[BMC SFA WAT CD BSX NETA VIGN] Fund Managers Find Value in Growth Stocks
Sunday August 12, 12:13 PM EDT
By Martha Slud
NEW YORK (Reuters) - As shares of enterprise software maker BMC Software Inc. (BMC) have fallen over the past year, they've landed in an unlikely place -- the lap of Merrill Lynch & Co. (MER) value manager Elise Baum.
Baum, portfolio manager of the $214 million Merrill Lynch Mid Cap Value fund, has invested in some former big growth stocks that have fallen on hard times. During the late 1990s market boom, these stocks would be off-limits to people like Baum, who invests in medium-sized companies that are cheap relative to earnings or assets.
But these days, some once-lofty stocks that Baum thinks are poised for a rebound have crossed her radar screen, if only because their market value has plummeted. The trend is especially visible in the tech sector. BMC's shares closed at $19.30 on the New York Stock Exchange on Wednesday, compared with a 52-week high of $33, while its market capitalization is down to $4.8 billion from about $11 billion in mid-2000.
"The decline in market capitalization has been so swift and so profound that a lot of companies that really I just never imagined would come back to mid-cap are hitting our screens now," said Baum, whose fund is up about 14 percent year to date and up 13.9 percent on average for each of the past three years. "They are at the low end of their historical valuation range, they are in the mid-cap space and it's providing us a lot of new companies to look at."
Baum, who looks for companies with market caps of less than $10 billion, isn't the only value manager scooping up stocks of once-larger companies.
The Neuberger Berman Partners fund, which targets mid- and large-cap value stocks, has invested in companies such as digital set-top box equipment maker Scientific-Atlanta Inc. (SFA) and biotech equipment maker Waters Corp. (WAT) Both companies' market caps have fallen to the mid-cap level amid steep drops in their stock prices.
"For now, we're finding mid-cap as a better hunting ground for good ideas," said S. Basu Mullick, manager of the $2.2 billion fund, which is down about 3.6 percent year to date.
Scientific-Atlanta stock closed at $26 on the New York Stock Exchange on Wednesday, down about 70 percent from its 52-week high of $94. The 52-week low was $21.
Mullick said he likes the stock because the company has no debt and the stock price includes about $5 per share in cash on the firm's balance sheet.
Waters Corp. stock closed at $28.30 on Wednesday, compared with a 52-week high of $90.94 and a 52-week low of $22.33. The firm's market cap is about $3.7 billion, down from $11.7 billion at its 52-week peak.
Value funds have been on a roll this year. Small-cap value funds are the best performing fund category this year, up 13.5 percent through July 31, while mid-cap value funds are up 8.3 percent, according to fund tracker Lipper Inc. The Standard & Poor's Mid-cap 400 index slipped 0.54 percent during the same period.
Baum's top holdings include travel and real estate services firm Cendant Corp. (CD), medical device maker Boston Scientific Corp. (BSX) and antivirus software firm Network Associates Inc. (NETA)
Baum added BMC stock to the portfolio about two months ago. The shares are down about 14 percent so far in the second quarter. But, despite the volatility, "we think that they have a very sustainable long-term position in the marketplace," she said. The company is becoming more conservative in its earnings guidance and "we feel that there's good underlying value in that (enterprise software) space," she said.
Another recent addition is business software maker Vignette Corp. (VIGN), which closed at $7.75 per share on Wednesday, down about 80 percent from its 52-week high of $42.37. The 52-week low is $3.62.
"I think that by stressing a close relationship with management, we are better able to take advantage of some of the volatility in the market," Baum said. "We believe that among the rubble right now there are a lot of quality companies."
Many mid-cap managers are boosting their stakes in tech stocks as some former highfliers become a lot cheaper. The $7 billion Fidelity Mid-Cap Stock fund, which is classified as a growth fund by data tracker Morningstar Inc., raised its tech stake to 22.4 percent at the end of June, up from 4.5 percent at the end of May, according to Fidelity Investments data released in mid-July.
"In '98 and '99 it seemed like a lot of stocks were mid-cap for a day, and then they would go on to large cap," said Russel Kinnel, Morningstar's director of fund analysis. For mid-cap fund managers, "I wouldn't say everyone sees the world teeming with opportunities, but certainly their universe has shifted -- especially to telecom and technology."
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