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The stock market may not have totally bottomed out yet, but there are some strong performers in an otherwise weak scene. So says John Derrick of the U.S. Global Investors All American Equity Fund. He mentions, among other points of strength, Wendy's and Bed Bath & Beyond, the latter of which, he notes, has just exceeded its earnings estimates.
While Derrick follows the growth strategy as a fund manager, he's also aware that it's hard to find growth these days. Two names he does cite are Apollo Group, which is in adult education, and AutoZone. The top holdings in his fund are Johnson & Johnson, Wal-Mart, Microsoft, Pfizer, and Fannie Mae. Microsoft and Intel he considers core technology holdings.
The fund's position in General Electric, Derrick reports, is being reduced because of doubts about the strength of the recovery and "too much exposure to weak areas of the economy." The fund has also been selling Baxter International, Cisco Systems, and Household International -- the last because of concerns on consumer credit.
These were among the comments Derrick made in an investing chat presented Oct. 10 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and David Shook. Edited excerpts follow. A full transcript is available on AOL at keyword: BW Talk.
Q: John, it was a good day on the market -- do you think we dare hope that the market has found a bottom and has turned a corner?
A: I think it's possible. I think one of the things that you look at that would be a positive is that the corporate-profit picture is improving. S&P earnings should be up about 15% in the fourth quarter, and we see corporate profitability actually turning around, and it gives us some hope for the future that companies can actually stop being on the defensive and invest in the future again, since they'll have some level of profitability.
Q: Are CEOs spending yet? Do you have any evidence that budgets will increase for next year very much?
A: We actually haven't seen evidence that that's taking place yet, but we're in that critical time of year where companies are making decisions.... Once people start seeing double-digit profitability...we're thinking that people will start spending again. We're hoping that'll be the catalyst we need.
Q: What are your largest holdings right now?
A: Johnson & Johnson (JNJ
), Wal-Mart (WMT
), Microsoft (MSFT
), Pfizer (PFE
), Fannie Mae (FNM
) -- those are the top five.
Q: Since you're a growth manager, where do you look for growth stocks now? Any specific names?
A: Actually, it's difficult to find growth stocks right now, but a couple of names that we've liked recently have been Apollo Group (APOL
), which is in the adult education area. AutoZone (AZO
) is another we've liked recently.
Q: Do you follow or have any small caps in your fund to balance the dips of the large caps?
A: We will participate in some small-cap names, but it's pretty selective. One of the bigger small-cap names we own is Federated Investors (FII
). They have the big money-market presence, very stable, great business model and selling culture. That's probably the largest position we have in what you might consider a small-cap name.
Q: There are some low p-e's among large banks with low credit risk. Do you own any?
A: We own Bank of America (BAC
). We still like that name. They don't have as much exposure to syndicated lending as Citigroup (C
), etc. but we like them. We own a position in Wells Fargo (WFC
) as well, which puts us in a good position to leverage the mortgage, too.
Q: John, how about some stocks you've sold recently? Can you name a few big names?
A: We've been selling GE (GE
). We still own it, but we've been reducing our position. Too many doubts about the economic recovery. Too much exposure to weak areas of the economy. We also sold Baxter International (BAX
). They recently came out and lowered their earnings and revenue guidance. We've been selling Cisco (CSCO
), because we don't see much near-term upside. Household International (HI
) we sold. There are some concerns about consumer credit in this economy. Those are just some names we've been selling recently.
Q: Intel (INTC
) -- is it cheap, and do you like it?
A: We own Intel, and we feel like it's a core tech holding for our portfolio. When the tech rebound occurs, they will definitely be beneficiaries. Earnings growth is projected at 40% for next year. It trades at about 18 times earnings. It's probably a good way to play a technology rebound.
Q: Can you please tell me how your fund has fared vs. your tracking index?
A: Year to date, we're just ahead of the index [the Standard & Poor's 500-stock index]. We're down 28.5%, the index is down just over 29%. That's just through today.
Q: How about your opinion on Pfizer (PFE
) and Johnson & Johnson (JNJ
)?
A: We like both of those stocks. They're both in our top five holdings. JNJ is our No. 1. Pfizer is a solid story. They trade at 16 times next year's earnings and are expected to grow at 16% in '03. Not a lot of generic risk. We think it's cheap.
Q: What are your thoughts about Microsoft (MSFT
)?
A: Another core technology holding. They're expanding in a variety of areas, trying to enter new markets. It's not the growth stock it once was, but a huge cash position and the ability to make an acquisition and make strategic investments make it appealing.
