A Peek At A Picky Fund's Latest Buys

Sequoia, which has lost money in only 2 years out of 25, adds a stock about as often as Tiger Woods shanks a tee shot

There's no shortage of ideas about which stocks to buy. Good ideas--now that's something else. So just as Wall Street stands at attention whenever Warren Buffett's Berkshire Hathaway unveils a new buy, I try to zoom in for a close look if a fresh name pops up in a few select mutual funds, especially Sequoia Fund.

Why Sequoia? Not for its affinity to Berkshire (its No. 1 holding) and Buffett (who threw its founders lots of clients in 1969 when he disbanded his partnership). Nor is it because the $3.5 billion fund lost money in just two of the past 25 years, including an ugly 1999. It's because Sequoia buys a new stock about as often as Tiger Woods shanks a tee shot, only less so.

Talk about picky. Sequoia began 2000 with just nine stocks named in its portfolio. In a recent report to investors, Sequoia's famously reticent managers noted: "The recipe for delivering superior long-term performance requires equal parts of picking the right stocks and avoiding the wrong ones." Which stocks did they lately deem the right ones? The report lists Dover, a manufacturing conglomerate, and furniture maker Ethan Allen Interiors. Beyond clarifying a couple of details, the fund won't discuss the stocks. Yet here's what I learned about each (table):

-- DOVER. A faceless collection of more than 50 separate industrial businesses, Manhattan-based Dover makes such stuff as gasoline-pump nozzles, big-truck trailers, supermarket refrigerator cases, and automated printed-circuit-board assemblers. Hardly exciting, but highly profitable: Continuing operations last year netted $405 million on sales of $4.5 billion. With lots of cash flow, Dover also was able to buy back a ton of stock. Chief Financial Officer David Smith told me the Street's forecast of a 35% jump in earnings per share, to around $2.60 this year, is reasonable. Future growth is set to come both internally--for one thing, higher oil prices will help its drilling-tool units--and via niche acquisitions, a strategy that Dover has pursued for years. "We consider it a core competency," Smith says.

But if you're thinking of following Sequoia's lead, don't miss that it began buying its 2.2 million shares last year and paid an average of less than $34--nearly one-third below recent prices. Just the same, because Sequoia habitually keeps its investments an average of nearly five years, it's unlikely to start cashing in yet.

-- ETHAN ALLEN. This familiar name looks like a more immediate bet. It trades near $26, and Sequoia paid about $25 for its 2.1 million shares. Along with shares held by Sequoia's parent company, Ruane Cunniff, the firm controls nearly 14% of the Danbury (Conn.) furniture maker.

One key to Ethan Allen's success, unlike Dover's, has been a singular focus on internal growth by burnishing its brand, investing in factory efficiencies, and broadening its product line to appeal to more customers. "Our philosophy is to be the best in what we do, not the biggest," CEO Farooq Kathwari told me. In the fiscal year that ended on June 30, the company earned $91 million on sales of $856 million. Street estimates of a 15% gain in fiscal 2001 earnings per share, to about $2.50, are "achievable," Kathwari says.

Ethan Allen's biggest worry right now, he says, is balancing the current need to add employees and factory capacity against an inevitable eventual softening of demand. Kathwari doesn't see a cloudy economy on the horizon, but if one arrives, Ethan Allen figures to weather it well. The company has nearly no long-term debt and generated enough cash to buy back lots of stock even after heavy capital spending.

Sure winners? No, but both companies say Sequoia looked closely. "A lot of institutional investors these days don't even bother to do their homework. They're chasing momentum, or rainbows," Smith says. "Not these guys." Sequoia has been closed to new accounts since 1982. But that doesn't mean you can't check out its picks.

Questions? Comments? Send an e-mail to barkerportfolio@businessweek.com or fax (321) 728-1711

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