A Bear Turns Bullish
Cliff Greenberg, skipper of Baron Small Cap (symbol BSCFX), says he’s casting off his “bunker mentality.” Greenberg, whose fund rode the stock market’s powerful recovery starting in March 2009, admits that he has been “nervous all the way up.” He was skeptical about the sustainability of the economic recovery and, therefore, worried about earnings growth in 2011 and 2012.
But the normally sober Greenberg has turned bullish. “The engines of the economy have recovered,” he says. Greenberg anticipates explosive earnings growth in 2010 mainly because of savage cuts in corporate costs and expectations that sales, until now the weak link in profit-and-loss statements, will start to rebound. And he’s raising his expectations for earnings growth in 2011.
Greenberg, who focuses on fast-growing small and midsize companies, listens carefully to the managers of firms that his fund holds. Discount retailing held up well last year, he notes, but now improvement in same-store sales (sales at stores open at least a year) is broadening to restaurant companies, mid-tier retailers and sellers of luxury goods. For instance, same-store sales at J. Crew, one of Baron Small Cap’s ten biggest holdings, jumped 17% year over year in the quarter ended January 30.
Greenberg guesses that we’re only about six months into an essentially normal recovery that will last two or three years. “I think the economy will perform better and grow longer than people think,” he says. Inflation will remain tame, he figures, because of surplus capacity in labor, real estate and factory space. He expects interest rates to move up a couple of percentage points from their “artificially low” level, but he doesn’t think that will derail the market. In fact, he says price-earnings ratios should expand as earnings beat analysts’ projections.
Greenberg is modifying his strategy to fit the current environment. After the 2007–09 market collapse, he loaded up on “classic growth” stocks, such as J. Crew, that plunged with the market. Prices of most of those stocks have surged. Now he’s focusing more on “special situation” and “fallen angel” stocks, where he espies better values.
For instance, he purchased shares of AOL (AOL) after the company was spun out of Time Warner (TWX) in December. The 2000 merger of AOL and Time Warner was a calamity for Time Warner shareholders (the value of AOL stock today is 1% of its value in 2000). But Greenberg thinks AOL’s assets would be worth $8 billion if the company were broken up, and the stock carries a market value of $3 billion.
Greenberg also invested in venerable NCR (NCR), the former National Cash Register. NCR stock was crushed last year by a large increase in pension-liability expenses, but Greenberg thinks NCR’s core bank-ATM and cash-register businesses are healthy and will perform well in an expanding economy.
Baron Small Cap, a member of the Kiplinger 25, gained 51.3% over the past year through April 15, trailing the average small-cap growth fund by 5.4 percentage points. Over the past ten years, the fund gained an annualized 6.8%, topping its peers by an average of 4.4 points per year.