Mutual Funds
Strong Opportunitys Value Picks
Jan 26, 2000
fnews.yahoo.com
Staff Writer: Craig Schneider (1/26/00)
It looks like value investing is starting to make a comeback. At least for some funds.
The Strong Opportunity Value Fund (NASDAQ:SOPFX) with more than $2.5 billion in has racked up a one-year return of 31%, double the S&P MidCap 400 Index?s 14.7% return, and handily beating the 2% return posted by the S&P MidCap 400/Barra Value Index. Strong also has a three-year and five-year annualized return of about 23%, and a 17% 10-year return.
This fund?s success is all the more compelling because it occurred during a time when value-oriented investing was largely out of favor, and large cap, hyper-growth technology and Internet stocks were popular.
The fuel for this fire is good, solid stock picking of companies with healthy valuations that also have a catalyst to get the stock moving.
'We try to look at growth at a reasonable price,' says Ann Miletti, co-manager of the fund. 'We look for things that are under-followed or at least over-looked in their market and (we) pick up on growth characteristics that the market isn?t paying attention to.'
The fund uses a 'private market approach? to find the value, which is basically evaluating a company?s worth as a whole, not merely as a stock. This is the kind of strategy used by someone interested in purchasing the company, or ?taking it out? (of the public domain).
'Richard Weiss, the fund?s lead manager has a long history of following takeouts, and he?s passed that on to us,' says Miletti.
But in this high-flying market, the value fund has outperformed also because it starts re-evaluating a pick after it hits their target price.
The fund typically maintains about 8% to 10% of its assets in cash, so it has some flexibility to move into a stock. Earnings are important, but cash flow is more of an indicator, Miletti says.
Generally, the fund buys a name that trades at 50% of its private market value and sells shares after a 30% appreciation. 'It works great, but you can sell too early if you don?t reevaluate before you sell,' Miletti says.
Take for instance, Omnipoint Corp. (NASDAQ:OMPT - news) , the fund?s top holding, which returned 615% this year. The fund bought the company in early 1998, before VoiceStream (NASDAQ:VSTR - news) took it out. Milleti expects the deal to close in the first quarter and says the fund still holds the company because of its comfort with VoiceStream?s management and the technological synergies it sees.
Both Omnipoint and VoiceStream use GSM digital wireless technology, she explains. ?These guys can be cross-continent players.' However, the fund has recently pared its Omnipoint position as the price continued to rise.
Liberty Media (NYSE:LMG - news) is another top-five and long-time holding for the company. 'I think there?s another 20% upside to it, given the public assets out there, and the growth rate the company has shown,' Miletti says.
Not only does Liberty have good distribution through its parent, AT&T (NYSE:T - news) , she says, but the company also has its own assets, such as the Discovery Channel, which is still growing at 20% annually.
In general, Strong has 22% of its assets in technology and 29% in what Miletti calls ?stable growth,? mostly media names, like Liberty.
Hughes Electronics (NYSE:GMH - news) , a provider of DirecTV and a satellite manufacturer, is another top-five holding. Miletti concedes that it does trade close to their target price, but there?s a lot to re-evaluate.
Specifically, there?s talk of its parent, General Motors (NYSE:GM - news) spinning off the tracking stock altogether. She believes that once Hughes completes its sale of its satellite business to Boeing Co. (NYSE:BA - news) , it will make it easier for GM to make that move, possibly by late 2000 or early 2001.
The other top-five holdings are American Power Conversion (NASDAQ:APCC - news) , a supplier of back-up power for servers and personal computers, and MediaOne Group (NYSE:UMG - news) , the broadband cable company that is being acquired by AT&T (NYSE:T - news) .
The fund trimmed its cable positions late last year. 'We?re still really big believers in broadband,' says Milleti. 'But there?s a lot of execution (with getting new services rolled out) priced into the stocks, and we want to see some performance with the numbers.'
Does Milleti have more ideas? You bet.
Seagate Technology (NYSE:SEG - news) , the leading disk drive maker, is one of Milleti?s favorite value picks. For one thing, Seagate owns 85 million shares of Veritas Software (NASDAQ:VRTS - news) , which amounts to a $12.8 billion investment, given Veritas? recent share price.
What?s more, Seagate owns five million shares of Gadzooks Inc. (NASDAQ:GADZ - news) , the mall-based specialty retailer of casual apparel, and five million shares of SanDisk Corp. (NASDAQ:SNDK - news) , a designer, manufacturer and marketer of flash memory data storage products, that together amount to $545 million in market cap. Seagate also has $6.70 per share in cash.
Adding up all the assets, and assuming a 30% discount on its Veritas holding for tax reasons, Miletti values Seagate?s stock above $60. Right now it trades closer to $40, so there?s a 50% upside potential.
?If they could sell all of Veritas at a 40% discount and buy back the same dollar amount in stock, it would be over $80,? she adds.
Milleti?s argument is that investors are now getting the disk drive company for free given today?s market cap. The disk drive industry, of course, is currently out of favor among tech investors.
The fund is also well diversified, with 9% of assets in healthcare, 12% in banks and interest sensitive financials, 12% in cyclical stocks and 4.5% in retail and distribution.
Strong Value?s energy stocks were big winners last year because the managers had built up the stake with such names as Weatherford International Inc. (NYSE:WFT - news) , a provider of equipment and services used in the exploration and production of oil and natural gas, when oil prices were in the basement.
Lately, Miletti says Weiss has been combing through the health-services sector for good buys, and has added to the fund?s positions in such names as HealthSouth (NYSE:HRC - news) .
Bottom Line: Strong Value?s managers continue to use a value-oriented stock picking formula that has allowed them to beat the major mid-cap indexes, and compile healthy returns in what is mainly a large cap, high-growth environment. |
