Stocks: Looking Beyond the Headlines
When mutual-fund manager J. Jeffrey Auxier isn't scouring the markets for downtrodden stocks, he's picking hazelnuts. He says working on his 58-acre nut and timber farm near Portland, Ore., keeps him "grounded and humble." And he expects it'll do the same for his four children, to whom he doles out farm chores. "The thing about the farm is that it's an everyday thing. You can't rest on your laurels," Auxier explains. "It's about stamina and persistence. It's all those things that make a great investor."
Auxier, 43, is president of Auxier Asset Management in Tualatin, Ore., which manages about $200 million for high-net-worth investors. He launched his first retail mutual fund in July, 1999, the Auxier Focus Fund (AUXFX ). It has done exceptionally well against the competition since its debut: The large-cap value fund is up just over 14% in the past 12 months, vs. a 1.25% loss for its peer group. It has gained about 2.5% so far this year through Mar. 27, while large-cap value funds are flat.
A self-professed "old-fashioned" investor, Auxier is highly cautious of the markets these days. Despite the fourth-quarter rally that began after the market bottomed on Sept. 20, Auxier greeted the New Year with about 20% of the fund's $13.5 million assets in cash. He has strict criteria when it comes to buying the stock of companies that make up the 30 or 40 holdings in his concentrated portfolio: Each company must have a high degree of predictable earnings, the ability to control their destiny in both weak and robust economic climates, and lots of free cash flow.
Mostly, he describes his stock picks as companies with leading positions in slow-growing industries. "They're generally dull companies," he says. "But the strategy has really worked through thick and thin."
BusinessWeek's Mara Der Hovanesian spoke with Auxier recently about his stock-picking strategy and the prospects for the stock market. Here are edited excerpts of the interview:
Q: You're a stickler for buying stocks at cheap prices. What's your take on current valuations? A:
Q: You're a stickler for buying stocks at cheap prices. What's your take on current valuations?
A:There are certain times to build wealth, and [one of them is] when you buy assets at far less than they're worth. When you're talking about the price-earnings of the Standard & Poor's 500 being at all-time highs, you wonder, well, how aggressive should I be in this situation? I still think we're working off this tech-telecom-media bubble, which just takes time.
There are other issues, too: If companies have to account for stock options, that could impact the assumptions about earnings. Major corporations like IBM (IBM ), Whirlpool (WHR ), and Boeing (BA ) have made assumptions that their pension-fund returns will be 11%, and if the stock market doesn't do that, it's going to be another charge to earnings.
People don't realize that if you go back 20 years, of the 50 fastest-growing companies, only three were able to sustain a 15% growth rate. And even though some of these stocks now are trading at 50 times earnings, there's no growth like that to be found today.
Q: Do you have a forecast for how the market will do this year? A:
Q: Do you have a forecast for how the market will do this year?
A:I don't pay much attention to the market overall. You have to break it down to individual companies that will build your wealth. I don't see the indexes doing anything. They're still weighed 20% tech, and we had a capital-investments cycle that was just unprecedented. Also, corporate debt as a percentage of the economy is as high as it was in Japan in 1990.
Historically, growth is going to be substandard, so you have to make sure you're in companies that can control their destiny and which aren't dependent on the capital markets to grow. And even though balance sheets are coming back into vogue, I still think you have to be very careful. My experience is you can get too much caught into forecasts -- and not into the value of things.
Q: Tell us about a stock or two that you've purchased recently. A:
Q: Tell us about a stock or two that you've purchased recently.
A:Buying a biotech company -- that's risky. But all this growth in these drugs is so exciting. Companies are spending about $90 billion on drug marketing, and they're hiring IMS Health (RX ) to do the sales management and track the drugs. It's like getting royalties on all the new biotech drugs. This company has got $1.2 billion of free cash, and it's a very conservative way to play biotech.
The big risk is that there's huge consolidation in the industry. Right now, they've got a dominant market share in the U.S. The stock dropped down to $18, its lowest price in six years, and it has been as high as $39. But I see growth accelerating. And IMS has a new chief financial officer who's reinvigorating the company.
Q: Wall Street has been lambasted for its shoddy research lately. How does a boutique shop like yours go about its research? A:
Q: Wall Street has been lambasted for its shoddy research lately. How does a boutique shop like yours go about its research?
A:We spend 10, 12 hours a day looking at companies. There's no substitute for grinding through hundreds of annual reports and 10Ks and all that boring stuff. Even talking to management can be misleading. A good CEO gets to where he is because of his sales skills. The CEO can persuade you, but you have to have the numbers.
You have to be a voracious reader. I read five financial papers a day and all the Value Line reports front to back, and I'd say that if I go through 100, I might find two companies I like.
Q: I noticed that Waste Management (WMI
) is in your portfolio. Aren't you worried about the recent Securities & Exchange Commission lawsuit alleging fraud? A:
Q: I noticed that Waste Management (WMI ) is in your portfolio. Aren't you worried about the recent Securities & Exchange Commission lawsuit alleging fraud?
A:I'm not worried about this investigation. The SEC wants to send a clear message to companies to clean up your accounting, or else. They're purging the system. But the issue is with the old management, not the new management.
A lot of these stocks get hit on headlines, not fundamentals. The fundamentals with the waste business and commercial construction are good. Volumes are picking up, and so we bought a lot of the bonds because of their cash flow -- they've got tremendous cash-generating ability because of the recurring nature of the waste business. They do have quite a bit of debt, but we're comfortable with their ability to pay it off. We're playing on the upgrade of the bonds.
Q: You've also got bonds in your fund. Why? A:
Q: You've also got bonds in your fund. Why?
A:We think that corporate bonds could beat stocks this year, so we've got about 10% of our assets in them. We treat them as stock positions and do heavy equity analysis on the issues. We think that the rating agencies can be late on their upgrades or downgrades, so there's a really good opportunity for equity managers to make money here.
The corporate bond market had a huge year after the recession in 1991, so that's pretty attractive. We're just trying to buy the most compelling stories, wherever it is, so we're not locked into one class of investment.
Edited by Patricia O'Connell