Long-Term Investors See Opportunity

BusinessWeek's Gene Marcial talks to long-term players about the market pullback—and finds out what they've been buying

by Gene Marcial

First of all, don't panic. The sky isn't about to collapse. For some perspective, let's get something straight: Markets go up and markets go down. This past week was bad, with the Dow Jones industrial average, the Standard & Poor's 500-stock index, and the Nasdaq index each tumbling more than 3%. But remember the week before, when the Dow for the first time crossed 14,000? The market then looked just dandy. This is what markets do, subprime mortgage woes or no. For the year, all the major market indexes are still up, so it isn't time to run for the hills.

Of course, lots of investors—both individual and institutional—are worried, especially those that do a lot of short-term trading. But dedicated long-term investors aren't alarmed at all. Their reaction: They bought more shares—mostly stocks they already have in their portfolios—during the pullback July 26 and 27. Some long-term investors have accelerated their buying of foreign stocks as well, in particular Asian stocks.

"We aren't unduly concerned about what's happening because we are long-term investors, and we invest in individual stocks with strong fundamentals, not the markets," Rodney Hathaway, vice-president and portfolio manager at Heartland Advisors, which manages $3.4 billion, said July 27. What's rocking the market is the distress in financial companies that have accumulated high levels of debt, he notes. But "our investment outlook is based on what's happening globally, and there we see strong growth and robust economies," he says. "We are optimistic overall, and so we bought stocks today and yesterday, mostly of stocks we know well."

Little Earnings Anxiety

The fund Hathaway directly manages at Heartland had 8% of its assets in cash. "We put a lot of it to work yesterday and today in stocks," he said. He expects to continue buying more stocks if the market continues to sink. Selling is not on his agenda now.

One of the stocks he purchased July 27 was LSI Industries (LYTS), a maker of lighting fixtures, whose stock has tumbled from more than $18 a share to $16.41. He thinks the stock is easily worth at least $21 this year. It pays a dividend yield of 3%. Another stock he bought July 27 was Olin (OLN), which produces chlorine and caustic soda, copper and copper alloy sheets, and stainless steel strip. It closed July 27 at $20.42, down from $22 a week ago. Olin also pays a nearly 4% dividend yield. Another stock he bought July 27 was Diamond Foods (DMND), a maker of branded food and snacks, which closed at $16.42. He had bought shares in June when they were at $18. Sales of its Emerald snack nuts have been solid, he says, and there was no fundamental reason for the stock to fall.

Part of what fueled the market's meltdown was concern that corporate earnings may not come in as strongly as many expect. That worry was sparked by the disappointing earnings that Caterpillar (CAT) reported for its recent quarter. "People were so sure that corporate profits would produce terrific news, but the Caterpillar numbers signaled otherwise," says Donald Gimbel, senior managing director at Carret Investment Counselors, which manages nearly $2 billion. But "we think the U.S. economy is in a sweet spot right now and the global outlook looks robust." The stock market's previous advance, says Gimbel, was based mostly on anticipated rosy corporate earnings, and partly driven by liquidity in the global markets that in turn fueled the mergers-and-acquisitions boom spearheaded by private equity groups. Earnings could still come up strongly but the Caterpillar disappointment was enough to fire up the bears, he argues.