BusinessWeek Online
INVESTING -- "Technology, Industry, Cyclicals, and Financials"
INVESTING
Interviewed by Jack Dierdorff of BusinessWeek Online
It's a good time to be investing in stocks, and once again, technology is a place to look. That, in any case, is the view of Robert S. Natale, managing director of Bear Stearns Asset Management and manager of its S&P STARS Portfolio Fund. The fund picks its holdings from the Standard & Poor's buy list -- and in 14 years has achieved a return almost three times that of the S&P 500.
Natale says the fund is now loading up on technology and basic industries while reducing its exposure to consumer-staples and health-care sectors. His reason for returning to tech is that he sees an upturn coming and wants to get in early. The fund's holdings now include AOL Time Warner, GoTo.com, and DoubleClick, as well as semiconductor companies such as Atmel and Xilinx.
He is also positive on financial companies, where the fund concentrates on money-center banks such as FleetBoston Financial and Bank of America. In the energy sector, he focuses on oil-service stocks, including such names as Santa Fe Drilling and Global Marine.
On the negative side, Natale is now staying away from those tech companies that depend on personal computers, which he believes are becoming commoditized, and telecommunications. And he is also nervous about fiber-optics makers, where he points to considerable excess capacity.
Natale was speaking as a guest in a chat presented May 22 by BusinessWeek Online and Standard & Poor's on America Online. He was responding to questions from the audience and from Jack Dierdorff of BusinessWeek Online. Edited excerpts from the chat follow. A full transcript of the chat is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Robert, last week it looked as if the bulls might be running again. Now the signals seem to have changed. What's going on?
A: Investors may have finally decided to stop fighting the Fed. Last year, stock prices were rising when interest rates were going up, which is not the rule. Earlier in the year, stock prices were dropping as the Fed was reducing interest rates. Now I think that investors finally have it right. With interest rates lower and economic growth picking up in the coming months, this is a good time to be investing in stocks.
Q: What have you been buying -- and selling -- for the fund in all the recent turbulence?
A: We are becoming overweight in technology and basic industries and reducing our allocations to consumer staples and health care. We continue to be overweighted in financials, too, which is an early-cycle play.
Q: So you see bargains in tech and basic industries, and a rebound to come?
A: They are no longer the bargains they were in April, but there is plenty of upside. The price-to-sales ratio for tech companies in the S&P 500 is 1.6, about the historical average. But that understates the potential improvement in earnings estimates, which could occur over the next year. And technology usually becomes overvalued before the up cycle ends. So, this is all by way of saying that we're probably 25% through the up cycle in technology, which could last 18 to 24 months.
Q: Let's pause and give you a chance to describe how the S&P STARS Portfolio Fund works.
A: We start with a buy list that's supplied by S&P. Since Jan. 1, 1987, that buy list has provided returns not quite three times the S&P 500. And I select stocks from that list based on my view of the economy going out 6 to 12 months. The fund has a five-star ranking from Morningstar, as well as the top ranking from Lipper and Investor's Business Daily.
Q: What specific technology stocks are you currently purchasing?
A: I can't mention the stocks that I'm currently active in, since that would be a breach of SEC rules...We have been collecting Internet stocks in 2001. They include AOL Time Warner (AOL ), GoTo.com (GOTO ), and DoubleClick (DCLK ). We also have maintainted and added to some of our semiconductor holdings, including Xilinx (XLNX ), Atmel (ATML ), and Integrated Device Technologies (IDTI ). We have steered clear of the PC space as well as telecommunications equipment.
Q: Would you hold or buy more EMC (EMC )?
A: EMC is currently a 4-STAR stock [under the S&P Stock Appreciation Ranking System, 5-STAR is buy, 4 accumulate, and 3 hold], and it's a holding in the fund. We find it attractive in the [range of] $30 [per share]. There has been some insider selling of late, which is cause for some concern, but demand for disk-space memory continues unabated in the enterprise arena.
Q: What's your opinion of Yahoo! (YHOO )?
A: Yahoo is one of those Internet names that could perform quite well over the next 24 months. It is an M&A [merger and acquisition] transaction waiting to happen. In order to capitalize on their large audience, they need to marry their portal with Internet access and traditional media, a la AOL Time Warner. Possible marriage partners might include Excite@home (ATHM ) and the large media companies, like Viacom (VIA.B ) and Disney (DIS ). There is some anecdotal evidence that Internet advertising is beginning to pick up a bit.
Q: I like eBay (EBAY ) -- your opinion?
A: EBay is one of the premier companies on the Internet. However, its p-e is somewhat daunting. Both S&P and Bear Stearns through the STARS Fund adhere to a growth-at-a-reasonable-price (GARP) investment approach. EBay wouldn't fit our investment guidelines because of its high p-e multiple on forward 12-month earnings, as well as its five-year earnings-growth expectations.
