Markets & Finance

Hanging Tough with Value


By Richard Diennor When stocks fall, as they have since last year, value-oriented investors like Carl Marker can go on a shopping spree. Marker, who manages IMS Capital Value Fund (IMSCX), says he was finding bargains even before stocks plunged in the wake of the terrorist attacks on New York and Washington on September 11.

Marker's focus on undervalued stocks has paid off during the market's slump. IMS Capital Value was the top performer among mid-cap blend funds at the end of the second quarter. After the drop following the attacks, it is down only 1.2% so far this year. For the three years ended in August, the fund returned 21.0% annualized, versus 16.3% for its peers.

TRASH TREASURE? Right now, the top holding in IMS Capital Value is Waste Management (WMI), the garbage disposal and recycling company. One simple reason for that: Even in a recession, people are going to need their trash hauled away.

Beyond that, Marker says he likes the fact that analysts increased estimates for the company over the last few quarters while the firm proceeded to beat them. As the largest player in its field, Waste Management also has pricing power, according to Marker. He thinks its stock, which closed at $26.95 on Oct. 9, can reach $60 within two to three years.

Marker also sees Wrigley (WWY), which ranks behind Waste Management in the portfolio, as a company that should hold up well in a weak economy. The chewing gum it makes is something "people are going to end up buying, whether or not they have a job," he says. He added that Wrigley has "tremendous ability to raise prices" and an "excellent" brand name.

Marker also cited the ability to weather an economic downturn as one of the attributes of H&R Block (HRB), the fund's fifth-largest position at 3.5% of assets. "Every year, you and I need to get our taxes done by somebody, and every year the tax code gets more complicated," he says. The stock has risen more than 84% this year, making it the fund's best performer.

Block also looks good because it has been able to sell the other financial products and services it provides, including mortgage loans and discount brokerage services, to people who come in for tax preparation, Marker says.

The fund's top holdings also include Gentiva Health (GTIV), which provides pharmaceutical and home health care services. Marker thinks the company stands to benefit from the aging U.S. population. With its 36% gain this year, the stock has also been among the strongest performers in the portfolio, according to IMS Capital Management, the fund's investment adviser.

"MOMENTUM" PLAYS. Marker looks for stocks whose prices are low compared to the company's earnings, sales, book value and cash flow. Then, he focuses on those exhibiting what he calls "momentum" characteristics. That is, analysts are revising their estimates for the company upwards, and earnings are topping those expectations. He also scans for a catalyst, like a new product or management, that can boost returns.

The approximately $11 million fund generally buys companies with market caps of $1 billion to $15 billion. Marker limits the fund to about 40 holdings. "We want to make sure we don't dilute the impact of our best ideas," he says. Concentrating the portfolio also facilitates research on companies.

Over the last six months, Marker says he has been buying Rite Aid (RAD), the second largest drug store chain in the country. He sees the company recovering from accounting problems a few years ago. Marker says he also likes the company because it recently strengthened its finances by restructuring its debt, and because its earnings for the last two quarters have pleasantly surprised Wall Street.

Another recent investment, Marker says, is Storage Technology (STK), which makes products for storing data electronically. "We kind of think of them as a smaller version of EMC Corp. (EMC)," he says. While corporations have slashed spending on computer systems, Marker expects demand for data storage products to hold up.

BARGAIN HUNTING. Because of the slide in tech stocks that began last year, Marker has been finding a lot of values. He doesn't think technology is going to stay down over the long term.

Technology stocks make up 22% of the portfolio right now, Marker says. In addition to Storage Technology, the fund has stakes in LSI Logic (LSI), 3Com Corp. (COMS), and Atmel Corp. (ATML).

The fund also owns Symantec Corp. (SYMC), which makes products to safeguard information stored in computer networks, an area Marker thinks will benefit as an unfortunate consequence of the attacks on New York and Washington this month.

Although Marker concentrates on individual companies, he says the fund has investments in all 11 industrial sectors of the S&P 500.

SECTOR BETS. Currently, about 20% of the fund's assets are in health care stocks. Holdings include Oxford Health (OHP), a health maintenance organization; biotech drug makers Biogen Inc. (BGEN), and Chiron Corp. (CHIR); Boston Scientific (BSX), which makes medical devices; and Henry Schein (HSIC), a distributor of health care, dental and veterinary products.

The fund also has 17% of its assets in banks and financial services companies, including Raymond James Financial (RJF), a regional brokerage firm; marker maker Knight Trading Group (NITE), the largest market maker for Nasdaq; First Tennessee National (FTN), a bank holding company; and T. Rowe Price Group (TROW), the parent of the T. Rowe Price mutual funds.

Even before terrorists flew jets into the World Trade Center and the Pentagon, Marker says he had been finding values as the stock market weakened. Over the last month, Marker says he has kept about 10% of the fund's assets in cash, but he plans to make investments to reduce the cash position to 2%-3% by the end of October.

"We're actively out there looking for bargains, and we think there are a lot of them out there," Marker says. Diennor writes about mutual funds for Standard & Poor's FundAdvisor


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