Three Contrarians Share Their SecretsRobert Barker
On the fourth floor of a plain, Pasadena (Calif.) office building, behind a set of fake-wood-veneer doors, you'll find three of the world's most accomplished investors. They manage more than $25 billion, much of it for one of the nation's most popular 401(k) options. But chances are you've never heard of Primecap Management, much less its three chief stock-pickers, Howard Schow, Theo Kolokotrones, and Joel Fried.
That's how they like it. Staying quiet helps Primecap keep some of its best ideas close--stocks such as Ortel, a little-known maker of lasers and optical gear. Primecap first bought it in April, 1998. When it sank to 6 last spring, the firm got more. Since Lucent Technologies agreed in February to buy Ortel, the stock has topped 189. Primecap's average cost: 12.
Such contrarian picks have powered the firm since its 1983 birth. Vanguard Primecap, its main fund and a popular 401(k) choice, returned 621% in the 1990s vs. 432% for the Standard & Poor's 500-stock index. Last year it returned 41%, nearly double the S&P. The fund doesn't always beat the market, but it prevailed in 10 of its 15 years. That's why I was glad when the firm recently set aside its usual reticence to talk for the first time since 1994, detailing for me some secrets of its approach, plus a few portfolio moves (table).
Unlike many stock-picking teams, Primecap avoids groupthink. "The best decisions are made by individuals, not committees," Kolokotrones says. So each manager takes part of the portfolio to invest as he pleases. Differing predilections provide the diversification. That approach wouldn't necessarily help you with your own portfolio, but three other Primecap habits might. First, it invests after getting to know companies and their prospects cold. Second, it holds stocks a long time--eight years, on average--leaving plenty of room to grow. Third, Primecap buys "when it's controversial," Fried says. "When the story is not clear, when there are disappointments, when there's negativism. That's when we feel we can take large positions at attractive valuations." And that's how Primecap scored in tech stocks, buying big in the late 1980s when the Street viewed them as cyclical commodity producers. It got Intel, now 110, under 8. "We buy stocks when they are going down," Schow says. "We sell stocks when they are going up."
"TOLERANCE FOR PAIN." Simple? Consider what that means today. Primecap is cutting its big stakes in some of the Street's favorites--Intel, Texas Instruments, Adobe, Ericsson, Nokia, and Motorola. Meantime, it has bought some small health-care stocks, including Biomet, a maker of orthopedic devices, Chiron, a biotech drug company, and Novoste, a profitless developer of a new catheter. It also added big, unpopular names, such as Raytheon, "one of the premier aerospace companies in their technology and programs," Fried says.
Primecap also is refocusing on a longtime love, transportation stocks. Last fall it did sell US Airways Group but remains bullish on others. Kolokotrones reckons AMR, American Airlines' parent, is a steal at 52. Minus its stake in Sabre Holdings, a separately traded reservations system, the airline goes for five times estimated 2000 net--"a ridiculous valuation."
Investing this way, Schow warns, requires "patience and a tolerance for pain." The easier way is to ride along in a mutual fund. Outside of retirement plans, Vanguard Primecap is closed. But the firm also runs Vanguard Capital Opportunity, up 98% in 1999. It takes at least $25,000 to get in (800 662-7447). But be careful. Its recent surge likely is unsustainable. "Frankly," says Kolokotrones, "we will do our best, but we wouldn't be surprised if we did poorly." With such salesmanship, these guys are in no danger of losing their low profile.
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