Putting a Price on Value


By James A. Anderson By dint of their job description, value managers are scavenger hunters. And given the saggy markets of late, they have been plenty busy sorting through low-priced stocks.

For Eric McKissack, who runs the $610 million Ariel Appreciation Fund (CAAPX), this is a time to look at battered sectors and buy those companies that still exhibit solid fundamentals despite having been dragged down by the overall market. "We've seen opportunities come up where stocks that have good fundamentals are suddenly cheaper, so we've moved in," he says.

Take credit-card company MBNA (KRB). Reports confirming a slowdown in the economy and a plunge in consumer spending have sent its shares reeling, down 10.1% in the last month and 23.6% for the year. Dismal earnings numbers released by rival Providian Corp. (PVN) have helped make investors leery of the sector. But not McKissack. He points out that MBNA hasn't staked its business on subprime lending to the same degree as Providian, so it isn't beset by the same credit-crunch worries. He also expects MBNA to benefit from continued aggressive rate-cutting on the Fed's part. As a result, he's building his stake in the company.

THE STRATEGY. McKissack's approach has helped keep Ariel Appreciation, a mid-cap blend fund, above water most of the year. It boasts a 4.2% total return since Jan. 1, better than 95% of the funds in its Morningstar peer group, and is nearly 21 percentage points ahead of the S&P 500. Its 11.6% tally for the last 12 months places it in the top 3% of its category over the same time period and a good 34 notches above the S&P benchmark.

The fund's long-term results are equally impressive. It has averaged an 8.7% total return annually over the past three years to outdistance the break-even performance of the S&P 500 over that same time frame. Over the past five years, the fund's 16% average annual total return is 5.3 percentage points higher than the benchmark.

When picking stocks, McKissack relies primarily on two yardsticks. One is a comparison of a company's stock price to its cash flow, which is then stacked up against those of its peers. Also, he'll measure the value of a company compared to recent acquisitions in the same business. Sometimes, McKissack will also use price-earnings (p-e) multiples. "It's not always the best indicator of value, but we often use it as a sanity check to make sure what we're thinking pans out," he says. Whatever measure he uses, McKissack has one goal in mind: landing companies that are selling at a 40% discount on their true worth.

THE LONG HAUL. Once it has a stake in a company, look for Ariel Appreciation to stay put for at least four years. That steadfast approach keeps turnover at a low 31%, according to Morningstar data, while the average for the peer group is a whopping 95%.

Another trait that sets Ariel Appreciation apart from other mid-cap blend funds is what, at first glance, looks like a quirky portfolio. McKissack's tastes have led him into investments like Rouse (RSE), a REIT, as well as small newspaper publishers such as Lee Enterprises (LEE) and McClatchy (MNI). All three are investments that haven't attracted a lot of big-fund investors. "One of the striking characteristics of this fund is the fact that it buys a lot of companies its competitors don't own," says Morningstar analyst Peter DiTeresa. "That makes this fund a good portfolio diversifier."

McKissack tends to gravitate toward consumer-staple makers like Clorox (CLX) and Fortune Brands (FO). A 4% drop in the price of McCormick (MKC), a spice-and-seasonings company, has also made McKissack's mouth water. It's the very sort of defensive food-industry play that should hold up well in a downturn, he says, so he has pounced on the stock.

CATCH A FALLING STAR. Another favorite: financials like MBIA (MBI) and MBNA. Municipal-bond backer MBIA has been caught in the market's fears that claims resulting from September 11 will hurt the insurance business. "They're only peripherally affected by the aftermath, and they still remain the dominant player in a very good business," McKissack points out. So while MBIA has fallen 9.4% over the past month, McKissack has been there to buy up more shares.

Ariel hasn't shown much appreciation for tech shares. Morningstar tallies show McKissack's portfolio has a 3% stake in tech companies, vs. the 18% average of his fund's peer group. One tech position he likes now, however, is SunGard Data Systems (SDS), which makes financial software for trading desks and helps firms recover financial data. SunGard played a major role in getting companies that operated in the World Trade Center up and running after September 11. The stock, which closed at $25.73 on Nov. 6, has been beaten up due to the market's concerns about tech stocks, but McKissack thinks this one is different. "This isn't a highly risky technology pick that's dependent on the next great innovation to come along," he asserts. His target price: $35 a share.

Another company for which he has high expectations is Interpublic Group (IPG), an advertising-and-marketing outfit he recently added to his portfolio. Aggressive acquisitions over the last two years have helped Interpublic become one of the largest players in its industry. An economic slowdown has been hard on Interpublic and its peers, and McKissack believes the company's shares have been shunned because of its $2.1 billion acquisition of True North Communications, which has been a drag on earnings.

"BUSINESS AS USUAL." Interpublic working hard to cut costs and reverse its course, says McKissak. "A couple of their properties have been weak, but, over time, we expect the company to be a beneficiary of consolidation within the advertising industry," he says. McKissack is looking for the stock, which closed on Nov. 2 at $22.15, to climb to $40 a share.

McKissack expects the market to remain rocky for anywhere from perhaps as long as six months. That prospect doesn't faze him, however. "We're value investors, and we'll remain opportunistic," he says. "For us, that's business as usual." Anderson teaches journalism at the City University of New York. Follow his Mutual Fund Maven column, only on BW Online


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