<EOG, a favorite> maybe a power play next week? IDPH <another favorite, in biotechs>
BARRON'S: Power Play: A Timely Bet On Energy Follows A Fund's Profitable Scaling Back On Techs
By Allison Bisbey-Colter
Co-manager Katherine A. Burdon of Pimco Mid Cap Fund has always been
interested in investing. Even as an undergraduate biology student in
the early 1980s, she took a class on the stock market. At the time,
everyone was keen on energy stocks, which had soared following the
Arab oil embargo. It turned out to be exactly the wrong time to buy,
of course. The prices of most oil and gas stocks had already peaked.
"It was a good thing we were all college students and didn't have
any money to invest," the fund manager remembers.
At Pimco Mid Cap, Burdon looks for companies that offer earnings
growth at an attractive valuation. There's no magic formula; she
considers companies with moderate earnings growth and low stock prices
to be just as worthy of consideration as companies with strong growth
and relatively high valuations. But when the earnings outlook
deteriorates, it's time to sell.
Burdon wasted no time in selling the fund's holdings in
semiconductors and semiconductor-equipment makers early last year when
it appeared that demand for personal computers and wireless
handsets-big end markets for chip suppliers-was slackening.
.........
"People weren't as focused on the
fundamentals," she recalls. "They were just in love with the concept
of growth stocks. [These stocks] had been successful and were a big
part of the index."
The fund manager joined Cadence Capital Management, Pimco Advisers'
small- and mid-cap equity-fund unit, as a health-care specialist. But
she claims to be completely "agnostic" when it comes to sectors.
The fund's holdings are constantly ranked against the universe of
Russell Mid Cap Index stocks for attributes such as earnings growth,
price momentum and price-to-earnings and price-to-cash ratios. "We
want the most growth at the best valuation," the manager declares.
Nevertheless, she thinks the outlook for the technology industry is
still uncertain, while there are good earnings prospects for many
energy and financial-services companies.
Indeed, Pimco Mid Cap's bets on energy stocks have been almost as
foresighted as its exit from technology. Convinced that natural-gas
prices were going to rise much more than most people expected, the
fund's managers early last year purchased shares of <<EOG Resources>>,
an independent oil and gas producer. Burdon says EOG, which devotes
80% of its exploration to natural gas, is among the companies best
positioned to benefit from the imbalance of supply and demand
highlighted by California's power troubles.
"On the demand side, there's an increase in use of natural gas to
produce power and electricity through the use of gas turbines," she
observes. "On the supply side, in the last five years we've pretty
much underinvested in exploration of natural gas."
Pimco Mid Cap initially purchased EOG Resources at around $18-$20 a
share, when natural gas was trading at about $2 per million BTUs. The
shares currently change hands at around $46, down 19% from their
52-week high of $56.69 at the end of December.
Natural-gas prices soared to $10 per million BTUs last month but
have slid sharply in recent weeks, in part because warmer weather has
eased concerns about dangerously low gas-storage levels. Nevertheless,
Burdon is confident that gas prices will continue to support EOG
Resources' earnings growth.
"At this point, based on our discussions with a lot of companies in
this area, we still feel comfortable that natural gas will stay in the
$5-$6 range for a couple of years, although it will have peaks and
valleys," she says.
While Burdon doesn't mind holding on to pricey stocks that have good
earnings prospects, it is possible for companies to grow their way out
of Pimco Mid Cap if they come to represent too big a portion of the
fund's assets. She likes to keep no more than 20%-25% of the portfolio
in its 10 biggest holdings.
One company that has found its way into the top 10 list through
market appreciation is <<IDEC Pharmaceuticals>>, a biotech firm that
has successfully brought its antibody cancer treatment to market and
is close to expanding its product lineup.
Burdon thinks IDEC was smart to enlist the support of another drug
company, Genentech, in marketing and selling Rituxan, which is used to
treat non-Hodgkin's lymphoma. "They're reducing the costs associated
with becoming a successful company," she states.
IDEC is currently trading at around $56 a share, down more than 25%
from its 52-week high but still three times the $17 Burden paid. She
took advantage of the run-up in IDEC's shares to trim Pimco Mid Cap's
stake in the company last year. But she's still confident that the
current valuation is justified because IDEC has a number of follow-on
drugs in the pipeline that could prove to be even more powerful cancer
treatments.
Large-cap funds haven't outperformed the broader stock market by as
strong a margin so far this year as they did in 2000, but Burdon
thinks the asset class still provides some diversification.
"The market always provides you with opportunities to buy stocks
that have been overlooked," she contends. "Over the past few years,
mid-caps have been overlooked relative to large-caps, and there's
still opportunity there."
---
ALLISON BISBY-COLTER covers mutual funds for Dow Jones Newswires.
(END) DOW JONES NEWS 02-24-01
12:59 AM
- - 12 59 AM EST 02-24-01
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