pfizer hasn't lost those earnings, hasn't lost those revenues, and the FDA has made noise about putting a warning label on these drugs but hasn't suggested they be pulled. They also warned Pfizer against the language used in the ads for Celebrex and Bextra for the past few years, but those are ads that had already been pulled. It struck me that the FDA was shutting the barn door a little bit late as it came under fire not being more aggressive about Vioxx. So the price is depressed on Pfizer, but the fundamentals are still in place. Everybody hates the stock -- it's probably a good time to buy it. It's not a stock for those who are faint of heart. JNJ is a much more stable choice, in my opinion. It sells at 19 times this year's estimates, growing at 14%. It's a pharma/medical-device hybrid company, and it has about a 2% dividend. Pfizer has a 3% dividend. Both names are in my portfolios. Q: Any other names in health care -- a sector you said you like? A: Yeah, I like some of the others.... Two related names I like right now that I'd be buying carefully are Patterson (PDCO ) and Waters (WAT ). I like both of these companies. Again, they're in the medical-equipment area. The other pharmaceutical that I like is Eli Lilly (LLY ). Their pipeline is recognized as being the strongest of the pharmaceuticals. Q: And any specific stocks in another sector you named as a current favorite, the financials? A: I like the financials. Citigroup (C ) I like a lot, and I thought their numbers were good. I continue to be concerned, though. I still like Bank of America (BAC ). Both have attractive dividends of 3.5% and 4%, respectively. I like St. Paul Travelers (STA ), with a good dividend and solid earnings. American International Group (AIG ) is a good name, with significant international exposure, particularly to Asia. Q: Some analysts are high on the industrials as the economy recovers -- do you share this view? A: On a stock-by-stock basis, yes. My problem with the industrials as a play for economic recovery is that most economic recoveries sooner or later lead to inflationary periods. Most industrials are commodity-sensitive and labor-intensive, so in the current environment, where rates are low and there's no immediate sign of inflation or inflation expectations on the horizon, they seem very attractive. I would caution that this can change quickly. In any case, I would strongly recommend studying these stocks on an individual basis. They've done very well over the past few years. Some names in this space are American Power Conversion (APCC ), General Electric (GE ), United Technologies (UTX ), Donaldson (DCI ), and Teleflex (TFX ). But I'd wait for pullbacks on all of these before buying into them. Q: Michael, how would you define your broad strategy and analytical approach? A: We are a GARP [growth at a reasonable price] manager. We look for stocks with value characteristics that also have a good history of earnings growth and a clear path to future earnings growth. We buy a rather narrow portfolio of around 30 stocks that would represent 22 different S&P industry groups, $50 billion in market cap. There will be a couple of small-cap stocks in our portfolios. The average p-e multiple for our 30 names will roughly equal that of the S&P. So while earnings are forecast to grow at 8% over the next five years for the S&P, our average shares are forecast to grow well into the double digits. Ours has always struck me as a very simple and fairly straightforward approach to investing. It's not sexy, it's not exciting, but the results have been exciting. Q: So what do you like -- and foresee -- among small- and mid-caps? A: Well, I've already mentioned a couple of my names. I think in general, small caps will not do as well as they have in recent years, and therefore the decision to own them needs to be made on a stock-by-stock basis. Now, I'm aware that almost every talking head is saying the same thing: Small caps have been very strong, large caps should rule 2005. That's precisely what they said last year, and they were wrong. One of the most perilous things that a strategist can do is call the end of a trend. Small- and mid-caps have long been in an upward trend. Trends never end on cue and always exceed expectations. It certainly feels like we're close to the end of the small-cap outperformance, but I wouldn't bet on it. What I do know is that the valuations on these shares are historically high, and the valuations on large caps are historically low, so I continue to favor those large-cap names with strong fundamental characteristics and strong management, because our investors will be safer over the next five years in those companies and enjoy good returns. I expect 2005 to be a good year for the markets. I still expect a positive return of almost 10%. Be patient, be disciplined, don't lose heart. Be not afraid, it's going to be O.K. And long-term investors will make money.
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