10 Questions With Janus Growth & Income's David Corkins
By Ian McDonald
thestreet.com
Top-Three Holdings:
AOL Time Warner (AOL:NYSE)
Liberty Media (LMC^A :NYSE)
Bristol-Myers Squibb (BMY:NYSE)
It wouldn't be surprising to see a line of Janus managers outside David Corkins' office with pen and paper in hand. After all, he's done what many of his colleagues and competitors couldn't: weather the past year's storm.
Corkins took over the Janus Growth & Income fund when Tom Marsico left the firm back in 1997. Since then he's beaten the average large-cap growth fund every year. He outperformed more than 80% of his competitors over the past year, when many of his colleagues' funds collapsed. And over the past five years -- a riches-to-rags stretch for many growth investors -- the fund topped 96% of its peers.
What's his secret? Well, he doesn't tend to make vast bets on a single company or sector, and he keeps most of the fund in stocks of companies he's willing to hold for years. Given his knack for posting solid gains, we got in that line outside his office to save you a trip to Denver. He told us which companies are worth owning for years, how his colleagues are reacting to the past year's drubbing and why many tech stocks aren't necessarily bargains today. Want the details? Read on.
1. You've sidestepped a lot of the obstacles that a lot of growth managers ran into. How'd you do it?
Well, my goal is to hopefully beat the market on the upside and not do too much damage on the downside. So that's kind of how I manage money, with those goals in mind.
I'm very risk/reward oriented, so I'm willing to take risks but only if I feel the reward is there. I'm not always right, but I constantly think of the risk/reward tradeoff on a stock in terms of what's the downside and upside [potential] with a certain stock given its valuation? I also own fixed income, which is typically a zero to 10% of the portfolio.
My typical shareholder is someone investing in a 401(k) plan or someone investing for college -- someone who doesn't need to open the newspaper every day and look at the price of their fund and make sure it wasn't up or down 10% a day.
2. How do you look at companies and build your portfolio?
I really like to dig into the numbers, which rarely boils down to a P/E [price-to-earnings multiple] or earnings growth rate because a lot of that is manipulated. Accounting can distort the "E" very easily, so I actually start with a company's balance sheet and cash flow. The income statement is the last thing that I look at.
I focus on free cash flow because if you were buying the entire company, what you'd be earning would be the free cash flow that the thing spins off, not the reported earnings based on [generally accepted accounting principles], so I try and dig into that.
The clincher is going out and seeing the people running the company. Are they a great management team? And what's the depth of the organization?
The equity portion of my portfolio has two parts. Two-thirds to three-quarters of the portfolio is core [stocks] where I feel like I understand the companies, I understand the businesses, I know the management teams really well and I expect to own them for quite some time. And when I buy a stock I usually make sure I write down a point where I'm going to sell the stock where I think it is fully valued, and I reassess that as I get there.
The other one-third to one-quarter of the fund typically is more special situation-oriented, where there's a specific catalyst going on now and I expect to own those probably over a shorter period of time, say 12 months.
3. What are a few companies you see as core holdings? Companies you think are worth owning for years?
Well, every business has risks, but some manage the risks well and make me think that maybe if I went to sleep for 10 years, the stocks would probably be higher than they are today.
Citigroup (C:NYSE ) is a good example. I think the infusion of Travelers culture into the Citibank culture has been excellent. It's a well-run company that I think is reasonably valued, gets decent returns, has diversified risks, has very open-ended opportunities and is probably less confronted with the law of large numbers than some other companies. I think Citibank generates close to a billion dollars in free cash flow a month. You could make an awful lot of mistakes if you have a billion dollars coming the next month to kind of bail you out and then a billion dollars the next month and then a billion dollars the next month.
Pepsi (PEP:NYSE) is a similar example. I think of it almost as a distribution company. They have this beverage business, which is primarily domestic, but they're expanding internationally. Then they made this Gatorade acquisition. So they're distributing Gatorade products and starting to dominate the delivery to the convenience store.
There are certainly risks [in their] business and all kinds of things can happen, but I think it's a very good business. And when you marry a good business with a good management team, hopefully over a 10-year period they can do well.
Another example is General Electric (GE:NYSE), which is many different businesses. They have the deepest management team I've seen and I think GE is probably one of the most misunderstood companies even though it's the largest company in the U.S. You can talk about the valuation and all that, but in terms of people running a business, it's an interesting one to look at.
AOL Time Warner (AOL:NYSE) is an interesting example, too. Certainly they're susceptible to risk and the economy in terms of advertising and changes in the Internet. On the other hand, I think it's a very strong management team. And their subscription model, which they don't talk about much, is very, very powerful in terms of...
The annuitized income.
Yeah, similar to Microsoft. They have such a fantastic business model that the government goes after them. I like companies in fast-growing areas that have this annuitized income, as you put it. It's tremendous compared to, I don't know, Cisco, where you're going for a big, one-time sale.
