"The Stock Market Is a Twisted, Perverse Thing"
By Robert Barker
A rough ride in the stock market had Rob Mohn's Acorn USA Fund (AUSAX ) on an unaccustomed descent into negative territory last year. Just the same, Mohn gamely answered my questions about why his stock picks were lagging and what he planned to do about it (see BW Online, 9/15/00, "What's Behind Mighty Acorn's Fall").
Mostly, he stuck with his stocks, and that patience has paid off this year: According to Morningstar, his fund was up 26% through the first half, putting it more than 17 percentage points ahead of the fund's average rival. The fund was renamed Liberty Acorn USA after its management company was acquired last October by Liberty Financial (L ). Liberty, in turn, recently announced a deal to sell its funds group to Fleet Boston Financial (FBF ). Mohn, who oversees a total of $755 million split among several funds, has no plan to give up picking small-cap stocks for Liberty Acorn. To find out what helped the fund rebound and how he sees stocks today, I phoned Mohn in his Chicago office the other day. Among his predictions is a World Series win for his hometown Cubs. No surprise there. But if you persist to the end of the edited excerpts of our conversation, you'll find Mohn has some surprisingly candid views on just this sort of Q&A.
Q: When we spoke last September, the fund was really struggling. What's changed? A:
Q: When we spoke last September, the fund was really struggling. What's changed?
A:Just great stock-picking.
Q: By an extremely modest portfolio manager, right? A:
Q: By an extremely modest portfolio manager, right?
A:Exactly. We had a number of stocks that have done very well for us. I think I've talked about one of these before -- Americredit (ACF )?
Q: That's the company that lends money to car buyers when nobody else will? A:
Q: That's the company that lends money to car buyers when nobody else will?
A:Exactly. The lender of last resort, kind of like the Federal Reserve. That's up 90%, year to date.
Q: Why is the market recognizing the strength of that business today when it did not do so before? A:
Q: Why is the market recognizing the strength of that business today when it did not do so before?
A:Just slow-witted investors, I guess. Americredit's earnings for the March quarter were up 70%, year over year. That was the 11th straight quarter of over-20% earnings growth. So I'm not sure what turned it, to tell you the truth. But the point is that we were there when everyone else finally got up and took notice, which is what we define our job to be.
Q: How's that? A:
Q: How's that?
A:To discover these things before the rest of the crowd. I don't know what the catalyst [for the stock's advance] was. I think, partly, it was interest rates dropping. That certainly helps their business because they are more of a fixed-rate lender, so their funding costs have dropped a lot. The story here is how Americredit has just whipped its competition.
Q: How about Micros (MCRS
)? That was a software stock in your portfolio that was suffering a year ago. Has that come on? A:
Q: How about Micros (MCRS )? That was a software stock in your portfolio that was suffering a year ago. Has that come on?
A:Actually, it's about flat this year.
Q: But you still hold it. A:
Q: But you still hold it.
A:They're moving along. They have this hotels systems business, and they've landed some new contracts there.
Q: That's a front-end software system where the hotel clerk puts in some information? A:
Q: That's a front-end software system where the hotel clerk puts in some information?
A:It keeps track of room inventory. It links up with the restaurants. It keeps track of "tip wages" and everything. It really caters more to the luxury hotels with a lot of different departments. It gets the different departments to speak to one another. You know, this is not an easy time to sell software. That's unfortunate for them when they're just rolling this out. They have landed some big contracts. We're still believers in the stock. We still think it should be trading at about 50% more than the stock price is at now.
Q: Which are some of the hotels that have stepped up to purchase the software? A:
Q: Which are some of the hotels that have stepped up to purchase the software?
A:Bass Hotels is one. Wyndham and Starwood are others.
Q: What else is clicking? A:
Q: What else is clicking?
A:ITT Educational Services (ESI ).
Q: Trade schools, right? A:
Q: Trade schools, right?
A:They were kind of late to the game with the whole [information technology] services and Internet development, Web-site development, and computer programming. The traditional business they're in is training in electronics, TV repairman-type stuff. So ITT -- they were a slow learner. [But] their new IT services courses are seeing enrollment growth of 100%, and then total enrollment [growth] is now back up to 10%.
