Here is the article. Keep in mind this is ancient history and by the time you and I know what the funds are doing, they are likely to be doing something else.. <gg> As to the sub 1k market, it will be interesting to watch what ASP's will do this year. Even at the very top end, I have seen announcements that vendors such as CPQ will be offering sub 2k PIII systems.
John
January 4, 1999
Top Dog
How Scott Schoelzel reaped a 73% gain for the Janus
Twenty Fund
By BARRY HENDERSON
If you're one of those investors who owns 103 stocks, and you're not
quite sure why you own some of them, you can learn an important
lesson from Scott Schoelzel: Find a handful of companies you
absolutely love, and then bet the farm.
That's just what Schoelzel does. He manages the Janus Twenty
Fund, with $16 billion in assets, yet he keeps all that money in a
mere 29 stocks. Other portfolio managers, by contrast, typically hold
more than a hundred stocks at any one time.
Schoelzel's system certainly works. His fund achieved a stunning
73% return in 1998, enough to give Janus Twenty the best
performance by far among the nation's 100 largest mutual funds.
The Standard & Poor's Index, by contrast, was ahead 26.7%, and
the average U.S. mutual-fund manager notched a gain of about
14%.
Schoelzel's approach isn't
without risk. Right now, for
example, he owns some of
the market's highest fliers,
including Dell, Microsoft and
Cisco Systems. In recent
weeks, Schoelzel has been
taking an even greater
chance, loading up on
America Online, which trades
at a mindboggling 226 times
next year's expected
earnings. He's been buying
so much AOL that it has
become his biggest holding.
Even Schoelzel admits the stock now looks incredibly pricey. But he
knows that if he wants to beat the market he must bet heavily on the
stocks he deeply believes in. Since Schoelzel started adding to his
AOL position in December, the shares have surged more than 70%
in price. Although he cautions investors to tread lightly with AOL
during the next few months, he says he likes the company's
prospects for the longer term. "I think they're signing up subscribers
faster than people realize, and they will continue to do so for at least
the next year," says Schoelzel. Indeed, AOL last week said it signed
up more than one million first-time users between mid-November
and December 30.
Schoelzel lives to invest in fast-growing companies, but that doesn't
mean he achieved his world-beating results simply by investing in
go-go Internet stocks. Besides AOL, Microsoft, Cisco and Dell, his
fund's 10 largest holdings as of October 31 were Pfizer,
Warner-Lambert, MCI WorldCom, General Electric, Time Warner
and Nokia.
Schoelzel has done meticulous research on his top 10 stocks, and
he keeps a close eye on them. It's easy to see why. Almost 60% of
the Janus Twenty portfolio is invested in these 10 names alone.
One surprise: Having fully enjoyed Dell's 249% gain in 1998,
Schoelzel has actually been selling the stock in recent weeks. On
October 31, Dell was his biggest holding, accounting for nearly 11%
of the Janus Twenty portfolio. Schoelzel won't say why he's selling
Dell, other than to note that he doesn't think its stock price will triple
again this year. One gets the sense there's something more on his
mind, but upon further questioning, he points out that he hasn't
completely dropped Dell, and he adds that it will probably rank as
his second-largest holding as of December 31.
There can be no question that Schoelzel gets excited about stocks,
though. When we visited him in mid-December at Janus's
headquarters in Denver, he couldn't contain his glee at the galloping
market. "We just had a ripping day," he said as he bound out of
Janus's six-story office building and clambered into his brand-new
white Ford Explorer.
Schoelzel knows he's hit the sweet
spot of the market, and perhaps his
career, but he sees no reason why
the good times won't continue. At
age 40, he's walloping his
competitors. He gets to dress in
turtlenecks, corduroys and a polar
fleece cardigan. He lives in a toney
section of Denver, his hometown,
and he is happily married with
three young children he dotes on.
After a 10-year career in
commercial real estate in Denver, Schoelzel joined Founders Asset
Management in Denver in 1990 and four years later hopped to
Janus to do some research and some money management. In 1995,
he took charge of Janus's Olympus Fund, and managed to beat the
S&P 500 Index by about a percentage point during each of his two
years there.
When Schoelzel took the helm of Janus Twenty in September of last
year, not everyone expected him to fare so well. To begin with, he
had big shoes to fill. Schoelzel was succeeding his onetime mentor,
Tom Marsico, who had expertly managed the Janus Twenty Fund
from 1987 to August 1997. Marsico routinely finished in the top 25%
of fund managers in his category, and he regularly beat the S&P 500
as well. When Marsico quit Janus, lots of financial advisers and
retail investors opted to follow him to the fund he started on his own,
which, by the way, was very similar in strategy to Janus Twenty. But
so far, Schoelzel has bested Marsico, whose fund was ahead 52%
as of late last week.
