Dispatch From Morningstar, Part 3
Bill Nygren feels like the boy who cried wolf. For three years, the lead manager of Oakmark and Oakmark Select has said that stocks of the biggest companies offered the best value in the U.S. market. For three years, investors have waited for the wolf to come as stocks of small and midsize companies have outperformed shares of larger companies. Nygren sounded his call to arms again Friday in a speech at the Morningstar conference in Chicago. He acknowledged that "investors are tired of hearing'' him make the same call that doesn't pan out.
But Nygren is sticking to his guns. He's honing in on stocks that traded at sky-high valuations in early 2000 but have dropped to dirt-cheap prices. The price-earnings ratios of most of these stocks are selling unusually close to the underlying company's growth rates. This means investors don't have to pay premium prices to own a higher quality company.
Traditionally, as a value investor, Nygren prefers to buy below-average companies with shares selling at low price-to-earnings ratios. Now he's targeting above-average companies selling at average prices. Since 2003, value investors have been able to own "great growth businesses," he says.
Nygren dubs these stocks "fallen angels." He named ten that fit the profile: Citigroup (C), Dell (DELL), Harley-Davidson (HDI), Hewlett-Packard (HPQ), Home Depot (HD), Kohl's (KSS), Texas Instruments (TXN), Time Warner (TWX), Tyco (TYC) and Wal-Mart (WMT). Nygren thinks these companies will achieve long-term earnings growth that will significantly exceed the earnings growth of companies in Standard Poor's 500-stock index and that the market will recognize that growth in the form of high stock prices in the future.
Nygren urged financial advisers attending the Morningstar conference to focus on long-term fund performance. He told them to look for companies with successful families of mutual funds rather than those with one hot fund because good managers tend to want to be around other good managers. He encouraged advisers to select managers who invest heavily in their own funds and candidly communicate their successes and failures to shareholders. And he stressed the importance of managers having a consistent investment strategy.
His call on the prospects of large-company growth stocks was early, but it has been consistent. Nygren acknowledges that "there is a fine line between being early and being wrong." Investors who have stuck with Oakmark and Oakmark Select realize that patience is a virtue. For the past couple of years, these funds have lagged more than half of their peers that invest in large-company stocks. More investors are withdrawing money from Oakmark fund than are putting money in for the second year in a row, Nygren says. Yet his funds have done well over the long haul, which is why Oakmark Select (OAKLX) is in the Kiplinger 25, the list of our favorite no-load funds.