LOR undervalued by 25%. Torray interview
August 9, 1999
Dow Jones Newswires
TIP SHEET: Torray Focuses On Businesses,
Not Stocks
By SHAWN YOUNG
NEW YORK -- Robert E. Torray is something of a Zen master of
buy-and-hold investing.
"I never worry, I never sell," he'll say with only a smidgen of exaggeration.
"If you invest in very good businesses, there's nothing to worry about,"
Torray says. "There's nothing to it, it's very simple."
His Torray Fund, which is rated five stars by Morningstar and consistently
appears on best-of lists, makes it look simple. The fund had a lackluster year
in 1998, but it has outperformed the S&P 500 almost every year this decade
and was up 15.2% for the year as of Friday, compared with 7.7% for the
S&P.
The overwhelming majority of investors are trying to ride the market worrying
about what makes stocks go up or down and trying to second-guess the
momentum of a stock, a sector or the market as a whole.
"They are wasting their time," Torray says.
"You have to reject the popular notion that volatility is risk," Torray says.
"The value is not in the stock, it's in the business."
If a stock he likes goes down, he may buy more. "If it goes up a lot, we're
just not going to buy more."
The fund invests in about 30 companies that Torray and manager Douglas C.
Eby expect to return 15% to 20%. Torray said his ideal investment would be
a well-managed, adequately funded company in a solid business that has high
barriers to entry, meaning it takes time, effort and capital to break in.
"The trouble is, everybody knows which ones those are," Torray says. He
makes up for that in part by buying when others are selling.
When AT&T Corp. (T) was Wall Street's whipping boy about two years
ago, Torray was unflappable. Management crises, earnings troubles, stagnant
revenue growth, stock in the 20's. It all rolled off. And paid off.
"It's just been a tremendous performer," says Torray, who now describes
himself as "indifferent," largely on valuation grounds but also because the
company's business seems less clear to him now that AT&T is branching out
with big bets on cable.
Mostly, he's letting AT&T slide, which is what he typically does instead of
large-scale selling. He lets a position gradually become a less central part of
the portfolio. AT&T has drifted down to about No. 10 from No. 3 at the end
of last year.
"They just drop off the bottom," he says of the companies he's no longer
buying. Of course, he does eventually sell some holdings. Among them has
been Motorola Inc. (MOT), which has risen sharply this year.
"I said, 'I'm just not going to think about it anymore,"' Torray says. "I lost
interest."
What does interest him are satellite companies such as the Hughes
Electronics (GMH) unit of General Motors Corp. (GM), which is the
company behind DirectTV, and Loral Space and Communications Ltd.
(LOR), a provider of commercial communications satellites.
Talk about barriers to entry.
It costs billions and takes years to get a satellite operation going. Rockets
explode, launches fail, satellites conk out in the air, spy scandals percolate on
the ground.
"It's been a business that has been troubled by a lot of setbacks," Torray
says. "If the stocks go down, we don't care."
Loral, which Torray bought in the low-to-mid teens, has been in the high
teens and low 20's for most of the year. Hughes started the year just below
40 and closed Friday at 53, a gain of roughly 33%.
He has stayed out of Iridium World Communications Ltd. (IRID), which he
thinks has little chance of recovering from a brutal series of setbacks, but he
thinks satellites have enormous potential.
"It's a very fast-growing business," Torray says. "I see satellites really as the
future."
"With just one satellite, Hughes blankets the whole country," Torray says.
Loral, he says, is undervalued by 25%. It is well-managed and will price its
service attractively, Torray believes.
He's also very enthusiastic about Walt Disney Co. (DIS), which has been out
of favor with investors. Its shares are down 15% so far this year, having
started the year at 30 and closed Friday at 25 1/2.
"It's an extraordinary entertainment company that no one could duplicate,"
Torray says. "I consider this to be undervalued."
Torray says he restricts his buying to a relatively small number of stocks
because there aren't many out there that can give him the return he seeks.
Heavy industry just doesn't have the profit margins. At the other extreme,
glamorous high-tech mainstays like Microsoft Corp. (MSFT), Dell Computer
Corp. (DELL) or Cisco Systems Inc. (CSCO) seem opaque to Torray.
"I'm a technophobe," he says. "I'm just not interested in technology. I don't
understand it." If he can't analyze the business, he stays on the sidelines.
Investments in the technological elite, he says, haven't helped a lot of
managers beat their benchmarks.
Earlier in his 38-year career on Wall Street, Torray played the market and
the momentum in stocks, buying low, selling high and doing well at it, too, he
says.
"I've become more of a purist," he says.
-By Shawn Young; 201-938-5248 shawn.young@dowjones.com
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