A Buy-and-Hold Vet's Winning Bets


By Amey Stone Crude oil has reached a record $64 a barrel, the Federal Reserve is up to 10 rate hikes and counting (see BW Online, 8/9/05, "The Fed's Clearly Opaque Message"), and growth in the U.S. economy depends ever more on a bubblicious housing market. Thanks to surprisingly strong earnings growth, stocks have had a good run lately, with the Standard & Poor's 500-stock index up 15% in the past year and the tech-potent Nasdaq up 22%. So, for investors this may seem like a good time to lock in some gains and revamp portfolios.

Not so fast. Long-term investing is working quite well this year, says John Carey, the veteran fund manager of the 77-year-old Pioneer Fund (PIODX), the third-oldest fund in the country. Value-oriented and with $7 billion in assets, Pioneer is up 4% this year and gained 12% in 2004, outperforming the S&P 500 both years. In fact, it has beaten the S&P for the past 10 years, with a 10.5% average annual return, vs. 10% for the S&P 500, according to fund tracker Morningstar.

THE RIGHT DRUG. But 2005 has proven to be a particularly good year for some long-term holdings, says Carey. In August, while reviewing his standout stocks, he noted with surprise that three were names he had bought soon after taking over management of the fund in 1986. In fact, he hasn't traded two of them at all since he added them nearly 20 years ago. These are Carey's long-term stalwarts, which he still recommends buying and holding today:

The first, Walgreen (WAG), the Deerfield (Ill.) drugstore chain, is up to nearly 5,000 stores nationwide and continues to grow organically -- via positive cash flow rather than acquisition. Carey estimates his original stake has risen 15 to 20 times from when he bought it and says he hasn't sold any shares. This year, the stock has climbed 17%, to $48.

Walgreen makes a great example of the benefits of a long-term approach, says Carey. He held it through periods when it got a little overvalued -- and then through periods when it treaded water for a while -- until the earnings caught up with the stock price.

NO CHANGE, NO PROBLEM. "Too many people get nervous when there's a spurt of performance," he says. "They sell and then don't get back into it, and they miss out on the next up cycle." When a stock gets pricey, his trick is to look out three to four years and make sure the earnings performance he expects justifies the current price.

The second stock he hasn't traded since 1986, publisher John Wiley & Sons (JWA), is one of the last remaining independent publishers, specializing in technical and professional books. It has done a few acquisitions but stayed focused on its niche and maintained healthy profit margins. Carey says he has never sold shares since he first bought the stock, and he still likes Wiley's business. At $42, the stock is up 23% year-to-date.

Wiley illustrates Carey's view that if a business hasn't changed much over the years -- like book publishing or drugstore retailing -- buying and holding makes sense. "You don't have to always be buying something new," he says. "Just make sure management continues with the basic strategy that has worked in the past and finds ways to improve on it."

FAITH IN RETAIL. Another Pioneer stock, May Department Stores (MAY), parent of Filene's, Lord & Taylor's, and David's Bridal chains, got a boost early this year when Federated (FD) announced plans for an $11 billion takeover. At $40, the stock has surged 38% in 2005.

Carey has added to, and trimmed back on, the stock over the years and admits he expected it to be bought earlier than it was. Now he's holding it through the acquisition to see if Federated can wring out some efficiencies and integrate the new stores without losing customers to the May brand names. "I don't think the department store is dead," he says.

Buy-and-hold doesn't always work, warns Carey. "Some companies take a wrong turn in the road and can't meet all of the challenges to continue to compete and grow earnings," he says. Particularly in the technology sector, it makes sense to switch out of names that lose their edge. "There are certain industries where you need to be fast on your feet," he says.

FED WISE. But leading companies in businesses that don't change that much year to year are good candidates for long-term holdings, says Carey. He mentions consumer goods companies like Procter & Gamble (PG), Colgate-Palmolive (CL), and PepsiCo (PEP) as good options. Johnson & Johnson (JNJ), one long-term holding in the fund, has recently proven to be "the best of big pharma." The Pioneer Fund's turnover averages just 15% a year.

Carey describes his current market outlook as "reasonably optimistic." He thinks the Fed is wise to raise rates at a reasonable pace to ward off inflation. He expects 8% to 10% returns this year and believes next year could provide decent results as well.

After that, he starts wondering: When's the next downturn? He worries about the effect of a high housing market and popularity of adjustable-rate mortgages. He notes that soaring oil and materials prices are starting to affect businesses. Particularly wary of utility stocks now, he says rising bond yields and high raw-material costs could hurt the shares in the next year.

For the most part, however, Carey doesn't invest based on economic trends, instead focusing on finding solid companies at a good price that will hold up well no matter what the economy is doing. His conservative, long-term approach rarely tops the charts. But sometimes, as in 2005, it yields a crop of winners all at once.

Stone is a senior writer for BusinessWeek Online in New York


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