Managers
finding value amidst devastation
I have to
admit that last year, when stock market indexes were suffering as a result of
the then one-year-old “tech wreck”, I wasn’t all that enthusiastic about the
prospects for a market rebound. While some were attempting to call for a
turnaround, I (along with many others much brighter than me) pointed to the
persistence of very high stock valuations and a sluggish economy. Today I’m
whistling a slightly different tune. No, I’m not wearing my bull horns, but I’m
hearing more and more from managers who are starting to put their cash to work
in attractively valued stocks.
Just six
investment funds focusing on telecommunications companies have been in
existence for a full three years to the end of June. The best performer of that
group has generated an average annual compound loss of 11 per cent annually.
That’s not a typo. As the time period shrinks, the losses grow. For the first
six months of this year, the median telecom fund shed fully 38 per cent of its
value.
It’s been
an ugly sector to be sure. How about putting some money into it – interested?
Maybe you
should be, because many of the industry’s best money managers are doing a bit of
bottom fishing – some of it in the telecom sector.
And not
just any managers, but those that employ the style that I’ve repeatedly
espoused in this space: value managers.
George
Morgan, lead manager of the Templeton Growth Fund Ltd., said this week at the
fund’s annual meeting that he’s been actively buying stocks. Morgan quipped
that “[stock] bargains are plentiful” and that he’s finding far more value now
than he has in years. SBC Communications and Nortel Networks are two of the
telecom stocks that have grabbed Morgan’s attention lately.
He’s not
alone.
Chris
Richey, lead manager of the new Brandes Global Equity fund, confirmed in a
recent interview that he also bought some of Nortel’s recent debt and stock
offering for his firm’s clients. In fact, the fund he was managing until a few
weeks ago – AGF International Value – had about 19 per cent of its assets in
the telecom sector.
Tim
McElvaine – lead manager of Cundill Value fund – has been building positions in
many beaten up telecom stocks. While McElvaine’s definition of “telecom” is
broader than most (i.e. radio, TV, other media and communications), his 30 per
cent weighting in these industries remains a striking figure. McElvaine has
entered the telecom sector in a more opportunistic fashion. He owns bonds of
distressed companies such as Liberty Media and IDT; but he also owns stock in
companies like VSNL – a major Indian telecom firm with substantial
institutional and government ownership.
Perhaps
most surprising is the fact that Warren Buffett’s holding company, Berkshire
Hathaway, recently bought a block of convertible bonds issued by Level 3
Communications (http://www.level3.com/576.html).
It’s surprising because Buffett has said in the past that he won’t invest in an
idea he can’t illustrate with a crayon. In other words, a business’ basic
raison d’être should be easy to understand. This led many to believe (including
me) that technology was taboo for Buffett – an investing legend known as the
Oracle of Omaha. It’s also interesting to note that Level 3 CEO, Walter Scott
is a friend of Mr. Buffett’s and occupies a seat on the board of Berkshire
Hathaway.
Fortune
magazine ran a great article (http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=208645&page=1)
on Buffett’s investment in Level 3.
It’s
important to note that none of these managers is saying that the
telecommunications sector is about to embark on another bull ride. Value
managers typically look for investment ideas on a stock-by-stock basis; not
because they think a particular industry is attractive.
The
examples noted above simply illustrate that managers are finding many
individual stocks that they see as good opportunities. Sure, the sector will
eventually see better times, but these managers are not counting on a return to
a 1999-like telecom boom.
Since the
goal of the value manager is to pick up stocks at bargain basement prices, it
sometimes means that bad news must be followed. Hence, it’s important to
understand that following bad news usually means getting into a stock before it
has bottomed.
Particularly
for two of the managers noted above, Chris Richey and Tim McElvaine, following
bad news is one of their favourite ways of finding good investment ideas. In
the telecom context, both would likely admit that many stocks are seeing their
prices taking a beating for good reason. But the hunt for the relatively few
stocks that are being unduly punished is too tempting for these bargain hunters
to resist.
This
article shouldn’t be taken as an endorsement of any of the stocks mentioned or
of the theory that telecom will come booming back. Rather, my point was to
illustrate that value managers are finally starting to find good value among
many different sectors – even those whose futures seem the dimmest.
Frankly,
that’s something I haven’t heard them say in some time.
With all of
the bad news that peppers the daily headlines, today seems like a good time to
put some money to work – particularly with one of the fine money managers
profiled above.
Dan Hallett, B.Comm., CFP, CFA is the Senior
Investment Analyst with Sterling Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, Alberta, and Manitoba.