How T. Rowe Price Value Hunts for Bargains
You won’t find Mark Finn, the manager of T. Rowe Price Value (TRVLX), in his office most days. No, he’s not a slacker. The reason is that he’s on the road much of the time. Over a 12-month period, Finn reckons, he meets with executives and other workers at about 300 companies. “I’m out kicking the tires,” says Finn, a former accountant turned analyst who took over as Value’s manager in January 2010. He still views himself as an analyst, so he loves to visit companies. “My traveling is self-imposed, but I like it,” he says. “It’s best to see a company in their home office. The executives are more comfortable and might share a little more.”
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What he’s looking for is a business that has hit hard times but is poised to turn around. It is a contrarian strategy—Finn’s penchant for stocks that few would dare to buy has earned him a few chuckles from clients. But he’s good at picking winners. From the time Finn assumed the reins at Value through March 24, the fund returned 16.6% annualized. That beat Standard & Poor’s 500-stock index by an average of 1.3 percentage points per year.
Finn sticks mostly with large, high-quality companies whose stocks have been hurt because of some controversy. If a catalyst for a turnaround seems in the works, Finn gets interested. He analyzes the company’s business, using several value measures—price to earnings, and price to book value (assets minus liabilities), among others—to come up with a “sum of the parts” value for the firm. If the firm’s shares sell at a discount to what Finn thinks the company is worth, he buys. “We’re trying to find that point at which sentiment and valuation are bottoming,” he says. “It’s almost always where the sentiment is at its worst. But no special bell sounds that this is the bottom.”
Finn calls all the problems that might bring a stock price down “controversies.” But some problems stem simply from the ups and, especially, the downs of the economy—a cyclical company, for example, suffering more than most during a recession. Or a controversy could be the result of industry-related woes. Think airlines in 2008 and 2009, when those stocks were in a nosedive (as indeed most were during the financial crisis). But the airlines were also being hurt by high oil prices, says Finn, who was an analyst for Price at the time. He believed that the industry would consolidate and that oil prices would fall, which would boost profits. He bought Southwest shares for about $8. They now trade for $23.
Other firms suffer from “self-inflicted problems,” says Finn. Carnival Cruises, for instance, suffered a rash of problems in 2012 and 2013. In one instance, a disabled ship in Mexico left passengers stranded for days. “Management had taken their eye off the ball and hadn’t been maintaining the ships,” Finn says. When he first bought the stock in the low $30s in early 2013, says Finn, “clients snickered.” But the stock has climbed 21% since then.
When Finn buys, he plans to hold for a while. “I have about a two- to three-year time horizon, which is an eternity compared to most of my competitors,” he says. Value’s turnover ratio of 44% implies an average holding period of a bit more than two years. The typical large-company fund, by contrast, holds a stock for an average of about 19 months. The fund’s annual expense ratio, at 0.84%, is well below the average fee of 1.16% charged by the typical large-company fund. Value has a $2,500 minimum initial investment.
Finn, who joined Price as an accountant in 1990, became a bond analyst in 1998 and a stock analyst in 2004, sells when a stock is no longer a value. He recently trimmed his holdings in Union Pacific, the Omaha-based railroad. “There’s nothing wrong with the company,” says Finn. But with the stock having nearly doubled over the past two years, “it doesn’t represent a compelling value anymore,” he says.
Although Finn likes controversy, he generally doesn’t chase deep-value stocks—those that are selling at super-low price-earnings ratios or other valuation measures. When he does, he buys small amounts. He recently picked up some shares of JC Penney, the troubled department-store company, figuring that the brand name and good locations in malls across America justified making the stock a 0.2% position in the $19 billion fund. “As a value investor, you’re going to push the envelope a little bit,” Finn says. “If you’re not, you’re not giving your investors all the opportunity you should as a manager.” When Finn first invested in chip maker Micron Technology in the third quarter of 2012, the position was just as small as the Penney stake. “I saw exploding demand for memory in all kinds of gadgets,” he says. The stock has since quadrupled.