Finding Value in Mega-Caps


Finding Value in Mega-Caps

Matrix Advisors Value's decision to load up on undervalued giants is finally paying off.

The long-awaited revival of mega-caps -- stocks with gargantuan market values -- is finally here, and Matrix Advisors Value is reaping the benefits. The fund, which has traditionally focused on the stocks of large, undervalued companies, is now stuffed with such behemoths as American International Group, Citigroup, General Electric, Microsoft and Wal-Mart Stores (all among the fund's ten biggest holdings).

Manager David Katz is a bargain hunter. He and two colleagues seek out stocks that sell for at least one-third less than their assessment of the underlying company's intrinsic value. The search for deep discounts often leads to companies with real or perceived short-term problems, so Katz wants companies that are financially strong.

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The Matrix team also looks for catalysts to push up the share price. In many cases, the driver is buyout potential. Five of the fund's biggest holdings were acquired over the past seven months, and MedImmune (symbol MEDI) and First Data (FDC), both top-ten holdings, recently received buyout bids.

The buyouts are a key reason for the fund's torrid performance of late. Over the past nine months through April 30, Matrix returned 28%, beating Standard & Poor's 500-stock index by 11 percentage points. Matrix's long-term record is fine, too. Over the past decade, it returned 11% annualized, beating the S&P 500 by an average of more than three percentage points per year.


Katz stays true to his bargain-hunting ways even when short-term results sag. As a result, the fund often moves out of step with the market. In 2000 and 2001, Matrix generated nice gains even as the S&P 500 produced negative returns. The fund avoided a bloodbath because Katz had avoided the pricy tech and mega-cap stocks that had powered the market during the preceding three years. On the flip side, the fund lagged in 2004 and 2005 because it jumped into mega-caps too soon.

Katz thinks the mega-cap revival has a long way to go. "We've just had a tremendous rally in medium and small companies, and this is the one group that's done nothing," he says. He thinks that laggard clothing giant Gap (GPS), which closed May 10 at $18.28, is an attractive takeover target and that its shares could rise more than 40%. Conglomerate Tyco (TYC) is separating into three companies, each of which, Katz, says could be attractive takeover bait. The stock, which closed at $32.19, is worth $45, in Katz's estimation.

Like many other prognosticators, Katz sees growth stocks taking over the market's leadership from value stocks. One lagging growth stock he favors is Wal-Mart (WMT), which "is one of the cheapest, most compelling stocks in the market," he says. "After years in the penalty box, P/E compression has more than run its course." He thinks the stock, which closed May 10 at $47.75, is worth $72.

Matrix Asset Advisors, which is based in New York City, manages $1.6 billion. The fund (MAVFX; 800-366-6223 holds $186 million. It requires a $1,000 minimum initial investment and charges 0.99% in annual expenses.