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January 12, 2006
A Tale of Two Stocks
If anyone knows controversy, it’s a fund manager at the once, scandal-plagued Putnam Investments. But the drama at the investment firm is nothing like the drama in James Wiess’s portfolio, Putnam Investors. This fund isn’t your typical large cap core fund with—yawn—names like General Electric or Wal-Mart Stores. It’s more like a collection of 100 or so controversial names in the market. As I see it, a far more interesting way to invest.
“Investors are more likely to make a mistake where there is controversy. If there’s no controversy, the market comes close to valuing the company right.” James Wiess
Simply put, you get better returns buying stocks that investors have underestimated. It would be reasonable to assume that Wiess—who I recently met with over coffee at the Bin 36 restaurant in Chicago—is talking about the underappreciated, beaten-down stocks that are the typical domain of those vulture value investors. For example, a stock like insurer AIG, which he bought in 2004 after the company got ensnared by regulators. But that’s only half of the formula. He also considers practically the opposite type of stock, high flyers, where investors don’t think the eye-popping returns can continue. Huh?
To see his philosophy in action, take a look at two of the portfolio’s holdings, Internet giant Google and beleaguered U.S. automaker General Motors. The stocks couldn’t be more different. Consider the numbers:
Google (GOOG)Price: $466Price-to-earnings: 80.2 times forward earningsRevenue: $5.2 billionMarket Cap: $138 billionOne-year price return: 141%
General Motors (GM)Price: $21Price to earnings: Not meaningfulRevenue: $192 billionMarket Cap: $12 billionOne-year price return: -39.4%
Whoa, how did those two stocks end up in the same portfolio? Well, they do have one thing in common: Wall Street’s skepticism is holding back both stocks, says Wiess. Okay, GM’s easy to see. The bankruptcy fears and slew of other problems have sent the stock plummeting—definitely controversial. However, I coughed a bit (don’t worry, no coffee was spilled) when he said investors didn’t quite get Google. After all, the stock has a market value of $138 billion, more than double that of its nearest competitor Yahoo! After hearing his lengthy explanation, I can see his point, sort of. At almost any point along the search engine’s triumphant rise, investors have been quick to question just how long this Internet stock can run.
True, it remains to be seen whether Google at $466 has much life left in it or whether GM can ultimately brighten its financial picture. But Wiess and his team have built up a solid record at the fund employing just this strategy with a split personality. Over the past three years, the fund is up 15.8% a year after expenses vs. 12.8% for other large-cap core funds and 13.7% for the S&P 500
Now, if Putnam could just convince its skeptics.
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