I also think of cable companies like Comcast (CMCSK). They're a pretty good business and it's becoming less capital intensive. I think incremental products are higher return and higher revenue growing and in terms of just businesses withstanding attack from competitors. I also think they'll do pretty well against the kind of DSL and satellite competition.
4. What's an example of a special situation company?
Mattel (MAT:NYSE) is a good example. I thought it was a good company with a good brand, but I didn't own it and then it blew up.
They bought The Learning Company and overpaid. The CEO [Jill Barad] left, but even if you valued the Learning Company at zero and looked at the associated losses, cash, balance sheet and the market cap, you came up with a valuation that was significantly higher than the $11 a share or whatever it was trading at.
So, I went in and bought the stock and then they hired [former Kraft President Robert] Eckert, the new CEO. Because of him the stock is trading at $18. We'll see if he's able to more than just right the ship but actually set it on a path for growth.
5. Tech has obviously been ravaged, but a lot of tech companies are still expensive because their earnings are so far down. What's the case for investing in tech today?
That's kind of the $64,000 question, isn't it?
Looking at technology and other down-and-out sectors like telecom or investment brokers today, no one wants them, right? I think all that creates opportunities and so I'm picking through all those kinds of sectors now.
I think in terms of tech and telecom there's very few companies that have the established franchises that I naturally gravitate toward. But there are other sectors that I think currently have weak fundamentals and a lot of pessimism, like some of these investment brokers or some of the down-and-out industrial manufacturers.
There are some technology companies I'm looking at too. If you look at the cost structures that they're getting aligned, cleaning up balance sheets, fixing working capital, there's a lot of operating leverage. But I think the valuation point you made is very valid. For maybe two-thirds of those companies, even with the economic rebound, they're probably fairly valued today. Some will bounce back to their previous growth rate, but many just are fundamentally not in industries that are going to grow at that pace.
6. What areas are you steering clear of?
I've found individual stories in many different sectors, so it's not like one huge sector I'm avoiding. Let's talk about auto manufacturers. There's been all kinds of crappy news about GM (GM:NYSE) and Chrysler. I don't own those stocks. I'm not particularly interested in them because I'm not so sure that they earn enough free cash flow or returns on capital even in good times to handle the risk that I think is inherent in those businesses. So, that is one area that I've kind of avoided.
Another area that I struggle with is retail. I kind of push away from retail because I think inherently that's not such a great business. You can have a concept that grows for a period of time and then it slows down. If it's fashion-oriented, that's very, very, very difficult. On the other hand, times are so bad now for retailers that part of me is thinking over some of those investments.
7. You've beaten your average peer, but you're trailing the S&P 500 over the past year. What mistakes have you made?
I've certainly made plenty of mistakes. The single biggest mistake I've made in the last two years was just reducing positions in large technology companies where I thought I saw deteriorating fundamentals or fair value in the stock price, but not completely eliminating them.
8. What idea are investors missing today?
I think people too often just focus on the potential reward, not the potential risk, when they're investing.
Over a long period of time, if you want those outsized returns, you're going to have to take outsized risks, which is OK if your time horizon is very long. If you're a 25-year-old kid and you're going to retire when you're 65, you've got 40 years. You can take some big interim swings. But I think for many people who have shorter time horizons, they just focus on the reward. They forget about the risk.
Some people are happy to take big swings and strike out, but others just want to hit singles. I think it's important that people recognize that.
9. Many of Janus' stock funds took a beating over the past year thanks to focused styles with big bets on tech and telecom companies. Now many of the funds own less tech, so will the funds be less aggressive now?
I thought about risk before and I still think about it all the time. We just had an [institutional] client conference a couple weeks ago. I think some of the more aggressive growth managers talked about lessons that they've learned in terms of stocks that have gone up and gone down.
Everyone is taking many of the things that have happened to heart and trying to learn from them. But I don't think anyone's 100% changing their stripes. I would say portfolio managers certainly have experienced some difficult times. I think that has impacted their view of today and tomorrow and the next couple years.
10. Given the past acrimony between Janus and the folks who run its parent, Stilwell Financial, some investors worry that Janus managers might take other jobs. What's the morale around the firm these days?
I think there's certainly a desire to do better in the future and an understanding of the [recent] losses. On the other hand, I think there's a lot of optimism internally about what's going on about the way that we're doing things and some of the new people we're hiring, some of the younger analysts that are coming up and a lot of optimism about our process and the new people and what we're learning and all that. That feels pretty good.
It doesn't mean that people aren't bummed that they're down 20%, 30%, 40%, for sure. All the portfolio managers here own their own funds. We're not allowed to buy stocks, so we primarily own Janus mutual funds, so a lot of people here have shared the pain with the investors. We hope to share the gains, too. |