Q: Who are the competitors? A:
Q: Who are the competitors?
A:DeVry (DV ), Apollo (APOL ).
Q: Where have you made investments more recently? A:
Q: Where have you made investments more recently?
A:After eight years of Medicare bashing, we're starting to get reimbursement rates increasing. We've purchased stock in some hospital suppliers, stocks like Serologicals (SERO ), which makes blood plasma [and] Edwards Lifesciences (EW ), which is heart valves. Those stocks we started buying about the middle of last year, and those have worked out real well for us, too.
Q: What else? A:
Q: What else?
A:We are looking at these IT-service stocks. The consultants. One that we own is RCM Technologies (RCMT ).
Q: R-C-M? Not R-C-N (RCN
), as in fiber-optic networks? A:
Q: R-C-M? Not R-C-N (RCN ), as in fiber-optic networks?
A:Oh, no. That was a bad memory. But these IT-service stocks rode the year-2000 wave and they rode the whole Internet thing....Now there are a number of small-cap stocks that came public recently that are sitting with large hoards of cash -- so it's not going to be a huge part of the portfolio -- but we believe that some of these could easily double over the next year or two.
Q: Another example? A:
Q: Another example?
A:CACI International (CACI ), which has doubled over the past year. They are in IT services. Over half of their business' revenue comes from Defense Dept. contracts. When we bought it, people spat at it because it was growing at 10% a year and it wasn't getting any of this Internet bulge of business, and no one cared for it. I think we're the largest owner of the stock.
Q: Do you have fewer ideas than money now, or do you have so many ideas you wish investors would write you lots of checks? A:
Q: Do you have fewer ideas than money now, or do you have so many ideas you wish investors would write you lots of checks?
A:We've got a good number of ideas -- we have fewer ideas than last time we talked. But I look at the portfolio, and our [price-earnings] multiple is still pretty close to [the portfolio's earnings] growth rate.
Q: What's that running? A:
Q: What's that running?
A:A median of 19 price-earnings ratio and a 19% [earnings] growth rate.
Q: What did you learn through the fund's ups and downs that individual investors can benefit from? A:
Q: What did you learn through the fund's ups and downs that individual investors can benefit from?
A:Look outside the spotlight. I shouldn't even say this, because this directly impacts my interview with you. If you look in the press...you constantly see articles [about]...and you're always hearing from investors and portfolio managers that have done well over the last year. I would advise people not to read those because it's true that markets always run in cycles and you should come up with your own long-term investment style and strategy and stick to it.
Q: Hmmm. A:
A:That's what I've seen here with my fund, and I just think that's the nature of the market. The stock market is a twisted, perverse being that is always going to prove the majority wrong and that's just something you have to remember always.
Q: I guess you did have the bad experience with [fiber-optic network builder] RCN, and that probably taught you a lot about telecom that you maybe never wanted to know. Are you keeping half an eye on telecom stocks since they might now be the most-hated sector? A:
Q: I guess you did have the bad experience with [fiber-optic network builder] RCN, and that probably taught you a lot about telecom that you maybe never wanted to know. Are you keeping half an eye on telecom stocks since they might now be the most-hated sector?
A:We have 10% of the fund in telecom stocks right now. Another good performer for us this year is Salem Communications (SALM ). They are the largest Christian broadcasting company. You go back a year ago when we bought this and no one wanted anything to do with it. And here's a company that's ... in all of the major markets of the country -- they're not in Podunk areas. They're in Chicago, they're in New York. But the stock is up 50% this year, when most radio stocks are down. Again, it's just the focus of looking at niches, where everyone else ain't.
So we have that [in telecommunications]. We have some cable companies, but I'll tell you what we don't have: We don't have the RCNs, the infrastructure builders that are [producing] negative cash flow. That's where you've got to look -- the hated groups. But we haven't purchased any of these hemorrhaging companies yet.
Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BW Online
Edited by Patricia O'Connell