The More Pain, "the Better the Bargains"


Many a money manager is still squeamish about investing in Internet and tech stocks. Not James Norris, partner at Philadelphia-based Cooke & Bieler, and co-manager of the C&B Mid Cap Value Fund. Norris is no growth investor, nor has he been particularly enamored in the past with tech stocks -- the second-worst performing sector after telecommunications since the speculative bubble burst and the stock market began to tank in March, 2000.

Rather, Norris is a classic buy-and-hold stock picker, schooled in the old-fashioned vein of selecting companies with solid prospects that sell at below-market multiples. His strategy has paid off in spades: The C&B Mid Cap Value Fund (CBMDX) has an annualized three-year return of 15%. The Lipper Mid Cap Value Fund index is flat for the same period, while the Standard & Poor's 500-Stock index has lost 13.5%. Lipper gives Norris' fund its highest ranking as a "Lipper Leader," which is a rank against peers for total return, consistent return, and preservation of capital. Cooke & Bieler manages about $2 billion in assets, including three mutual funds.

Leaning on tech for future returns is a bold statement for Norris. He hones his investment picks down to a select roster of 30 to 50 stocks. Individual holdings typically range from 3% to 5% of assets. Right now, Norris is double his benchmark's stake in tech stocks at about 15% of assets.

Still, it's not as though he expects his tech bets to pay off overnight. "No matter how cheap it is now, it can always get cheaper," says Norris. "But we are quite confident in the economy of the U.S. Yes, there are problems now, but if you look out 12 months to 18 months, you've got to be optimistic."

BusinessWeek Markets & Investment Editor Mara Der Hovanesian caught up with Norris to find out not only why he's so upbeat about tech but also to get his stock market outlook. Edited excerpts of their conversation follow:

Q: How do you view the market's prospects for 2003?

A: We started off the year with a bang, but it didn't last long. There's too much to worry about. It's frustrating on the one hand, but then a little bit exciting, too, because we're finding really good ideas.

We're long-term-oriented, and Wall Street tends to be short-term-oriented. That's leading to opportunities. And the longer this pain goes on, the better the bargains are. You have to keep in mind where we started from: the indexes were at such extended high levels back in 1999 that the market had a long way to fall. But, that said, you still have to be very selective.

Q: What's your biggest investment worry these days?

A: That this recession lasts longer than we think it will. It's a 6- to 9-month concern for us. But there are some doomsayers out there who would say this is like Japan's speculative bubble bursting. We don't believe that a bit. There are some structural differences between Japan and the U.S.: A recession is a natural cleansing process for us, a flushing out of the economic system of the excesses built in the previous recovery.

Japan doesn't let that happen. We have no problem letting our companies fail in the U.S., and there were a lot of companies that shouldn't have existed -- and they don't any more. And that's why we're still optimistic. Yes, the recession has lasted longer than most, but the excesses were worse than in most boom markets, and we think we're coming to the end of that whole process.

Q: How healthy are U.S. companies right now?

A: We base a lot of our opinion on the bottom-up picture, by looking at company after company after company and whether they've gotten themselves together in terms of restructuring. Corporate America is a lot leaner and meaner than it was a few years ago. Any business can be profitable if you right-size the expenses to be in line with the current level of revenues, and that's what has happened.

Of course, a lot of companies are toiling under the load of excess leverage and debt -- those are the companies that might not make it. But those who have right-sized their businesses for a more reasonable level of economic activity have cut back on capital spending, and now there's a limit to how far they can cut back. Any further and you're really hurting the long-term strategy of your company. We feel that we're at that point.

If capital-spending declines are over, then almost by definition you've reached the bottom of the cycle. It's not that we're necessarily saying that cycle is turning up, but we are seeing that the cycle has stabilized. They're not cutting as much as they used to. Things are tough, but they've stopped getting worse.

Q: Why is the tech sector is your favorite at the moment?

A: We've found quite a number of little niche, high-quality companies, and they seem to have been hurt the worst. I would point out that there are a lot of tech wrecks out there and a number of lingering dot-com companies, so it's very important to focus on quality and companies that have solid balance sheets and competitive advantages.

That has led us to companies like Mykrolis Corp. (MYK), a $7 stock with $2 a share in cash and no debt. They make filters for semiconductors used in the manufacturing process, and here's the beauty of it: Most suppliers are extremely cyclical, but these guys don't sell equipment as much as they sell replaceable filters. Its part of the production cycle that will turn up long before capital spending does. My target is about $16.

Another favorite is Dionics (DION), which is in the test-equipment business, a leader in ion chromatography. There are a gazillion applications, like water sampling. We bought it at $24 back in March and believe the fair value is $40.

Q: Small and mid-cap tech stocks are considered growth plays. Are you really a growth investor in disguise?

A: We're in for a cycle where the differences between value and growth investing are going to be much more muted. The huge swings from growth to value that we've seen recently are anomalies.

What has mattered more is not whether you were growth or value, but whether you picked good stocks. And since investors aren't going to forget the Enron experience any time soon, it's going to pay to buy good companies. And I happen to think there are lot more ideas in mid-cap land than in the large-caps, and you still happen to be dealing with well-established companies.


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