Q: Is it a good time to buy defense stocks? And if so, what stocks?
A: We own several defense stocks. We believe we're in a multiyear cycle for defense spending. We own Lockheed-Martin (MT
), Northrop (NOC
), and Alliant Techsystems (ATK
). Alliant would be a beneficiary of a war in Iraq. They're primarily munitions. It has actually had a little bit of a pullback recently. So we like those names.
Q: How significant is the Iraq war uncertainty to the performance of the overall market?
A: It's tough to quantify, but definitely there's an overhang. The longer it's drawn out, the worse it will be. Overall, it's a negative, but it's not something that you wouldn't be able to overcome through earnings growth and just a moderate economic rebound.
Q: Back into financials, your thoughts on JPM
(J.P. Morgan Chase) and LEH
(Lehman Bros.)?
A: We've owned J.P. Morgan in the past. We sold a couple of months ago. They're under a lot of pressure, and I would be very cautious with them. We actually own Lehman -- they're our exposure to capital markets. It has a lot of exposure to the fixed-income aspect, and as far as the large brokerage firms go, we like Lehman as well as any other out there.
Q: Do you think it's possible to time the market successfully? What are your investing techniques?
A: You can effectively time the market for certain names. It's very difficult to make an absolute market call, but within stocks or moving from one stock to another, I think you can time the market from that sense. But being able to time the market from a cash-to-stock-back-to-cash trade is pretty difficult. We look primarily for solid earnings growth, combined with revenue growth to go along with that. We use quantitative models to try to help timing entry points, exit points, but primarily just have a growth focus -- companies with good market position in growing industries, etc.
Q: How do you feel about the retailers, such as Target (TGT
), Wal-Mart (WMT
), Kohl's (KSS
), Lowe's (LOW
), and HD
(Home Depot)?
A: We own a variety of retailers. Obviously, this week we've had some negative news come out on the retailers. Kohl's today, for example. Wal-Mart lowered their guidance as well. We like companies that have a strong story. Bed Bath & Beyond (BBBY
) is one we like. Wal-Mart is another, just because it's so dominant. We recently sold TJX
(TJX Cos.) because it had problems. Home Depot and Lowe's -- we still like that area, and Lowe's has done better recently, so that might be a name to look at.
Q: What's your opinion on Philip Morris MO
, John? Do the lawsuits make you nervous about that name?
A: Actually, we own them. The lawsuits don't bother us as much as the promotional spending they're being forced to do to maintain market share. We believe this $28 billion judgment will be reduced. We don't believe there's any catastrophic litigation risk with them. The stock does have a 7% dividend yield, which right now looks fairly attractive.
Q: How is your equity fund weighted as to sectors, and also cash?
A: Cash, we're about 9%, which is a little bit high, but we've been defensive. As far as sectors go, the largest weighting is in financials, at 17%. Consumer discretionary is at about 16%, as is health care. Technology and industrials are in the 11% to 12% range.
Q: Any opinion on hospital stocks? How about Tenet Healthcare (THC
) or HCA (HCA
), the two biggest for-profit hospital chains?
A: We actually like both of those, and we own both those names. That's one of the areas that's still exhibiting pricing power, and that's one of the few areas where we're actually seeing growth and positive upside surprises.
Q: Do you like any energy stocks? What about ExxonMobil (XOM
)?
A: In the energy area, we don't own Exxon. We would rather typically play an E&P [exploration and production] company, driller, or service stock. But we own Enerplus Resources (ERF
), which is a Canadian oil and natural-gas income fund -- yields a 13% dividend. The oil stocks in general haven't been performing in line with most commodities, and that's made us a little nervous, so we don't have much exposure there.
Q: John, how about some closing thoughts on a stock or two you bought recently? Names you haven't mentioned yet.
A: Wendy's (WEN
) would be one. Actually, Wendy's sold off today on the downgrading of a competitor. They have a strong advertising campaign that's driving sales, and they're having strong sales growth. That's a name that we like. Another one is Omnicom (OMC
). It looks like they're positioned to take advantage of the rebounding cycle, especially if the economy improves going forward. They're winning new business and have strong earnings growth.
Q: Here's a problem many of us would like to have -- what would you do with $100,000 tomorrow?
A: Tough question. We're not sure that the market has totally bottomed yet, so it's a tough question if you were just going out to buy one stock. But some I just mentioned, Wendy's and Bed Bath & Beyond, are solid companies. The latter has no debt [and] just beat their numbers. Those are two that come to mind as strong performers in an otherwise weak market.
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