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When mutual-fund managers talk, most investors don't want to hear about low expense ratios, the delights of diversification, or fearless economic forecasts. They're listening for names of stocks that the managers think will go up.
With that timeless truth in mind, I kept my ears open at Morningstar's annual investment conference in Chicago recently for who likes what and why. Here's what I heard:
My ear wasn't the only one turned to William Miller, whose Legg Mason Value Trust (LMVTX)has beaten the market nine years straight. The No. 1 question in the air: Has Miller given up hope on Amazon.com (AMZN), the profitless Internet play that he has championed, yet seems so odd in his value-stock portfolio?
INANE ANALYSES?
Not on your life. Miller said he added to his Amazon position as it recently dipped below $33 a share, bringing his average cost in the retailer to the low $40s. "We believe that Amazon today is worth something in the $70s or low $80s," he said. "We happen to believe
that some analyses of Amazon in the last week were seriously inane."
Miller was referring to a controversial Lehman Brothers report that questioned Amazon's ability to stay afloat. Miller instead figures that Amazon's operations already are generating more cash than they're using and will continue to do so "forever." He sees Amazon's current situation as analogous to the once-dark days at America Online (AOL), which, at more than 9% of assets, was his largest position at last report and has proved a big winner for Miller's fund holders.
By contrast, Amazon made up less than 1.7% of the fund's assets as of Apr. 30, the 27th-largest position in a 42-name portfolio. He's far more bullish on decidedly low-tech Waste Management (WMI), the nation's largest trash hauler, which made up more than 3.5% of assets. He's also betting on Kroger (KR), Eastman Kodak (EK), Gateway (GTW), and Washington
Mutual (WM). All are trading below the current value of his estimate of their future cash flows.
PLAY MONEY.
Another fan of Washington Mutual, which operates the largest savings-and-loan operation in the U.S., is Bill Nygren, manager of Oakmark (OAKMX) and the less-diversified Oakmark Select (OAKLX) funds. "That company is dramatically undervalued," he said, noting that at $30 a share, it's trading at 7.5 times his estimate of earnings this year. He notes, too, that management has a hefty stake in the stock, and that its thrifts operate at very low cost.
Nygren also thinks new management, in the person of former Citigroup executive Jamie Dimon, will turn around troubled financial-services company Bank One (ONE). Ditto Mattel's (MAT) new CEO, Robert Eckert. He also sees toy retailer Toys 'R' Us (TOY) as a low-risk stock with high potential that's being exploited by new CEO John Eyler, a veteran of FAO Schwarz. Nygren observes that the stock, now trading near $15, represents more than $5 a share in real estate, plus further value in its Toys 'R' Us Japan and Babies 'R' Us units. "I expect by this Christmas, they will be the dominant toy retailer online," he added.
Financial stocks also have caught the eyes of two small-cap investors, Third Avenue Value's (TAVFX) Marty Whitman and Ariel's (ARGFX) John Rogers. Insurance broker Arthur J. Gallagher (AJG), municipal-bond insurer MBIA (MBI), specialty property and casualty underwriter HCC Insurance Holdings (HCC), and Horace Mann Educators (HMN), which insures
teachers, all made Rogers' list.
"LICENSE TO STEAL."
Whitman likes to crack up a crowd with straight talk, and he did it again in Chicago. The veteran money manager advised investors to pounce on shares of money-management companies whenever they get beaten down because, he said, "managing money is a license to steal." He likes John Nuveen (JNC), Liberty Financial (L), Atalanta Sosnoff Capital (ATL), and Enhance Financial Services Group (EFS).
Although Morningstar has long tilted toward value investing, growth-fund managers got their say at the conference as well. John Sykora, who co-manages the $43 billion American Century Ultra Fund (TWCUX), made a case for America Online. With 23 million subscribers, he sees profits from online advertising about to surge. Sykora expects AOL, which is merging with Time Warner (TWX), to generate some $5 billion in free cash flow next year.
Similarly, Sykora sees Qualcomm (QCOM), which has been hammered in the market so far this year, churning out "a ton of free cash flow" in 2000 and for several more years to come. "We think a lot of bad news is in the stock, and we stand to make some very good money" on Qualcomm, as its capital spending moderates. Sykora said Qualcomm expects capital expenditures in the range of $100 million to $150 million for several years.
KEEPING MUM.
RS Internet Age Fund (RIAFX) co-manager Cathy Baker has seen the chart of her fund's price trace the outline of a witch's hat this year -- up a lot at first, then down a lot. For the year, it's now off 1.4%. She advised caution on the shattered shares of consumer-focused Internet plays, many of which have had to pay too much to acquire customers and so have lousy business prospects. An exception, in Baker's view, is About.com (BOUT), which has organized a network of Web sites. She sees it turning a profit within 12 months.
Conspicuous by their absence was any fund manager from Fidelity Investments, which, with $929 billion under management, is by far the industry Goliath. Morningstar's conference organizers, analysts Sarah Bush and Emily Hall, told me the Fidelity managers they had invited some months ago were unwilling to commit themselves to attend. In any case,
Fidelity bars its managers from discussing individual stocks, a fact that would have made listening to them entirely beside the point for many investors at the conference.
Robert Barker covers personal finance for Business Week EDITED BY BETH BELTON
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
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