Against The Tide

Contrarian bets are winners for Brandes

You won't find high-priced Net issues in the $60 billion worth of funds managed by Charles Brandes and Glenn Carlson, the two top stockpickers at San Diego's Brandes Investment Partners. Die-hard value investors, they prefer beaten-down companies with sound balance sheets that sell for book value or less and fetch single-digit price-earnings ratios. Once they buy, says Brandes, they may have to wait "for a hell of a long time" before their bets pay off. The wait can be worth it, however.

One of the two essentially identical retail mutual funds Brandes manages, the $382 million Northstar International Value (table), returned 44.39% over the 12 months ended Sept. 30. With a lower expense ratio, the other fund, the $20 million Nations International Value, had slightly better returns. But its load is higher.

Brandes and Carlson attribute their solid recent performance to a prescient decision to invest in Europe in 1992. As anticipation of a successful launch of the euro increased last year, they unloaded many of their holdings at huge gains and plunged into Asia--just in time for Japan's market to take off. The partners also manage domestic portfolios for institutional clients and say that they are finding value in the U.S. now that stocks are off their record highs. They spoke with Senior Editor William Glasgall.

Q: Why did you sell in Europe?

CARLSON: We'd been building positions in big, reasonably valued European companies the world believed couldn't survive, like Alcatel, Daimler, Nestle. In 1998, values in these wonderful companies reached huge levels. So we got out.

Q: You sold Daimler-Benz at 22 times projected earnings. Now it's DaimlerChrysler and the stock's p-e is down to 10. Are you going back in?

BRANDES: We're getting closer. No doubt about it.

Q: The Nikkei stock average is up 37% in dollar terms this year. Are you selling?

CARLSON: We're starting to take some profits.

Q: What do you still like in Japan?

BRANDES: Hitachi. With hundreds of businesses, they had no idea what they were doing. They hit 60% of book.

CARLSON: But Hitachi has taken some interesting steps. They're breaking into five business units and setting new targets for return on equity and capital. [Despite the Nikkei's recovery], they're still selling for a slight premium to book. They're still cheap.

Q: Are you still in Europe?

CARLSON: We continue to own a big chunk of phone stocks, including Deutsche Telekom. Even in developed parts of Europe, phone use is two-thirds to 80% of that in the U.S.

Q: Where do you see value at home?

CARLSON: We look for growth stocks gone bad. One is Service Corp. International [the funeral home group]. It was selling for 30 times earnings, but much of its gains were due to acquisitions. Now, expected growth rates have dropped from 15% to 18% a year, to 5% to 8%. It's trading at 10 times forward earnings but has a decent balance sheet. [We also own] McKesson HBOC, the largest drug distributor in the world. The value of the merged companies has dropped $17 billion since their merger.

Q: Anything else?

CARLSON: Toys `R' Us. Its market cap is half that of eToys, and it's trading at book and nine times earnings. After being the darling of the street, they bungled it. But is it right to completely write them off?

BRANDES: We don't have a feel for the upside--but history tells us that, on average, [in situations like this] there is a whole lot of upside.