Foster Friess met his wife, Lynn, four decades ago at the University of Wisconsin, where she was a Badger Beauty and he was hoping to leave the dairy lands far behind. When I first met the Friesses in 1995 over Mexican food in Phoenix, they still held hands like campus sweethearts. More recently, they began pumping iron together and, this March, became grandparents. Yet for all this evident fidelity, when it comes to the growth stocks in his $7.5 billion portfolio, Friess is a regular lothario.
His flagship Brandywine Fund returned 7% in 2000, more than 16 percentage points better than the Standard & Poor's 500-stock index. While it lost 11% this year through June, it remains ahead of most growth-stock funds, which on average sank 14%. A key reason is Friess's unfashionable habit of picking up and kissing off stocks as fast as he likes, without apologies. If Friess keeps a stock more than six months, it's a long-term affair.
Just listen to what he told me the other day: "We don't subscribe to the theory that `XYZ Co. is a great company. It has a 30% growth rate for the next five years. Great management. Great product.' We don't care. Look how Cisco Systems (CSCO ) was telling everybody things are great, and, within six weeks, it just went off the cliff." By dumping big positions early last year in such stocks as Nortel Networks (NT ) at $71 (now $9) and Nokia (NOK ) at $58 (now $22), Friess figures he saved his clients $1 billion. "As soon as we saw the first wisp of any concern, we were out the door."
Friess has by no means proven error-free. He still smarts from criticism of his 1998 dash out of stocks, into cash, and back into stocks. Yet Friess, 61, may be the longest-surviving successful growth-stock picker, having navigated markets for 36 years, in his own firm since 1974. So what does he expect now? Regardless of the Fed's rates cuts or Washington's tax cut, Friess doesn't see the environment for growth stocks turning friendly soon. "We think it has the potential for getting worse before it gets better," he said. "You have to look at other things rather than just being Pavlovian and thinking: `Rates are going down; the market has to go up."'
What Friess and his 34 researchers are looking for is evidence of future earnings growth. It's scarce. Friess's M.O. entails schmoozing with corporate types on quail hunts and golf courses. There, he has been hearing CEOs complain about higher energy costs and a glut of capacity that is making price increases the stuff of dreams. Those hard realities figure to keep pinching profit margins for a while to come.
As usual, some industries look brighter, and Friess has reshuffled his portfolio to reflect changing expectations (table). Tech stocks, two-thirds of the portfolio in early 2000, now make up less than 10%, with the notable--and timely--inclusion in April of Microsoft (MSFT ). More prominent are tamer names such as conglomerate Tyco International (TYC ), medical insurers UnitedHealth Group (UNH ) and Tenet Healthcare (THC ), power supplier Duke Energy (DUK ), and supermarket operator Kroger (KR ).
It was Kroger execs who tipped Brandywine to Optimal Robotics (OPMR ), a small-cap stock that the fund bought in April near $26 a share. Based in Montreal, the company sells to retailers an optical scanner, the U-Scan Express, that stores hope shoppers will use to check themselves out. Sales in the March quarter grew 63%, to $19.6 million, and earnings jumped 259%, to $2.5 million. The stock has since climbed above $38, almost 30 times estimates of next year's earnings.
That's toward the high end of valuations in Friess's funds. So don't be surprised if he kisses Optimal Robotics good-bye. Overall, his stocks are trading at 18 times next year's estimated earnings, while the Street expects the companies' profits on average to grow 25%. That discipline of keeping price-earnings ratios well below prospects for earnings growth is what Friess credits for saving his funds from the tech-stock wipeout. It's a lesson worth remembering.