Top 10 Holdings
Company
Percentage
of Portfolio
America Online, Inc.
12.2%
Dell Computer Corp.
8.5%
Microsoft Corp.
7.2
Time Warner, Inc.
6.3
Nokia Oyj (ADR) -- Class A
5.6
Cisco Systems, Inc.
5.4
Pfizer, Inc.
4.6
MCI WorldCom, Inc.
3.7
Warner-Lambert Co.
3.7
General Electric Co.
3.3
Total
60.5
As of 12/31/98
Source: Janus Capital
Schoelzel and Marsico are now fiercely competitive and don't really
talk much any more despite the fact that they live in the same
neighborhood. "We do our own thing," Schoelzel confides.
So what did Schoelzel learn from Marsico? Probably how to get
comfortable making concentrated bets on just a few stocks. Other
than that, it's difficult to say. Frankly, Schoelzel has always been a
little bit hard to pin down when it comes to his investment strategy. In
general, he likes to buy into high-growth businesses that have a
dominant franchise. But he doesn't have any absolute guidelines or
thresholds. For example, he doesn't seem to have any strict rule
about how rapidly a company's earnings must be growing for him to
get interested. He also professes to be unconcerned about stocks
with sky-high price-to-earnings ratios.
Schoelzel does display some sense of acrophobia on occasion.
Press him on the Internet darling Amazon.com, for instance, and he
confesses that even he can't stomach its current level of $321 a
share, or 45 times revenues.
Yet Schoelzel shows no such fears about AOL, which last week was
trading at 154. How can there be any further upside in a stock that's
already jumped 585% in the past year? Right now the strongest
demand for AOL's service is coming from individuals who are
clamoring to get online, but Schoelzel feels the real growth is going
to come from business users. He cites two factors: AOL's deal to
acquire Netscape and its joint venture with Sun Microsystems.
Schoelzel predicts that as businesses rush to "webify," they're going
to become AOL customers almost without thinking about it because
they will be buying Sun's hardware or Netscape's Internet-navigating
software. Schoelzel says he became convinced that the Netscape
deal was a winner after talking to David Gang, a strategic planner
and programmer who works for AOL in California and is one of the
driving forces behind the transaction.
There are other trends Schoelzel likes at AOL. He says the company
has managed to decrease its customer-defection rate to less than
3% a month, down from roughly 15% a few years ago. This is a clear
sign of operational improvements. One of the most important
manifestations of AOL's progress is a new software program that
allows users to more easily surf through the company's many
electronic offerings. Already 57% of AOL clients are using the new
program, known as 4.0, and it has helped cut customer-service
costs 75%, in large part because it has greatly reduced complaints
and the length of phone calls from dissatisfied users.
AOL turned a profit for the first time in its
history for the fiscal year ending June 30,
earning $92 million, or 35 cents a share, on
revenues of $2 billion. For fiscal 1999,
analysts expect AOL to earn $179 million,
or 68 cents a share. It sounds like
Schoelzel thinks AOL will do even better
than that, but he refuses to say how high he
expects AOL shares to go as a result.
Another online stock Schoelzel likes is Intuit, which provides
everything from portfolio-tracking software to a service for buying
auto insurance online. Like AOL, Intuit doesn't have much in the way
of earnings. Indeed, the company hasn't made a profit since 1993,
when it earned $8.4 million, or 38 cents per share, on revenues of
$121.4 million. For the fiscal year ending July 31, 1998, the
company posted a loss of $12.2 million, or 24 cents per share, on
revenues of $593 million.
The recent losses stem mainly from the company's expansion onto
the 'Net, well beyond its traditional software business, which
includes such dominant titles as Quicken, QuickBooks and
TurboTax. Schoelzel is particularly enthusiastic about the company's
auto-insurance program, which allows online customers to get a
passel of price quotes in one place. He's convinced that this
convenience factor is going to appeal to a lot of car-insurance
buyers who are tired of making numerous phone calls to do their
comparison shopping.
How high can Intuit go from its recent price of about $72? Again,
Schoelzel is extremely cagey. The only thing he'll say definitively:
Intuit has the potential to post profits far in excess of what the Wall
Street is predicting for the next few years. Right now, Intuit has no
earnings, and less than 10% of its revenues come from its Internet
site.
For the current fiscal year, the company is expected to earn $1.41
per share, according to First Call. That's an impressive swing from a
loss, but it still puts the stock's price-to-earnings ratio at 51, well into
nosebleed territory. Schoelzel's response: "Good companies find a
way to grow into their valuation just when you think they're too
expensive."
Yes, but which are the good companies? So far, it looks like
Schoelzel has done an excellent job of answering that question. May
his good fortune continue.
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