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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
The president's campaign has a new rule—no cell phones allowed
In honor of remote control inventor Eugene Polley, we recognize other influential but neglected inventors who have felt the sting of stolen glory
Forget Adderall. Traders now pop chia seeds to stay focused and energized
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
|  | SEPTEMBER 2, 2004
 FUND Q&A Seeing Opportunities Others Overlook [Page 2 of 2] Q: Your top three sectors, which account for 50.5% of the fund's assets, can broadly be called "financials". A: Yes. Since I've worked here, financial stocks have typically held a prominent position in our fund. Chris Davis' grandfather, Shelby Cullom Davis, invested exclusively in financial stocks and did extremely well. Financial-services products never become obsolete, they're always in demand. Moreover, these stocks always seem to trade at a significant discount relative to the S&P 500 and other businesses with similar growth rates. This is also an industry in which the quality of management is crucial to a company's success. Q: How does this new climate of higher interest rates impact your affinity for financial stocks? A: It's difficult to generalize the impact of higher interest rates on financial companies. For example, higher rates are beneficial for one of our favorite holdings, Golden West Financial (GDW ), which provides adjustable-rate mortgages. They're superbly managed, and their earnings have compounded 20% annually over the past 35 years. When interest rates rise, their business soars. Their volume is up 35% this year, while the overall mortgage pie is declining. Modestly higher interest rates also benefit American Express if it means the economy is stronger. That means corporate spending is increasing, jobs are being created, more cardholders come into being, and credit losses should therefore decline. Q: What are your sell criteria? A: We sell when our investment premise has been proved wrong. For example, maybe a competitor entered the field and hurt our company's performance. We sell when an overly euphoric market bids up a stock's price too high. We also sell when we don't like the compensation plan for a company's senior management. They may receive too many option grants, for example, which we view as a "wealth transfer" away from the shareholders. Q: Can you cite a stock you have sold off for that latter reason? A: We sold RadioShack (RSH ) last year because their executives were getting option grants valued at 2.5% to 3% [of shares outstanding]. We told them we didn't like these payouts since the company was only growing by 10% annually. They also authorized the expenditure of $250 million to build a new headquarters in Texas, which we thought was a waste of money. We disposed of RadioShack because we determined the management only thought of themselves. Q: What kind of stocks does the fund typically avoid? A: Today, we don't have significant exposure to technology and telecom stocks because of the fickle nature of their industries and the stocks' high volatility. If you pick wrong, a tech company's business can decline by as much as 50% in just one year. Tech stocks tend to trade at too-high multiples and are susceptible to sudden earnings decline as well as obsolescence risks. We also avoid cyclical companies like autos, steel, chemicals, and metals, since they don't provide stable earnings. We find it hard to value them. Q: Given record high oil prices, would you expect to increase your exposure to energy stocks? A: We have had a significant stake in energy companies, even before the recent spike in oil prices. We like the supply and demand dynamics in the industry. We feel that as long as oil is priced above $30 per barrel, energy companies can exhibit strong earnings and are cheaply priced today. Some of our favorites in the sector include Devon Energy (DVN ), Occidental Petroleum (OXY ), and ConocoPhillips (COP ). These stocks are trading at p-e ratios at 10 or under, so there's a great margin of safety. From Standard & Poor's Fund Advisor
 All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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