Where the Bargains Are
Two veteran fund managers talk at the Morningstar Investing Conference about what stock deals they're buying now -- and what to avoid.
Value-oriented fund managers have had to navigate a minefield over the past year. Financial stocks, which are typically important holdings in a value portfolio, are sucking wind. Meanwhile, energy stocks, which look awfully overvalued to many bargain hunters, have been the only sure way to make a buck.
Amid the carnage, Bruce Berkowitz and Susan Byrne are hanging tough. Berkowitz's Fairholme fund (symbol FAIRX) has lost 6.47% year-to-date through June 26, beating Standard & Poor's 500-stock index by nearly five percentage points. Byrne's Gamco Westwood Equity AAA (WESWX) has lost 8.14%, beating the index by 3.2 points.
Both managers say they are finding compelling investments. Berkowitz likes sectors that everybody else hates, and today that's leading him to health care. Ten years ago, he says, "people were rushing to buy pharmaceutical companies with price-earnings ratios of 40 and 50, and today they're at ten." But baby boomers will only spend more on health care and drugs as they age, he says.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
As of the fund's last shareholder report, dated February 29, Fairholme had more than 3% of its assets in the shares of Bristol-Myers Squibb (BMY). The fund may have more in health care now.
Berkowitz is also looking at misunderstood retailers. He's still bullish on Sears Holdings Corp. (SHLD), which accounts for 9% of Fairholme assets. He says there's hidden value in the company's real estate and in its brand names, such as Kenmore appliances and Craftsman tools.
You won't find either Berkowitz or Byrne snooping around many financials. "It's impossible to know what the banks and brokers really have" on their balance sheets, Berkowitz says. "I don't know if their managements really know what they have."
One exception is MasterCard, which Byrne recently sold after watching it soar from $50 to $300 a share. "There were perceptions that because MasterCard is involved in credit cards that they're exposed to credit risk, but they're not," she says. Instead, the company collects fees off transactions.
Berkowitz says that all the uncertainty over banks' balance sheets underscores the importance of cold, hard cash. He says his three most important considerations when picking stocks are as follows: how much free cash flow per share a company is generating, how management puts that cash to work for shareholders, and whether the company has a strong enough balance sheet to sustain any disruptions. At Fairholme, says Berkowitz, "we try to focus on those companies that are genetically engineered for hard times."
Byrne, too, looks for stocks that other investors misunderstand. She says she's been purchasing Nike (NKE), whose shares have been weak because of concerns about the health of U.S. consumers. But the two-thirds of Nike's sales that come from outside the U.S. are growing at a yearly pace of 20% to 30%, she says, so the company's doing just fine with or without the help of Americans. "But if everyone understood that, we couldn't buy it at a favorable price," Byrne says.
Neither Byrne nor Berkowitz claim to know where energy prices are going. But Berkowitz says the sector's overwhelming popularity is starting to drive him away: "The euphoria is driving me crazy -- it's like the Internet bubble."
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Stock Market Today: Stocks Are Positively Mixed to Open December
Technology led the way Monday as two of the three main equity indexes closed higher.
By David Dittman Published
-
The Best Retail Stocks to Buy This Holiday Season
E-commerce is a growing trend, but most folks still prefer to shop in stores. That makes these dominant retail stocks worth a closer look.
By Louis Navellier Published
-
The 5 Best Actively Managed Fidelity Funds to Buy Now
mutual funds In a stock picker's market, it's sometimes best to leave the driving to the pros. These Fidelity funds provide investors solid active management at low costs.
By Kent Thune Last updated
-
The 12 Best Bear Market ETFs to Buy Now
ETFs Investors who are fearful about the more uncertainty in the new year can find plenty of protection among these bear market ETFs.
By Kyle Woodley Published
-
Don't Give Up on the Eurozone
mutual funds As Europe’s economy (and stock markets) wobble, Janus Henderson European Focus Fund (HFETX) keeps its footing with a focus on large Europe-based multinationals.
By Rivan V. Stinson Published
-
Best Bond Funds to Buy
Investing for Income The best bond funds provide investors with income and stability – and are worthy additions to any well-balanced portfolio.
By Jeff Reeves Last updated
-
Vanguard Global ESG Select Stock Profits from ESG Leaders
mutual funds Vanguard Global ESG Select Stock (VEIGX) favors firms with high standards for their businesses.
By Rivan V. Stinson Published
-
Kip ETF 20: What's In, What's Out and Why
Kip ETF 20 The broad market has taken a major hit so far in 2022, sparking some tactical changes to Kiplinger's lineup of the best low-cost ETFs.
By Nellie S. Huang Published
-
ETFs Are Now Mainstream. Here's Why They're So Appealing.
Investing for Income ETFs offer investors broad diversification to their portfolios and at low costs to boot.
By Nellie S. Huang Published
-
Do You Have Gun Stocks in Your Funds?
ESG Investors looking to make changes amid gun violence can easily divest from gun stocks ... though it's trickier if they own them through funds.
By Ellen Kennedy Published