Online Extra: Investing Against the Tide

Fund manager Brian Rogers believes that where disaster strikes, opportunity knocks for savvy -- and patient -- stock-pickers

A 23-year veteran of investing, Brian Rogers of the $18.9 billion T. Rowe Price Equity Income has weathered many a market storm. But for a contrarian like Rogers, who has managed the fund since its start in 1985, such turbulence is actually welcome. It gives him the chance to pick up strong companies at deep discounts. He was poised to pounce after the stock market crash in October, 1987, and nearly 15 years later when the technology bubble burst.

Those moves have paid off: Since inception, the large-cap value portfolio has returned an average of 13.4%, outpacing both its peers and the market. And like other no-load funds at T. Rowe Price, it carries low expenses, at just 0.78% of assets a year vs. as much as 1.42% for similar offerings. Rogers recently spoke with BusinessWeek Chicago Correspondent Adrienne Carter. Edited excerpts of their conversation follow:

Q: What's your stock-picking process?

A:

We have a large-cap value orientation. Our philosophy is to identify companies when they're out of favor. Invariably we're looking at companies that have had some type of issue where investors have been worried about the company's prospects. That concern or controversy creates opportunity. Typically, the stocks' price-to-earnings ratios are lower and the dividend yields are higher than they've been.

Q: So you like to buy when others are selling?

A:

I thought 1987 was a good period. In that dislocation in October of that year, so many great companies were massacred, so there were a number of opportunities.

Q: What gives you the courage to buy stocks in such a market environment?

A:

Being willing to invest in the face of uncertainty and having the stamina to live through uncertainty comes from experience.

Q: We haven't had any major shocks to the market as of late. So where are the opportunities today for a contrarian investor like you?

A:

Coke's (KO ) problems over the past couple of years have been well covered in the media. There have been management issues, board issues, financial issues. In the course of this, the stock has declined from the mid-$50s to less than $40. We bought it around that price when it was trading for 18 times earnings and had a 2.5% dividend yield.

Q: You recently bought another beverage maker, Anheuser-Busch (BUD ). What's the story behind that investment?

A:

Anheuser-Busch is selling at 15 times earnings because of competitive pressures. The beverage and food business gets more and more competitive every year. But Anheuser-Busch is quite a formidable marketing company. Every time I see their Super Bowl ads, I think they're great marketers. The company has strong cash flow, and management can be trusted to behave responsibly. They will do well over the long term.

Q: Lately, you've been eyeing media, technology, and pharmaceuticals. Why is a value investor buying traditional growth sectors?

A:

Growth is cheap by historical standards. These sectors aren't trading at 10 times earnings, but the valuation difference between value and growth stocks isn't as wide as it usually is. So I'm leaning in that direction -- media, health care, even some technology names look more attractively priced than they would normally be. I have no idea if that will work out in 2005 or 2006, but it feels like a good bet at this time.

Q: How long do you hold onto those companies?

A:

When we make an investment we try to think: Is this a company that we will be happy to hold for three years? In reality, there are a couple of stocks we've held for 20 years and ones we'll hold for a couple of months. Our turnover tends to be 15% to 30% a year.

Q: You focus a lot on the dividend yield of the stock. Does that make this a good fund for income-oriented investors?

A:

I think it's tough to get a lot of income in either the bond market or the equity markets. This fund is a reasonable place to get dividend income. Over the long term, I'm looking to build a portfolio with a payout that's 25% higher than the S&P 500. Right now, the fund's yield is 1.9%. The index is 1.6%.

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