Sticking with Dodge & Cox Stock Pays Off Big
After a period of weak results, the Kiplinger 25 member has chalked up two straight years of scintillating gains.
Streaky. That's the word we used in early 2012 to describe Dodge & Cox Stock (symbol DODGX), after the fund trailed the broad market for two calendar years in a row. We kept it in the Kiplinger 25, however, and our decision has paid off big time. The fund returned 22.0% in 2012, outpacing Standard & Poor’s 500-stock index by 6.0 percentage points. And 2013 has been another banner year. So far this year, Stock has earned 34.8%, thrashing the index by 6.9 points. (All returns are through November 14 unless otherwise indicated.)
Too many investors focus on short-term performance, says Charles Pohl, one of Stocks' nine managers. "Two to three years is too short to judge the fund," he says. "We take a long-term perspective in terms of how we invest, and we encourage investors to take a long-term view as well."
Pohl and his colleagues analyze stocks on a company-by-company basis with a three- to five-year time horizon in mind. They steer toward well-established firms with attractive long-term prospects that are trading at bargain prices. "We're looking at anything that does poorly," says Pohl. At times, their investment thesis can take years to play out.
The managers bet on Hewlett-Packard (HPQ) in the early ‘00s, and kept buying even as the stock dropped from about $50 in early 2010 to $12 in late 2012. But this year, the stock has rebounded 79% and is one of the fund's best performers. "It's still a strong business franchise, and the board or directors is now more shareholder oriented," says Pohl. "We stuck with it and this year we've been rewarded."
And then there's Nokia (NOK). Dodge & Cox Stock has owned shares in the one-time leader in wireless phones since 2009, and for most of that time it was a "dreadful performer," says Pohl. (Nokia shares dropped steadily from about $40 in late 2007 to below $2 in mid-2012.) But each time the managers re-examined the company, they saw glimmers of hope. The Finnish company recently sold its handset business to Microsoft and is bolstering its wireless infrastructure business. So far in 2013, the stock has doubled. "It's one I wish we'd never bought in the first place, but I'm glad we stuck with it," says Pohl.
Sometimes, however, the turnaround never comes. The fund's managers picked up shares in J.C. Penney (JCP) after the department-store chain named Ron Johnson, a former Apple official, CEO in 2011. "We had considerable hopes that Johnson and his team would take the company to a higher level of profitability," says Pohl. "But at the end of the day, it didn't really work." Moreover, he says, Penney was "bleeding a lot of cash," which made the Dodge & Cox managers uncomfortable. They finally dumped the stock last spring—at a loss. "Our fundamental thesis was destroyed," he says. Shares in Penney dropped from about $35 in early 2012 to below $20 a share in mid-2013.
Dodge & Cox’s contrarian approach takes patience and fortitude—for the fund’s managers as well as its investors. But the strategy has been rewarding over the long term. The fund’s 15-year annualized return of 9.3% through October 31 beat the S&P 500 by an average of 4.2 percentage points per year. Investors in the fund, however, have realized only 6.6% annualized over that period, according to Morningstar, because they buy and sell at the wrong times. “Many investors pile in at the top and sell at the bottom,” says Pohl. “They’d be better served by investing in good funds, and not looking at them frequently. Just leave them alone and things will work out over time.”
Thanks to this year's huge advance, U.S. stocks are "not a bargain anymore," says Pohl. But, he adds, there are always opportunities to be found. "At a place like Dodge & Cox, which is based on fundamental analysis of every company, you look for things that are going to do well over time and hope to add some value to your shareholders."