A Contrarian Awaits His "Pleasant Surprise"
By Robert Barker
Losing less money on the way down is at least as crucial to successful investing as beating the market on the way up. One of the best hands at that tricky task is T. Rowe Price's Brian Rogers, who is perhaps best known as the veteran manager of the firm's biggest portfolio, the $10 billion Equity Income Fund (PRFDX ).
Rogers also runs the $1.2 billion T. Rowe Price Value Fund (TRVLX ), which just finished its first seven years with a 16.7% annual average total return. That beat the Standard & Poor's 500 by 2.5 percentage points, a feat that is all the more impressive because, for much of that stretch, growth-stock investing held sway over value investing. So far this year, the fund is off 6.8%, vs. a loss of 18.2% for the S&P 500.
To find out what Rogers has learned along the way, and what cheap stocks he has been buying lately, I reached him the other day by phone in his Baltimore office. Here are edited excerpts of our discussion:
Q: What's behind the Value Fund's success? A:
Q: What's behind the Value Fund's success?
A:There is a clear contrarian element to our approach. So the worse something has done, the more we're attracted to it. In the case of companies with long operating histories...you invest in them after they've been through the wringer and you're convinced that things like balance sheets and cash-flow statements are in good shape.
Q: When you make mistakes, what goes wrong? A:
Q: When you make mistakes, what goes wrong?
A:I probably artificially divide our mistakes into two categories. Category One would involve companies where it turns out that turnarounds take longer and the balance sheets are more stretched.
Q: And Category Two? A:
Q: And Category Two?
A:We've always had trouble making money by buying technology turnarounds. And I think, in that case, what we have learned is how tough it is for a company to turn around when there is a very rapid degree of technological innovation in its business. And that doesn't apply to [non-tech companies, such as] American Home Products (AHP ) and Comcast (CMCSK ) and Bank One (ONE ), but it may well apply to Lucent Technologies (LU ) and Hewlett-Packard (HWP ). So betting on technology turnarounds has never been a real successful strategy for us.
Q: Among your big holdings last summer were Honeywell (HON ) and AOL Time Warner (AOL ) and Lockheed Martin (LMT ). Are they still? A: Honeywell now would be a larger holding than it was. AOL probably hasn't changed materially. We were Time Warner investors and wound up with AOL stock [after their merger]. We probably shouldn't have held on as long as we did. Lockheed Martin was a large holding, and that is something that we have trimmed very late in the third quarter, when the defense stocks moved up quite sharply.
Q: A lot has happened to Honeywell in the last quarter, with its purchase by General Electric (GE
) falling apart. What do you like about it now? A:
Q: A lot has happened to Honeywell in the last quarter, with its purchase by General Electric (GE ) falling apart. What do you like about it now?
A:In the mid-$20s, it's trading roughly a third below where it was before all [the merger action] began a year or so ago. [CEO] Larry Bossidy, whom we always liked, has come back to help straighten the situation out. And it seems to me as though there's a 25% chance that the company is acquired or restructured. But we're willing to bet that this company is worth a lot more than the current price, even if they just run it as a business. Obviously, they've been hit and have taken earnings estimates down like everybody else for cyclical reasons, but at this point it looks very inexpensive.
Q: What stocks have you been trading? A:
Q: What stocks have you been trading?
A:We sold positions in Tricon Global Restaurants (YUM ) and Canadian Pacific (CP ). We've continued to buy Disney (DIS ). Disney is obviously very controversial in light of the break in the stock following Sept. 11. We have bought an additional position in Starwood Hotels (HOT ). We have increased our position in media companies Meredith (MDP ) and Viacom (VIA.b ), and we have continued to buy McDonald's (MCD ).
Q: What's your thinking on McDonald's? A:
Q: What's your thinking on McDonald's?
A:How many things can go wrong with one company? A year and a half ago, the stock was in the $50s. Then, [worries over] mad cow [disease] and hoof and mouth, and a strong dollar, and concerns over a slowing economy all combined to drive the stock below $30. The one thing that I feel quite strongly is that this is a very strong company financially. Between $25 and $30 [a share], you have to own this. We have no real assurance that it won't go down further. But, at the same time, the balance of opportunity between further risk and future potential reward looks pretty attractive to us.
Q: Some retailers have really taken it on the chin ahead of what seems to be an inevitable recession. I'm thinking particularly of Gap (GPS
). Are stocks like that attracting you? A:
Q: Some retailers have really taken it on the chin ahead of what seems to be an inevitable recession. I'm thinking particularly of Gap (GPS ). Are stocks like that attracting you?
A:Gap is something we have made a mental note to look at. My favorite, relatively safe, retailer would be May Department Stores (MAY ), which is a classic cheap stock with a p-e [ratio] of 10 and a yield of 3%. And my favorite higher-risk turnaround would be RadioShack (RSH ), which is something that we've owned off and on in my 20 years here. And it always amazes me how the stock price moves around so much more than the business does.
Gap is moving up on our list, simply because of the severity of the price decline. Of course, my daughter tells me that since I shop at the Gap, that means it's hopelessly tainted because she has moved on to other places. But...early last year, the stock was at $50 and now it's under $12. And this is a reasonably strong company. So I would think that there's some reason to be somewhat optimistic about Gap.
Q: Broadly speaking, do you think that investors today are too pessimistic about stocks, or are they getting it about right? A:
Q: Broadly speaking, do you think that investors today are too pessimistic about stocks, or are they getting it about right?
A:I don't have a good answer to that. My sense -- which I would not bet my life on -- is that people have become a little bit too negative. People have not panicked out of stocks, but with everything that has gone on people have become fairly negative on the prospects for returns.
My bet is that, sooner or later, the Fed is successful. And if you look out into 2002, earnings comparisons are going to look an awful lot better primarily because earnings this year are so bad. So over the next -- I wouldn't necessarily say two quarters -- but over the next two years, it's really easy for me to see how people could be pleasantly surprised.
Q: Finally, what should a prospective investor think about before sending you a check? A:
Q: Finally, what should a prospective investor think about before sending you a check?
A:Prospective investors should take a look at what we have done historically on a year-by-year basis, including this year, because it's not all milk and honey all the time.
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