On the Trail of Long-Term Growth
Seeking long-term growth? It's the guiding principle of Colin Ferenbach, portfolio manager of the Tocqueville Alexis Fund, which over 20 years has done better than the Standard & Poor's 500-stock index. Ferenbach picks stocks one by one, based on growth at a reasonable price (GARP) -- "reasonable being a very elastic term," he says. "The higher the rate of growth, the more you can justify paying for it." However, he sees growth potential in a few broad sectors, notably information technology, telecom (although he acknowledges risk), medical technology, and pharmaceuticals.
Stocks he owns in those areas include Cisco (CSCO ), Automatic Data Processing (ADP ), Andrew (ANDW ), Medtronic (MDT ), and Pfizer (PFE ). He also has a substantial investment in Microsoft (MSFT ), initiated to take advantage of the release of cash to shareholders that has taken place. "It's too big to be a dynamite growth stock anymore." he comments, but "it could turn out to be a good yield stock."
These were some of the points Ferenbach made in an investing chat presented Aug. 26 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online Jack Dierdorff and Karyn McCormack. Edited excerpts follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Colin, how do you see the broad stock market? Can it get out of this rut? A:
Q: Colin, how do you see the broad stock market? Can it get out of this rut?
A:Not soon. I think several things are pulling on it. One is that corporate earnings are doing very well. The economy is slowing down a little now but won't get much worse. This is such a divisive election, though, and there's a lot of uncertainty -- a lot of differences in political opinion, political direction -- so who knows which way it's going to go, and the market hates uncertainties.
Also, you have interest rates tugging at it. Rising interest rates are in general not good for the stock market, while rising earnings are. So you've got one pulling up, one pulling down. The result is confusion and stagnation.
Q: If you could play one long-term growth story over the next few years, what would it be? A:
Q: If you could play one long-term growth story over the next few years, what would it be?
A:In the macro sense, I presume? IT -- information technology. But don't expect a repeat of 1999-2000. Hangovers like that take a long time to get over with. I can tell you what I own there: Cisco (CSCO ), Dell (DELL ), Intel (INTC ), Xerox (XRX ) (which I'd say is still a tech stock), and Automatic Data Processing (ADP ). Those are some of the larger holdings I have.
Q: Any other sectors look good to you for growth? A:
Q: Any other sectors look good to you for growth?
A:Well, I think that we sort of pick stocks one by one. Telecom has a long way to go, and it's more dangerous than just IT, but there's a lot of consolidation going on. The only direct play we have there is Andrew (ANDW ). Also, medical technology is an area where we'll probably have tremendous growth, but it's very pricey.
Q: Colin, how do you pick stocks for your fund? A:
Q: Colin, how do you pick stocks for your fund?
A:Well, we've got a team of analysts, a team of portfolio managers, and a weekly investment committee. We all do a lot of reading, get a lot of research from outside brokers, including independent research sources, and come up with ideas ourselves. We have criteria, obviously -- we don't look at everything that comes along.
Our criterion is basically GARP [growth at a reasonable price] -- we look for companies that have real growth, not engineered numbers. I look for a strong balance sheet, high return on capital. In combination with that is not too much leverage and management that seems to have proven itself.
Then you apply the reasonable-price factor -- reasonable being a very elastic term. That's a judgment call. The higher the rate of growth, the more you can justify paying for it. If somebody can grow in double digits, they're doing well. That's almost triple the growth rate of the economy.
Q: What's your view on real estate and REITs? And how about Weingarten Realty Investors (WRI )? A:
Q: What's your view on real estate and REITs? And how about Weingarten Realty Investors (WRI )?
A:I own WRI. Not in the fund, but I do own it. I've owned them for a long time and have gotten a very handsome total return on investment from the beginning. They're serious, straightforward people and have done a great job. I own Rouse (RSE ), which is doing very well.
General Growth Properties (GGP ) is another I've been happy to own for 10 years -- they're up substantially from what I paid for them. The fund actually owns General Growth. So I think well-managed REITs make good sense.
Q: What's your opinion of Microsoft (MSFT )? A:
Q: What's your opinion of Microsoft (MSFT )?
A:In the firm, we own a lot. Part of our reason for buying it was we thought they were going to start letting go of some of their cash -- they've done that. It's too big to be a dynamite growth stock anymore. They did increase the dividend quite a bit -- it could turn out to be a good yield stock.
Q: Moving into pharmaceuticals -- Pfizer (PFE )? A:
Q: Moving into pharmaceuticals -- Pfizer (PFE )?
A:I own a lot of Pfizer. I was going to say that another area we're going to see a lot of growth is in the pharmaceutical business -- maybe not necessarily in their earnings, though. Pfizer is a great company with an outstanding pipeline, but the politics in the arena are uncertain. I own a lot of Pfizer, though, as I said, and have purchased quite a bit even in the last six months.
Q: Do you like any retailers? A:
Q: Do you like any retailers?
A:I guess I'm not a big fan of retailers, though I have on occasion made money off them. They're really only growth companies when young and starting up, but after that it gets tougher and tougher -- it's brutally competitive in that business. I own a couple that I thought were well positioned. I own a little company called 99 Cents Only Stores (NDN ), which had sensational growth in California but then moved to Texas. They then realized Texas was a different country, and sales there have been very disappointing.
