No Rocket Science, Just Stratospheric ReturnsJeffrey M. Laderman
Technology stocks have been hotter than a midsummer heat wave. And many investors are sweating over what's perhaps the most critical decision in the market today--whether to take the juicy profits they have made. Indeed, the 7% plunge in tech stocks in just two days, July 18 and 19, shows that some have begun to cash in. But for investment-manager Lee Kopp, who has made tons of money on his high-tech holdings, the decision is a no-brainer. "Stay with the tech stocks. This wave has a long, long way to go."
Kopp's counsel is worth heeding. His firm, Kopp Investment Advisors (KIA), based in Edina, Minn., recently celebrated its fifth anniversary by posting what is perhaps the best five-year record in U.S. money management today: a 44% average annual total return, after fees and expenses, for the five years ending June 30. By contrast, the best-performing mutual fund for the same period, Seligman Communications & Information Fund, earned a 30.8% average annual return. And Kopp's results surpass the returns of most hedge funds, which use techniques Kopp does not employ, such as leveraging and selling short.
LESS IS BETTER. In fact, there's nothing all that unique about how Kopp selects stocks. He has no secret formula or "black box" trading system. Instead, Kopp and the seven other portfolio managers do shoe-leather research, visiting companies, their managers, employees, and work sites, while crunching numbers from financial statements. They also prefer to invest in companies before Wall Street analysts start talking them up. Kopp, 60, who was a retail stockbroker for 30 years before switching to money management, says many of his leads come from talking with corporate managers about competitors they fear and admire. "That's how we first learned about Bolt Beranek & Newman," notes Kopp. That company, which builds wide-area communications networks, is now one of his 10-largest holdings. The stock is up 122% so far this year.
Unlike many investment managers, Kopp takes relatively large positions. Although the firm has $2.3 billion in assets under management, the KIA buy-list has only about 75 companies. (To brake growth, Kopp is turning away most new business.) Portfolios have 30 to 35 stocks. By contrast, emerging-growth mutual funds of KIA's size hold 200 to 300 stocks in a number of industry sectors. With more money concentrated in fewer names, Kopp's clients get a bigger bang for their bucks.
Of course, this portfolio concentration carries far greater risk: A bad investment takes a heavier toll. About one out of five investments don't work out, says Kopp, but earning triples and quadruples on others more than compensates for the flops. Short-term returns can be volatile; in 6 out of his 20 quarters, including the first 2 of 1994, Kopp's returns were negative. Peter Walker, editor of Money Manager Review, says that KIA has taken more risk than most of its peers, but the returns have more than compensated for it.
Kopp also practices a buy-and-hold strategy that's unusual in this fast-moving corner of the market. Only 24 cents out of every dollar turns over every year, about one-quarter the rate of turnover at emerging-growth mutual funds. "Low turnover means few commissions and higher aftertax returns," Kopp says.
The by-product of concentrated portfolios and low turnover is that KIA has become a major and, in many cases, the largest shareholder in some companies it owns. Technometrics Inc., which tracks managers' holdings, reports that KIA holds 22.5% of California Microwave, 18.9% of Norand, 16.4% of Picturetel, 16.2% of Network Equipment Technologies, and 14.6% of Bolt Beranek & Newman.
NO HURRY. Kopp's firm has even larger stakes in some of the smaller companies in its portfolio, holding more than 30% of the stock in Digital Microwave, Empi, Stanford Telecommunications, and Telco Systems. These huge positions in relatively illiquid stocks mean Kopp can't unload quickly without taking a bath. "You don't get in or out of these positions overnight," admits Kopp. "But we're comfortable with these large positions because we know the companies."
Assuming large positions also means Kopp's clients will have to ride out any correction. "Things were getting overheated, especially in the last few weeks," he says. "A correction is just what the doctor ordered." Kopp says he may step up his buying as prices pull back and that his commitment to high tech is unwavering. After all, he doesn't have to invest in tech, only emerging-growth stocks. Says Kopp: "We're in technology because that's where the best growth opportunities are."