"Wait for the Right Price," Part 2


The Tortoise and the Hare -- is it possible for them both to be winners? In the case of Morningstar's twin demo portfolios, managed by Mark Sellers, the answer is yes. As of June 17, their third anniversary, the Hare portfolio, which focuses on large growth stocks, returned an annual average of 2%, vs. a loss of 2.1% for the S&P 500. The value-oriented Tortoise had an average return of 12%.

Sellers recently spoke with BusinessWeek's Robert Barker about his portfolios and his strategy. In Part 1 of the interview, he spoke about his successes (see BW Online, 6/23/04, "Wait for the Right Price"). Here in Part 2, he talks about choices that didn't work out so well and jumping the gun -- also, at what price he would buy eBay. Edited excerpts of the conversation follow:

Q: What didn't work for you last year?

A: CarMax (KMX).

Q: The used-car dealer?

A: The bane of my existence over the past six months. The management team has done a competent job. They've grown the company quite well, and now it's the largest used-car dealer in the U.S. It still has only 1% market share, though, so there's a ton of room to grow. They've got a unique business model, where they're trying to solve what's called the Lemon Problem.

Q: Which is?

A: The old economic theory where if you buy a used car you're not willing to pay full price because you're not sure if you can trust that it's not a lemon. So CarMax is trying to infuse trust into the car-buying process by engineering this friendly brand-name image. And they're the first dealership really to succeed at that, and I think that long term it's a viable strategy. The used-car market itself is not going away -- it's pretty healthy.

Q: So what's the problem?

A: I paid too much for the shares.

Q: What did you pay? It's about $21 now.

A: We bought it at $33 and then again at $27 and I bought it again at $21. It's now the largest holding in the Hare portfolio, at 10% of the portfolio. I wish I had waited.

Q: Why do you think you got anxious?

A: I bought a car there on a Friday, and Monday I bought the stock. Our analyst had been pounding the table on it for a while. By the time I finally got around to looking at it, it had run up quite a bit. I can't say enough good things about the car-buying experience. So I thought, well, Monday I'm going to put some money into this stock. And I did. It immediately started going down. That has been the only mistake we made in the Hare portfolio last year.

Q: That's all?

A: Well, we sold some stocks too early.

Q: Which ones?

A: One...was Autodesk (ADSK). I sold it at $34.50, and about a week later it was up to $39, but it was overvalued. My timing when I sell seems always to be too early. That's one of the reasons why I purposely limited the turnover this year, because I have had a tendency to sell too early.

Q: Another?

A: Abercrombie & Fitch (ANF) I sold at $25. I think that's close to what the 52-week low is now. It's up to $35.

Q: Shares of teen retailers are hot. What's your outlook for them?

A: Well, it's a pretty crowded market. The outlook for them now is the same as it always has been. You never buy these things to hold for the long term, because the fashion shifts are just too dramatic and there's just no way to develop a unique, sustainable advantage that can last for decades. But Abercrombie has a great management team and a decent brand name and a good presence with teenagers. I like the company, but you just play these things. Every six months, every nine months, the market panics, sells them off, and then another six months later, they've doubled and you sell.

Q: When would you buy them?

A: Apparel companies are real easy to play if they have a very healthy balance sheet, almost no debt. If you're playing around with companies that have a lot of debt, that's a pretty dangerous game. They could keep going down to zero.

Q: What's your overall market outlook?

A: I don't ever do that anymore. I'm not good at it. I'm not good at shorting stocks. I'm not good at making market calls. I'm not good at selling. I'm only really good at a couple of things: determining the economic moat and then determining a price to buy. I actually think that 90% of investment success is the price you pay. The market outlook? I try to ignore that as much as possible.

The worst thing you can do is read an article in Barron's that says inflation is coming, Greenspan is going to have to raise rates more than expected, the European Union is having problems, oil prices are going higher, blah blah blah blah blah blah, and all of a sudden on Monday you want to start selling everything. And then the market goes up again another 20% over the next six months. It's just impossible to play that kind of game and consistently win.

Q: Now, will you be buying stock in Morningstar at its initial public offering?

A: I can't comment on anything related to that, but I think it's a pretty good bet that it will be on our restricted list of stocks we can't buy.

Q: What's the name on your watch list that you really want to buy now?

A: One that I'm watching very closely now is Amgen (AMGN). I own it already in the Hare. I bought it when it just imploded a few years ago. It got down to $38. Now it has come back from its highs quite a bit. And I think [Tuesday] it hit a 52-week low, around $52 a share. I think if it goes below $50, I'm going to double my position.

Q: Any others?

A: The company that has the strongest economic moat that I can think of is eBay (EBAY). I have never been able to buy it because it just doesn't work. You run the numbers, it just doesn't work. The price, I mean.

Q: What's the right price for eBay?

A: Probably around $50 a share.


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