I own Borders Group (BGP ), the book and record stores. I've had great capital gains on them, sold them at the 30 level. I own some Foot Locker (FL ), the athletic-supply store. I think it's a cheap stock and a well-run company. Borders and Barnes & Noble (BKS ) are genuine growth companies, actually, but I can't say I'm in love with the area. There's an exception for every rule.
I do own Lowe's (LOW ) in a private fund -- we got it ages ago at 2 cents, and it's now $50. So while retailers aren't generally growth, one might say that 2 cents to $50 might be.
Q: When do you expect the market stagnation you mentioned to end, and what's your target for the Dow in 12 months? A:
Q: When do you expect the market stagnation you mentioned to end, and what's your target for the Dow in 12 months?
A:I would think we ought to see some clarification in the market after this election. If Bush gets reelected, you know what to expect, and if Kerry gets elected, you'll get something different. It won't be what's being said now, but we knew that.
As for the Dow, I don't play that game. I've been at this for 40 years, and I've never met anybody who could get it remotely right with any degree of consistency. It's like playing roulette, with two-thirds of the numbers being zeros and double zeros.
Q: What do you think of energy stocks? Do you own any? A:
Q: What do you think of energy stocks? Do you own any?
A:Yes. For a long time I was substantially overweight, but no longer. At one point, I was around 12% energy -- now down to 9%. I think there's a good chance we'll see oil take a big slide in price. It won't happen overnight, but I bet a year from now that oil will be much lower.
A lot of these people playing oil futures -- not too far down the line, they're going to get market called, and it'll be an ugly surprise to many of them.
Q: What are some of your fund's top holdings -- and what has done best for you recently? A:
Q: What are some of your fund's top holdings -- and what has done best for you recently?
A:Very recently, Getty Images (GYI ) has done extremely well. They and Bill Gates's company have a duopoly in photographic archives. They've been up 12% or so in the last two weeks.
Year-to-date performance? Well, the fund has been flat on the year, but the banking group has done well for me this year across the board -- certainly some regional banks. It has been a nice area, unless you have a credit panic (which we haven't had for 13 years). These regional banks have been solid performers.
Q: Which regionals do you like? A:
Q: Which regionals do you like?
A:I own Hibernia (HIB ), Mercantile (MBWM ), National Commerce Financial (NCF ), SouthTrust (STR ). I'm always on the lookout for good new names. I bought all of these companies as eventual takeover candidates, and two of them now are in the process of being taken over. HSBC is my biggest bank holding.... Hang Seng Bank (HSBAY ) is another that's a very solid stock, with a good yield, too.
Q: What's the the average p-e of the Tocqueville Alexis Fund? A:
Q: What's the the average p-e of the Tocqueville Alexis Fund?
A:Good question -- I just don't know the answer. I buy stocks one by one. Then again, there are some tech stocks in there that are at high multiples of depressed earnings, which will push up the p-e ratio. For me, I'm more interested in the ratio of price to 2006 earnings. I, of course, don't know the answer to that. I've got guesses, though.
Q: Earlier you mentioned medical devices -- are you looking at any, or are they too high now? A:
Q: Earlier you mentioned medical devices -- are you looking at any, or are they too high now?
A:I have owned Medtronic (MDT ) for quite a few years now. It's an outstanding company. I paid a high price for it. Actually, I've paid a price for it in another respect because it hasn't made me much money. But they're doing outstanding things.
I owned Stryker (SYK ) for a few years, sold them at 32, but bought them at 4. They've since gone to 50 and back down. I owned Guidant (GDT ) for a while, did very well with that. It's an intriguing area, the medical-technology area. There's a lot of exciting stuff going on there -- the average layperson doesn't really realize how much is going on there right now. I do own Johnson & Johnson (JNJ ) as well -- they're into pretty much everything medical. You name it, J&J is in there as a strong competitor.
Q: Tyco (TYC ), Texas Instruments (TXN ), General Electric (GE ) -- which do you like? A:
Q: Tyco (TYC ), Texas Instruments (TXN ), General Electric (GE ) -- which do you like?
A:I've never been interested in Tyco. They're a conglomerate. They now have honest people running it, which is a nice change, but I don't really like it. TXN, I don't own, but I have nothing against them. GE is unanalyzable. I don't think there's anyone out there who can analyze them. I hope they can -- that's about all I can say. There's a lot of spinning mirrors there -- there's a lot going on.
Q: Can you sum up your thoughts on how investors keen on long-term growth should proceed now? (Other than buying your fund!) A:
Q: Can you sum up your thoughts on how investors keen on long-term growth should proceed now? (Other than buying your fund!)
A:Well, if you look at my record, you can see it has worked out pretty well. As of the end of June, we've done a little better than the S&P over the last 20 years, so it's a good place to have your money. That wonderful phrase by Alan Greenspan about irrational exuberance in the market, I just don't see any now. I do see room for a big tumble in oil, though.
Patience, I guess, is what I'd say. Buy good managements and be patient. At the end of the day, companies are run by people, and the smarter people are going to run better companies.
Edited by Jack Dierdorff