Art of investing is simple: buy quality at a low price

January 05, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Be a value investor in 1994.

That's the art of buying the "right" downtrodden stocks that are selling for less than their net worth but have excellent potential for recovery. It's a concept that makes sense no matter what the time or place, but is especially smart in a period in which overall equity prices appear quite high.

"Value investing to me means determining whether the stock price relates to the quality and quantity of a company's assets," explained Martin Whitman, portfolio manager of the $125 million Third Avenue Value Fund, which features a three-year average annual total return of 30.18 percent.

"In the boom market of the past 20 years, most of corporate America, including real estate, automobiles and steel, has gone through some low points, and that's the best time to buy."

Seeking out both recovery candidates and financial giants selling cheaply due to weak earnings or restructuring provides the underpinnings of Whitman's philosophy, in which buying a dollar's worth of assets for 50 cents is the only way of doing business.

Companies must also be in a strong financial position, reasonably well-managed and readily understandable through reliable financial statements.

"I've got $3.7 million of my own money in this fund, so I'm definitely looking for value," declared Whitman. "My advice to investors is not to take advice from anyone who buys when a stock is popular or doesn't know a lot about the company."

Whitman owns stock in Apple Computer because of its new products and the fact it's adequately financed. He admires Digital Equipment Corp. due to its growth-oriented service business and strong finances.

Longer-term, even if some companies he buys don't ultimately make it, they'd be extremely attractive acquisition candidates.

Debt-free real estate companies such as Forest City Enterprises, Public Storage Properties and Mellon Participating Mortgage Trust are other holdings. SunAmerica, specializing in annuities, looks good because of the profit margins in its business, while St. Joe Paper has vast Florida land holdings worth more than its stock price.

Shelby Davis, portfolio manager of the $914 million New York Venture Fund, which has a three-year average annual total return of 21.91 percent, is a different sort of successful value investor who focuses on industries or companies that won't become obsolete in the future. He notes they "aren't making any buggy whips" these days.

Many of Davis' choices are well-known in industries analysts aren't "oohing and aahing" about right now.

For example, many portfolios are unloading financial company stocks, but Davis is stocking up.

"I'm concentrating on financial markets because their basic business is money, which won't get obsolete, since governments need it and print it," said Davis, who describes himself as a growth investor at value prices. "I guess you could say that the business of trying to make a spread on money is the second-oldest business in the world."

Traits of companies in which he invests include management having a stake so that it's shareholder-minded; the company being a leader in its industry when the industry is out of favor; ability to put excess cash to good use; and the likelihood that the firm will remain fast-growing even though its stock's been battered by bad news.

He also likes a firm to have attributes of a growth company even though it appears to be something else, such as a cyclical. That way, most analysts won't initially recognize its potential. He prefers that a company have "fewer rather than more" employees.

"The investor should consider whether, if he could own the company, he'd really want to own it," advised Davis, who points out every shareholder is a fractional owner in a company. "Eighty percent of company managements are 'bluffers' that can't back up their statements with a track record, and the goal is to separate winners from bluffers."

In investment banking, with increasing global needs for capital, he owns shares of J. P. Morgan, Morgan Stanley and Salomon Bros. because they offer high rates of return on their businesses.

Insurer American International Group boasts international exposure, while Chubb Group features a high-margin franchise. Equitable Co. and Primerica are potential financial superpowers

in future years, he believes. Banking holdings include First Bank System, Norwest Corp., Barnett Banks and Wells Fargo.

New York-based Third Avenue Value Fund, up 22 percent the past 12 months, requires a 5.75 percent "load" (initial sales charge). New York Venture Fund, up 15 percent over 12 months, has a 4.75 percent load.

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