Portfolio takes issues others like
By John Dorfman
Published: Tuesday, Oct. 16, 2012, 12:01 a.m.
Like baseball players watching the scoreboard to see how their rivals are doing, I like to keep an eye on other money managers.
About once a year in this column, I present the Purloined Portfolio, consisting of stocks drawn from the holdings of managers I respect. My lineup contains eight managers: Bruce Berkowitz, Scott Black, David Dreman, Randall Eley, Mason Hawkins, Ken Heebner, David A. Katz, and Charles (Chuck) Royce.
From Oct. 18, 2011, through Oct. 12, 2012, the Purloined Portfolio rose 15.1 percent. Unfortunately, that wasn't enough to beat the Standard & Poor's 500 index, which returned 19.2 percent. It was the first time in eight outings that my collection of stolen ideas trailed behind the S&P 500.
For all eight one-year periods (with start dates in 2000-2006, plus 2011) the Purloined Portfolio has returned an average of 19.5 percent, compared with 6.9 percent for S&P.
The managers whose selections I discuss are not consulted. I select a stock from each manager based on filings with the Securities and Exchange Commission. A manager could have changed his mind since his holdings were filed.
Bear in mind that past performance doesn't predict future results. The performance of my column recommendations should not be confused with that of real-money portfolios I manage. Also, the results for column recommendations are theoretical and don't reflect trading costs or taxes.
Bruce Berkowitz, manager of the Fairholme Fund (FAIRX) in Miami, had a bad year in 2011 and was widely chastised for it. I thought the criticism was ridiculous, because for the 12 years through 2011, his fund returned 192 percent to the S&P's 6.5 percent.
From Berkowitz's holdings last year, I selected the stock that had done the most to tank his 2011 performance — American International Group Inc. (AIG). It rose 51 percent. This year I'll go with Berkowitz's second-largest position, Sears Holdings Corp. (SHLD).
Sears sells for 0.2 times revenue, which is half the multiple of J.C. Penney Co. and one third the multiple of Macy's. In my view, they may be better companies, but not that much better.
From Scott Black of Delphi Management Solutions Inc. in Boston, last year I took America's Car Mart (CRMT), which returned 43 percent. This year I like Barrick Gold Corp. (ABX) of Toronto, Canada — indeed, I own it for most of my clients. With monetary authorities pumping up the money supply, I believe that gold will do well.
David Dreman of Dreman Value Management, co-manages the DWS Dreman Small Cap Value Fund (KDSSX). From his holdings last year, I selected Coeur d'Alene Mines Corp. (CDE), a gold and silver miner that rose 26 percent. This year I pick Fulton Financial Corp. (FULT), a bank holding company in Lancaster, Pa. Fulton sells for just above book value and pays a 3 percent dividend.
From the portfolio of Randall Eley, manager of Edgar Lomax Value Fund (LOMAX), I took Johnson & Johnson (JNJ) last year. (I also own J&J for clients.) It rose 9 percent. This year my pick is Intel Corp. (INTC), the world's largest semiconductor manufacturer. At nine times earnings and a dividend yield of 4 percent, I think it's a good value. I own it for most of my clients.
Mason Hawkins runs Longleaf Partners Fund (LLPFX) in Memphis. From his list, last year I disastrously picked Dell Inc. (DELL), which fell 40 percent. This year I'm drawn to Bank of New York Mellon Corp. (BK), which sells below book value and has fewer nonperforming loans than most banks do.
From Ken Heebner, who runs CGM Focus Fund (CGMFX) in Boston, I picked Occidental Petroleum Corp. (OXY) last year. It suffered a 1.4 percent loss. This time I will plump for DR Horton Inc. (DHI), a homebuilder at the lower-priced end of the home market. Home purchases are finally increasing three years after an historic recession.
David A. Katz runs the Matrix Advisors Value Fund (MAVFX) in New York. A year ago I plucked Harris Corp. (HRS) from his holdings, and it rose 38 percent. Now I like JPMorgan Chase & Co. (JPM). Despite the “London whale” trading scandal this year, I think JPMorgan is one of the nation's strongest banks. Yet its stock fetches only eight times earnings and less than book value (corporate net worth per share).
Finally, I will borrow from Chuck Royce, who co-manages the Royce Focus Trust (FUND). My Royce pick from a year ago, GameStop Corp. (GME), fell 6 percent. This year I would single out Microsoft Corp. (MSFT). Everyone thinks of it as yesterday's news, but it earned a 27 percent return on stockholders' equity last year. The stock sells for 11 times earnings and yields 3 percent in dividends.
John Dorfman is chairman of Thunderstorm Capital in Boston; firstname.lastname@example.org.
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