Money Manager Q&A: Mairs & Power Inc's George Mairs
St. Paul, Minnesota, March 24 (Bloomberg) -- George Mairs, who manages the Mairs & Power Growth Fund, likes to stay put.
The 72-year old investor went to work for his father's Minnesota firm when Harry S. Truman was president; he keeps his $560 million fund's shares for an average 10 years; and, when investing, he rarely strays from his native Midwest. About 80 percent of his picks are companies based in the area.
The strategy has served him well. Through last year's stock market slide, he steered the fund to a 26.5 percent return, even as the Standard & Poor's 500 Index declined 9.1 percent.
The fund has averaged a 20.7 percent annual return in the past decade, beating the S&P 500's 17.4 percent.
Mairs, who has managed money at Mairs & Power Inc. through other bear markets during his 50 years in the business, thinks health care and financial stocks will fare well through the current slump. His largest holding is Target Corp., a discount retailer that stands to benefit from leaner times if consumers try to save more money, he said.
Q: How do you pick stocks for the fund?
A: Basically, it's a bottoms-up approach. We tend to concentrate our inquiries on upper Midwest companies, which is where we're located. We came to the conclusion some decades ago that if we had any advantage over other investment advisers around the country, it was our knowledge of upper Midwest companies. Since we're a 70-year-old firm, we've been watching them for a great long time.
What we tend to do is to find companies in this area -- not exclusively, but in large part in this area -- that seem to have outstanding characteristics. Typically, a very strong franchise, a number one or two position in whatever industry they happen to be in, and companies that have been able to show fairly consistent earnings growth over fairly long periods of time, which would suggest that these companies are well-managed.
We don't spend a lot of time on sector allocation, but we do have certain sectors that we like very much. One of them has been health care over the years -- almost over the decade -- and that has been a leading position in our portfolio. The other one has been financial services.
We happen to have a couple of outstanding health care companies in this area: Medtronic and St. Jude Medical. Other health care companies we have are not regional at all: Pfizer, Johnson & Johnson and Baxter.
We like the long-term outlook for health care. We also think financial services are a good place to be, particularly in a period of declining interest rates. We have about 18 percent of our portfolio currently in financial services.
Q: Is health care something you like because of the slowing economy?
A: I think at the current time that's why health care becomes particularly attractive. Health care stocks did very well in 2000. In 1999, they didn't do well at all. They underperformed the market. But in 2000 they outperformed the market. We feel this is a particularly good place to be given the current economic slowdown.
Q: What are your favorite stocks?
A: Our largest holding is Target. We think the outlook for that company is particularly bright. They have been able to grow faster than other companies in the industry other than perhaps Wal- Mart and they have been able to distinguish themselves from other discount retailers. I think the current environment is favorable for discount retailers as opposed to traditional department stores.
Our second largest holding is Wells Fargo. This is formerly a Minneapolis-based company now based in San Francisco that has really outperformed the banking industry over the last five and ten years. Therefore, it has a fuller valuation perhaps that other banking companies, but justifiable based on the company's long- term record.
Our third largest holding is Baxter International, which is in the health care area. We think this stock represents good value at current levels and that it will ultimately gain a higher price- earnings multiple as people are more familiar with the fact that this is a very high-growth company.
Q: In December, you said the valuations of some technology shares were attractive. Since then the Nasdaq Composite Index has continued to decline. How do you see valuations of technology companies?
A: I think you have to be very selective in this area. We have just recently, within the last week as a matter of fact, added Corning to our portfolio. The stock is down from a high of about $113 to the current level of about $25 a share. We think of this as a core holding. It's a very high-quality company that we think is very well positioned in the telecommunication area. This looks particularly attractive to us at the present time.
I think there are a number of tech stocks that look particularly expensive. Cisco Systems comes to mind, because the growth rate is a lot slower than a lot of people thought.
Q: You have been doing this for 50 years. How does this bear market compare to past ones?
A: This has been a very unusual bear market. It's been concentrated obviously in technology and in the broad market indexes because of their representation in the indexes. But if you look at the New York Stock Exchange Index, for instance, you'll find it's down about 6 percent over the last 12 months. This is a multi-cap index. We think there are a lot of mid-cap stocks that have under-performed over the last two or three years and have been performing reasonably well over the last 12 months.
So our strong performance last year reflected the fact that we do own a number of mid-cap and some small-cap stocks that have been outperforming the market simply because the valuations became too low. Saint Jude Medical, one of our holdings, had a spectacular rise. So did TCF Financial.
Q: Do you think that stock prices have bottomed out?
A: I would think that the overall market is pretty close to the bottom right now. I think there is still weakness in some of the technology stocks. But I think the rest of the market looks to us fairly priced at the current time and there are a number of issues that look undervalued to us. So we are pretty comfortable putting money to work at these levels.
Q: Which companies do you think are undervalued?
A: Corning, as I suggested, is something that we have added to our list. Interestingly, we added to our holding of Medtronic a just a week ago on the basis the stock is off 20 percent from its all-time high. It's not a cheap stock by any means. But we think there has been a sufficient correction in some of the health stocks so that we would be adding to them at current levels.
Q: While the market was rising, there were a lot of people that took their investment decisions into their own hands. Have your skills as a money manager become more in demand in light of the stock market's decline?
A: What we have seen is a pretty decent flow of new cash into our growth fund since the beginning of the year. This reflects, first of all, the fact that we had pretty good performance last year but also the fact that the concept of mutual fund investing has become more attractive in light of what many individual investors have experienced by investing in individual technology stocks. A well-managed fairly conservative stock fund becomes a very attractive alternative.
Q: What, in your view, caused the current slump in the market and how long do you think it will last?
A: The current market correction was obviously precipitated by the amount of speculation in technology stocks. We had a bubble and the bubble burst. That obviously was the thing that precipitated the market decline. I think that many stocks are higher today than they were a year ago this time. So it was really the technology area that has suffered.
I think the slowing in the economy that we're seeing right now is the external situation that is causing concern on the part of investors. But it isn't evident to us that the economy is all that weak and we think the Fed is taking appropriate corrective action. The administration is proposing tax cuts. All of this I think should provide some ultimate stimulus to the economy. We think that the economy is probably going to be stronger in the second half of the year. >>
I Love these old guys the have been around for long time. A couple of times I sat down with these two old guys watching the ticker go buy, one had cigar in his mouth the other wore plaid, both had hats on. LOL It was cool sort of like the old days. I miss my last broker, he was 78 when I left to go on my own, I was still a young punk then, thought I knew it all. Invaluable knowledge came of his mouth every time I sat down with him, I'm still using it.
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