Q: What are your top holdings?
A: [Our] top holdings include Comcast (CMCSK ), Moody's (MCO ), Sprint PCS (PCS ), FleetBoston Financial (FBF ), and Xilinx (XLNX ).
Q: Would you buy GE (GE )?
A: GE isn't in the fund, and it's currently ranked 3-STARS by S&P. Again, it's a fine company, but the stock is somewhat expensive from a GARP perspective. For more on GARP investing, you might take a look at my book, Fast Stocks, Fast Money, which came out in 2000.
Q: Here's [a question for you] about two companies: Tyco International (TYC ) and (Liberty Media) (LMG.A ).
A: Both are 5 -STAR stocks; both are important holdings in the fund. Tyco has been [rated] 5-STAR for quite some time. We aren't a fan of the pending CIT Group (CIT ) acquisition, but management has executed well in the past, and the stock remains attractive from a GARP point of view.
Liberty Media became a 5-STAR last week. It's a leading growth vehicle for investors wishing to participate in cable content for the new digital cable systems. These new digital cable systems can carry two or three times the number of channels currently offered in most parts of the U.S. That means that Liberty Media's Discovery channels and its other channels will reach more homes. Viewership is up on most of its channels.
Q: What stocks should I buy for fast growth? Is it, in fact, reasonable to expect fast growth?
A: The Bear Stearns S&P STARS Fund is a large-cap core portfolio with a growth bias. We don't focus on aggressive growth. We try to find companies that provide greater-than-average returns, with only moderately more risk than the overall market. Fast-growing stocks are usually overpriced....GARP helps to keep the average investor out of trouble when looking at growth stocks. It's extremely easy to become enamored of growth just for the sake of it -- and very dangerous for your financial health.
Q: You say you like financials -- what's on your list there?
A: S&P has chosen to focus on money-center banks -- rather than regionals -- as the economy starts to improve...S&P has buy ratings on Citicorp (C ), Bank of America (BAC ), FleetBoston, and J.P. Morgan Chase (JPM ). The fund owns BAC, FBF, and PNC.
Q: What is your opinion on Corning (GLW )?
A: Corning is in the very area which I believe will take the longest to recover. Demand for [optical] fiber is up year-to-year, but significantly less than expected. The communications industry is suffering from overcapacity, and it will take a while for fiber in the ground to be completely lit [and] before new fiber is ordered in quantity. I would hold off.
Q: What do you think about the energy sector? Some analysts see it as benefiting greatly from Bush policies.
A: There are many crosscurrents affecting energy stock prices these days. An improving economy in the U.S. and increased demand for electricity produced with natural gas are strong positives. On the other hand, international economies are slowing, and the supply of oil and gas is rising to meet increased demand. Although the STARS buy list is quite overweighted in energy names, the fund is market-weighted. We are choosing to emphasize oil-service companies, such as Santa Fe Drilling (SDC ) and Global Marine (GLM ), as is S&P.
Q: What do you think of biotechs?
A: S&P is looking favorably on biotech in general -- 5-STAR stocks include Immunex (IMNX ) and Incyte Genomics (INCY ).
Q: What do you think about the retail sector?
A: The retail group has had a great run so far this year. They usually outperform in the first half of the calendar year and underperform as Christmas approaches. Things could be a little better in 2001, given the easy comparisons most retailers are up against. We would emphasize those companies that have gained market share over the long term. They include: Home Depot (HD ) (5-STARS), Wal-Mart (WMT ) (4-STARS), Costco (COST ) (4-STARS), Staples (SPLS ) (3-STARS), and Target (TGT ) (currently 4-STARS).
Q: You referred to the improving U.S. economy. So you think there will be a second-half upturn -- and no recession?
A: Recessions are defined as two consecutive quarters of negative GDP. I think that history will not record that such a recession occurred in the first half of this year. Interest-rate cuts, manufactured by the Federal Reserve, usually take nine months to favorably impact the U.S. economy. It took nine months for interest-rate increases to harm the economy last year. If that's the case, and it should be, the economy should start picking up in the September-October time frame.
Q: About where do you see the market by yearend 2001?
A: Certainly higher. My best guess is between 10% and 20% higher than [the] current levels. That will be spurred by improved earnings growth for companies in the S&P 500.
Q: Robert, remind us what your favorite sectors are for investing now?
A: Technology, basic industry, consumer cyclicals, and financials.
Q: And a few quick names from you in basic industry?
A: Tyco International, Vishay Intertechnology (VSH ), and Technitrol (TNL ). |
