The Secret of "Back Pocket" Investing


By Amy Tsao Market booms and busts matter not much to Marilyn Holt-Smith, who co-founded institutional money manager Holt-Smith & Yates Advisors 17 years ago. Through the tech bubble of the late 1990s and the doldrums of late, her strategy of long-term investing in high-growth companies has proven wise. As of the end of 2003, the Madison (Wis.) firm reported an annualized compound return of 14.5% over the last 10 years, while the benchmark Standard & Poor's 500-stock index returned 11.1%.

Holt-Smith's strategy is unadulterated buy-and-hold: Hang on to quality names as long as growth prospects are strong. She admits that the tactic comes with anxiety. "We don't tend to jig the same way that the market is going," she says. In some years her portfolio kept pace with the broader market, and in others it was way behind. Eventually, she says, "We'll zoom way ahead, because the fundamentals of our companies have been compounding all the way along, and all of a sudden the market will push our companies' stocks way up."

The firm's concentrated portfolio now includes stocks ranging from blue-chips Pfizer (PFE) and Home Depot (HD) to tech names such as business and tax-return software maker Intuit (INTU) and chip outfit Microchip Technologies (MCHP). And since turnover in the portfolio is rare -- Holt-Smith might make a couple of adjustments a year -- she has learned a thing or two about knowing when to let go of a stock.

On Mar. 12, Holt-Smith spoke with BusinessWeek Online reporter Amy Tsao in New York City. Edited excerpts of their conversation follow:

Q: Have you made any changes to the portfolio this year?

A: Yes. We just recently added Teva Pharmaceuticals (TEVA) to the portfolio. We're looking at 24% long-term growth rate in earnings. It's the largest generic-drug company and is based in Israel, which is probably why it sells a little cheaper for its growth rate than a lot of companies. But 90% of sales are in the U.S. and Europe.

[It's benefiting from] increased generic use and a proprietary drug that's coming online for Parkinson's disease. They have over 150 products in the market now. They have 280 products in their pipeline, of which about 112 are just waiting for Food & Drug Administration approval.

Q: What are some other recent changes to the portfolio?

A: Kohl's (KSS) is a relatively recent buy. We bought that last year, and we have yet to make money on it, although it's doing much better this year. Kohl's comparable-store sales gains dropped to 1% to 2% recently. Their merchandising person kept buying, though, as if they were at 5% to 6%. He's no longer with the company.

The long-term story is they've just started to go into California, and they're expanding on a national basis. Even if their same-store sales are even, their revenues will grow 20%. But you're talking about a company that should be growing 24% per year.

Q: So when would you exit a stock like Kohl's?

A: On Kohl's, square footage is expected to grow 20%, but comparable sales are still trying to come back. Ideally, we would want to see both.

One example of a retailer we sold is Barnes & Noble (BKS). When we owned it, it had bought a video-game chain that to us did not seem to be a long-term move. While the stock was running up because of what was happening on the video-game side, the bookstore business side was slowing. So we sold it.

Q: How do you know when it's time to sell?

A: That's an excellent question. Because we have a long-term focus, we buy companies with a good growth structure to them. So we won't sell just because the stock price has moved up. If you think that growth is going to continue and you've got that growth compounding for you, we don't think there's a reason to sell. For us to sell, something has to have changed in the fundamentals -- or [else] we've found a company that looks even better.

Q: What's an example of fundamental change triggering a sell?

A: We sold Wellpoint (WLP) recently. It's in the process of being taken over by Anthem (ATH). It was doing fabulous, fundamentally, and we had no problem with that, but the combination probably isn't going to grow quite as fast.

Q: Are there cases where you've seen temporary slowdowns?

A: We have owned Dell (DELL) since 1991. It turned out to be one of the best-performing tech stocks of the 1990s. It's a good example of making sure you're not exiting a stock because of short-term fundamentals.

In the mid-90s, the company had problems with its laptops. It turned out to be a short-term issue. From our view, the rest of the business was going great guns. It took a year for the stock and earnings to recover, but at the time, we kept buying more shares.

Q: Your firm owns Disney (DIS). What are you planning to do with that stock?

A: We went to the recent shareholder meeting. We normally don't go to these things, but we decided we needed to in this case. We did...withhold support for [CEO and former Chairman] Michael Eisner. Our first concern was that Roy Disney and Eisner were not trying to work out their issues. They had descended into name-calling instead of looking at how to resolve the problem and act in the best interests of the shareholders.

And recently, with the Comcast (CMCSA) bid, Disney would no longer be the kind of company we want to own long-term. We have been thinking about an exit strategy. We're holding on to Disney for now. Whether it's another buyout bid or the exit of Eisner, the pot is being stirred up.

Q: Are there any kinds of companies that you specifically stay away from?

A: In general, energy and industrials are tough for us. Utilities...don't work into our situation.

We see a lot of people who chase after stock ideas from a cyclical basis. So, they're doing well now, but we're not really interested in that. We look at it more from a core-growth-type situation, that these are companies you should be able to put in your back pocket and let them just compound back there indefinitely. Tsao covers financial markets for BusinessWeek Online in New York


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