Yet another Barron's plug for QCOM. This time, in the Mutual Funds section, a manager whose top holding is the Q.
Ambidextrous
This manager likes both growth and value stocks
By Barry Henderson
If you worship at the altar of asset allocation, Saul Pannell's investing style probably will give you fits. Unlike the legions of fund managers who have been browbeaten into running a portfolio that's easy to label, Pannell uses an investment style that's all over the map. "I have defied being put into some kind of box," he says, with a faint note of pride in his voice.
Not that fund watchers haven't tried. Fund tracker Morningstar, for example, puts his Hartford Capital Appreciation fund into its mid-cap growth "style box," while Lipper lumps it into the catch-all capital-appreciation category. But as soon as you pop the hood, it becomes apparent that this $960 million portfolio is something of a hodge-podge. Pannell owns everything from big, ugly turnaround stories, like Waste Management, to fledgling growth stocks, like Genzyme Surgical Products.
Hartford Capital Appreciation's Pannell: ''Performance is where you find it."
Fact is, he doesn't even care if the company is a growth-oriented or a value play -- as long as he thinks he can make 25% or more on his investment over the next 12 months. "My idea is that performance is where you find it," he observes.
From the looks of it, he hasn't had too much trouble recently. The fund was up 23.1% year to date, compared with a gain of 8.6% for the S&P 500. For the trailing three years, it was up 34.6%, compared with 28.9% for the S&P 500.
At his best, Pannell is an ambidextrous investor who's equally at home with growth or value stocks. When he's going for growth, he tries to figure out the company's three-year growth rate. Then he tries to calculate what that earnings stream is worth going forward over the next couple of years. That means he's usually not willing to pay a big premium. "I assume that after three years, a company's growth rate will decay to the same rate that the S&P 500 is growing. Right now, that's 11%," he says. His growth picks run the gamut from Qualcomm and Citigroup to more speculative fare like Rexall Sundown and Rational Software.
Table: At A Glance
When he switches to the value side of the plate, Pannell looks for stocks that are trading at substantial discounts to the market. He starts with the assumption that a good measure for a value-style equity is the 30-year-Treasury. So he takes the yield on the long bond and doubles it to add in a risk premium. Next, he takes the inverse of this percentage, and that produces a target multiple of enterprise value to cash flow. With long bonds yielding roughly 6%, Pannell's current target multiple works out to around 8.5. (The S&P 500, in comparison, has an enterprise value to cash flow multiple of 11.) "Usually, if a stock is more expensive than that it doesn't make much sense for me to do much more work on it," he says.
One of his favorite value ideas these days is Waste Management, which, by Pannell's calculations, has an enterprise value to cash flow multiple of six. Considering the accounting and management problems the company has experienced over the past several years, most investors now treat the stock as if it were toxic. Pannell, however, thinks the accounting problems have been cleaned up, and he's encouraged by the fact that the waste hauler is looking for a new CEO. He notes that executive recruiter Korn/Ferry has been tapped to come up with a list of candidates.
Assuming that a new CEO could end Waste Management's problems, Pannell says there's a lot to love about the stock. For starters, the company is working to more closely align its collection routes with landfill sites. This sounds like common sense, but it apparently hasn't been a major priority in the past. This new approach could produce big cost savings.
Perhaps even more significant is the fact that Waste Management owns or has access to a large number of landfills at a time when local governments are making the approval process for new ones increasingly difficult. None of this, Pannell says, is factored into the stock. "We're at a real trough in terms of expectations," he maintains.
For calendar 2000, he expects the company to produce around $4.8 billion in cash flow, a figure that should grow to $6 billion in 2001. Once that growth starts to kick in, he thinks investors will bid up the stock very quickly. Pannell's target is 45, or more than twice the recent price of 21.
When it comes to growth companies, you'll generally find Pannell involved in two kinds of names. There are the fallen angels, which he believes are under temporary pressure. First Data, which got hammered last fall on fears of new competition, is a case in point. Pannell thought, correctly, that the fears about the credit-card processor were overblown, so he swooped in and picked up shares on the cheap.
Of course, not all fallen angels bounce back. Computer Learning Centers went from bad to worse, contributing to Hartford Capital Appreciation's sickly 3.26% return last year.
That's why he leavens his holdings with a slug of emerging-growth companies. His favorite, Genzyme Surgical Products, is an underappreciated biotech firm with revenues of $104 million and a market cap of about $92 million. (The company, which makes products for minimally invasive surgical treatments, is actually a tracking stock controlled by Genzyme.) Like most early-stage biotechs, Genzyme Surgical is losing money. But Pannell thinks its products, like its "biosurgery" film that prevents organ adhesion after surgery, will take off this year.
The company, he notes, currently has about $150 million in cash, more than twice the amount he thinks it needs to become profitable. Pannell believes that the shares, which recently traded at 6, can triple over the next couple of years if it stays on course.
Pannell, 48, developed his eclectic investment style as an analyst at Wellington Management, where he has worked for nearly 25 years, since earning an MBA from Harvard Business School. (Wellington subadvises the fund for Hartford.) "You're a servant to many different masters when you're an analyst, so I think that's why I'm comfortable looking at all kinds of investment ideas," he comments.
Actually, when you listen to Pannell's story, you can trace his opportunistic streak back to his college days. A scholarship student at Harvard in the late 1960s and early 1970s, he helped pay his way through school by working as a janitor on campus. In a bid to upgrade his station in life, he swapped his mop for a summer job as a part-time letter carrier in his hometown of Lynn, Massachusetts. There he got in trouble with the other letter carriers because he finished his work too quickly. "They told me to slow down because I was making them look bad," he recalls.
Instead, he continued to speed through his route and spent his free time at a local PaineWebber office, reading financial magazines. "This was during the bear market of '73-'74," he recalls. "So these guys didn't care if I hung out in the office." Finally, he worked up the courage to buy a stock. "I was going out on dates, and it seemed like even though there was a recession on, people were still going to the movies. So I bought some General Cinema," he says. In a matter of months, the stock doubled. "From then on, I was hooked," he says.
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