From Barron's
--
An interview with Cappy McGarr ~ It may be downright un-Texan, but
for the proprietor of Dallas-based McGarr Capital Management,
"Barron's: Up and down Wall Street, the young and the restless are
starting hedge funds today. What can you tell them, after 15 years in
the game?
McGarr: I can only tell you what we do. I run a traditional hedge fund with
about $250 million in assets. We don't invest in commodities, futures or
currencies. I'm a stockpicker, and I hold 10-15 positions at a time. I have a
long bias, but I also sell stocks short. On average, we're 110% long and
30% short, although we're about 120% long and 35% short at the moment.
Most of my short positions involve paired trades. I like to buy one company
and short a related company when the values of the two stocks are out of
sync. Sometimes I'll buy a company and short a competitor. A few years
back, we made a lot of money going long Dell Computer and shorting
Compaq Computer. It was a great paired trade. In fact, I wish I still had it
on.
Q: It's not too late.
A: We continue to own Dell, although we covered our Compaq. Shorting
helps to mitigate the volatility of a very concentrated long portfolio. And it
helped us post a 9.5% return in 1994, the last tough year for the market."
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"Q: Let's rephrase the question. If you weren't constrained by the size of
your position, would you buy Cisco at these prices?
A: That's a good question. I would not. Cisco is a core holding for us, as it
should be for anyone who wants exposure to technology. If you sell it, there's
really no comparable tech company with which to replace it. But we would
not chase the stock up from here.
Q: Do you feel the same way about Dell?
A: Absolutely not. We're not buyers now, because Dell already represents
more than 10% of our portfolio. But we see 20%-25% upside, probably in
the next six months. The company's business is great, and Dell likely will
double its worldwide market share over the next three to four years. If I told
you about a company that had almost $6 billion, or roughly half its assets, in
cash; and no net debt; generated more than $1 billion in cash per quarter;
had virtually no inventory, negative working capital, a 290% return on
invested capital and an 80% return on equity; sold $35 million a day over the
Internet and grew earnings by 50% a year for the past five years, would you
buy the stock?
Q: Tell me about the outlook for the next five years.
A: Earnings will grow by 35%-40% on an average annual basis. Dell now
trades for 41, but probably should trade for 55-60. Where's the
competition? Compaq went out and bought Tandem and DEC [Digital
Equipment]. Compaq needs a psychiatrist. It doesn't know what it wants to
be. It wants to be IBM."
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