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In real estate it's location, location, location. For Pat O'Neil, president of Loring Investments and manager of the Loring Hedge Fund, it's earnings, earnings, earnings.
O'Neil doesn't bother about a company's story -- he just looks at the earnings record and buys on that basis, although he also pays close attention to what the big mutual funds are buying.
In any case, it's a bear market now, he says, because the stock market is a technology market. But he does see prices creeping up and expects the Nasdaq to show a significant gain by yearend. In the meantime, his fund is 90% in cash, and instead of the 10 to 15 stocks it usually owns, holds only Network Appliance.
These were among many observations O'Neil made in a Sept. 14 chat presented by Business Week Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and Amey Stone. Following are edited excerpts from the chat. A complete transcript is available from BW Online on AOL, keyword: BW Talk.
Q: Pat, it seems to be sort of a seesaw stock market: not going anywhere very fast. What's your macro view of the market outlook?
A: We've been in a bear market for a little over five months now, and election-year Septembers are always lousy. But I expect a move later this year. Watch for one big day where the Nasdaq trades 2 billion shares and goes up 125 points. That is when you buy stock in profitable companies.
Q: I have to ask about your characterization of this market as a bear market -- few Wall Streeters have been that outspoken. Can you elaborate a bit? A: The Dow is right where it was one year ago, and the Nasdaq is up 25%. Last March, technology stocks broke badly, and they have been going sideways for the last five months. This is what I call a bear market, because technology is our new stock market.
Q: I own WorldCom [WCOM] at 38.5, Microsoft [MSFT] at 78, and Novell [NOVL] at 19 1/4. Do you believe I should hold or sell these? A: All large-cap tech stocks are biding time, waiting for the general market to recover. Judge each stock by its quarter-to-quarter earnings, and only hold stocks that show quarter-to-quarter profits.
Q: What is a prudent cash position for a senior's portfolio now? A: I would recommend that any prudent investor -- senior or not -- be 40% in cash now, and go back into the market with another 10% to 20% when the Nasdaq moves.
Q: Is this the strategy you're following with your hedge fund?
A: Yes, it is. My hedge fund is now 90% cash, but we go in and out of the market to aggressively protect our principal.
Q: If your fund is now 90% in cash, what are the stocks you're hanging on to for the other 10%?
A: The only stock I own right now is Network Appliance [NTAP]. I typically own 10 to 15 stocks when fully invested.
Q: What is it about Network Appliance to make it deserve being the only stock you own now?
A: Network Appliance is increasing sales and profits 80% a year. They're in some very technical data-storage business, which I'm not going to attempt to explain. The gains in sales and profits are what attract the big buyers into the stock. The big buyers are mutual funds, and they buy 10,000 or 20,000 shares at a time.
It is misleading to try to judge a company's story, because none of us are experts at things like DRAM memory chips. In this case, I am following the expertise of the mutual-fund people, who have bought Network Appliance and voted with cash. When Fidelity puts $20 million into a stock on Friday, it gets my attention on Monday.
Q: Pat, you set up the stockbook Web site (www.stockbook.com). Why did you set it up, and do you have a lot of users?
A: We have 10,000 people a week coming into the site, and the goal of the site was to provide free software for investors to use to measure the health of their stocks and mutual funds. The real goal of the Web site is to communicate with my hedge-fund investors.
Q: Do you see global stocks and ADRs strengthening from current levels? Is it possible to see 15% to 20% [increases] this year?
A: Global investing is going to be very big, but not soon. And the world markets are not ready to support worldwide bull markets at once. Currency exchanges and political uncertainties make this very unstable. If you're looking for straight returns, the best bet is simply the U.S. stock market.
Q: Do you use options for hedging, and do you take short-term taxes into consideration when trading in and out? A: Taxes are not considered at all. The goal is to focus on a stock doing well and having a plan to make profits. I don't use options, which is like buying insurance. Instead, I focus on finding the best stocks and being prepared to sell them at a moment's notice.
Q: Would you invest in energy stocks at this time? A: Yes, I like energy stocks, primarily because they're less likely to go down than technology highfliers. However, don't expect a big move from an energy stock. You can look at El Paso Electric [EE] and look closely at their earnings quarter-to-quarter.
Q: Do you think Internet stocks will rebound in the next three to six months?
A: I think Internet stocks will begin to come back next year, but look for the profitable ones and not the ones with the great story.
Q: There's a lot of buzz about DSL -- what do you think about it ?
A: Hardline or wireless, the Internet connections are going to have spectacular stock results. I don't try to judge the company's story -- I just follow earnings. If you never look at companies that have no profits, you'll never buy a stock with no substance.
Q: Do you invest in any IPOs? If so, which have you?
A: I don't like IPOs until they've been trading for six months, because of the volatility.
Q: Earlier you said you expect the Nasdaq to rise 15% -- why are you still 90% in cash?
A: I go in the market when the market starts to move, and I can't afford the risk of waiting for something that is likely to happen. There is no sure thing in the stock market -- only better odds.... I don't care if I buy a stock at 50 or 60, as long as it goes up from there.
Q: So you think your strategy is practical for the average investor? Or should they invest with you?
A: Well, first of all, hedge-fund investors must be accredited investors meeting the millionaire test. Hedge funds are not allowed to solicit business like mutual funds are. Our strategy does not allow for one bad year. The risk taken by accredited investors is O.K. because they can afford to take the loss.
Q: Do you ever do short-selling? A: I don't short any stocks. I use the time during bear markets to do research. It's a welcome change from the bull-market times, when we're busy day and night.... I think shorting is dangerous, because we don't know whether to root for success or failure. I keep it simple and only buy stocks to go up.
Q: What's the future of financial stocks? And do you think the merger agreement between Chase and J.P. Morgan is positive? A: Whether it's CMB or anyone else, I stay away from merger candidates until the dust settles.... I like financial stocks for the next year. Money is the one thing that will never go out of fashion.
Q: What are your favorite sectors for 2001?
A: The broad answer is technology, and my broken-record answer is: Who's making money on the technology side, and who can grow their profits in their sector? Many technology stocks are on the cheap-stock list. Stay away from stocks under $10, because 90% of them will never see $11.
Q: What's going on with AOL? The elephant at every investment chat :-)
A: AOL is a sound brand that will do fine. It is still increasing profits over 100% quarter-to-quarter. . . It is stuck in the technology bear market like everyone else. Remember that stocks don't move unless the market moves...
Q: What do you expect to trigger a significant market move? There are conflicting trends -- flat interest rates bode well, but an economic slowdown may bode ill. A: We don't care what the catalyst is. We just care that the market goes up. This bear market hit bottom about two months ago and has been creeping forward ever since. Sometime between now and the end of the year, there is going to be a push to the upside, wherever it comes from. I have one last cautionary note for investors: Remember that you cannot have short-term reactions to long-term investments. Patience is critical.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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