Traders work on the floor of the New York Stock ExchangeSHANNON STAPLETON
Individual investors are increasingly fearful as they grapple with wild swings in the stock market. Professional investors, on the other hand, say there are plenty of value stocks for those who can stomach the risk.
The Dow Jones industrial average has swung wildly this month, rising and falling by more than 420 points in five out of nine trading sessions. But with many stocks trading at only 11 times earnings in a near-zero interest-rate environment, professional investors are turning greedy while the majority have become fearful.
Brian Frank, manager of the Frank Value Fund, says the valuation of his portfolio was the cheapest ever heading into second-quarter earnings, and that includes 2008 and 2009 when share prices plummeted during the heart of the deep recession. "Guess what? Now it's even cheaper," he says. "The fundamentals are still getting stronger, even if there is economic weakness in the future."
While mom-and-pop investors succumb to panic and euphoria on alternating days, worried about the risk of holding stocks over the weekend after two days of gains for equities, Frank and other professional money managers are snapping up shares.
"It's a summer sale. Everything is a lot cheaper and there are fantastic opportunities," says Philip Tasho, chief investment officer of Tamro Capital Partners. "You want to buy the best when they're depressed. You have a lot of companies falling with the whole market coming down. With everything on sale, it's a great time for an individual investor to pick up the pace and buy some high-quality companies."
"When the market goes down 5 per cent, people on CNBC start screaming and people call their broker to sell at any price. This is the time we go to work. This is when we take advantage," Frank says. "Whether or not someone wants to pay $45 for my stock today and then $40 on Monday because there were some fears over the weekend, that doesn't affect me. That's just what the crowd thinks about it over the next few days. It doesn't affect the fundamentals.
While mutual fund outflows are expected to hit record levels, Frank is actually building up his business. "Actually, I've had one major investor add a significant amount of capital this week," he says.
Frank and Tasho have added to positions in health-care stocks this week. Frank says he purchased shares of WellCare Health Plans for his fund, arguing that fears of a European debt crisis are misplaced with U.S.-focused health-care companies.
"People might pull back on their next vacation, but they still have to pay their health-care bill," Frank says. "There are other things to worry about, of course, like the impending government bill. But in the last week, the fear in the market doesn't affect U.S. health care one bit."
Tasho says there is still good growth in health care. "The necessity for us to reduce costs and improve efficiencies across the board to take care of an expanding demographic group is a major trend out there," he says. Cerner , Quality Systems and Athena Health "are very attractive here," Tasho says.
Tasho also finds opportunity in natural gas and oil, specifically Range Resources , EOG Resources and Precision Drilling . "There is tremendous opportunity that will lead to tremendous job growth in this country," he says. "It's a global economy, so if there isn't growth here, the demand will be there in emerging economies."
Other professional investors are taking advantage of market selloffs but employ different investment strategies. Craig Hodges of Hodges Fund has been focusing on stocks that were performing strong before the broad selloff earlier this month.
"I've seen it time and time again," Hodges says. "We've done poorly on the way down, but we do extremely well on the way up because we focus on the stocks that perform well before the selloff. We're talking about leading stocks breaking out. Typically, that means people were buying into the fundamentals at that point, but many of them have been decimated."
Some of the stocks that fit the bill are oilfield driller Halliburton , engineering and construction company Fluor , plane maker Boeing , offshore driller Atwood Oceanics and railcar manufacturer Trinity Industries .
"No one is talking about individual companies. Everyone is talking about the market, the market, the market," Hodges complains. "No one seems to be focusing on individual stock selection. There were a lot of stocks we sold out of just to create cash to buy some of these ones that have really gotten hit. They've been hit the hardest, but we think they'll be the strongest to come back."
Bob Auer, manager of the Auer Growth Fund, has used the selloff to find new buys in the market. Auer only invests in companies with 25 per cent increases in profits and 20 per cent in revenue while also carrying a price-to-earnings ratio below 12, so there has been plenty of turnover as the market drop has coincided with earnings reporting season for several companies.
One stock Auer has picked up during the pullback is Kronos Worldwide , which he bought for about $25 after the stock traded as high as $34.50 a month ago.
"We bought it during this crash. It's an unbelievable story of a neat little company," Auer says. "The stimulus money went into road projects as the interstate system is crumbling. Every road is under construction. As they redo roads, they have to re-stripe them. One easy way to put guys to work is to let them stripe the roads. The paint is completely sold out for years. They're running 24/7 and they can't keep up with demand."
Auer is now looking to sell out of a position to create room for Lithia Motors , a car-dealership franchiser that has been on his target list since last month. Second-quarter results impressed Auer, as profit doubled and revenue climbed 30 per cent from a year earlier.
"The day we found it, the stock was at $23, but we had no cash. Now we're selling a holding at a nice profit and we're going to start a position in Lithia Motors for the fund at a better price of $17," he says.
Mark Travis, chief executive officer of Intrepid Capital Funds, has been similarly active during the market's plunge over the past week. "You see events like this week where human emotion takes over and you get some broad disparities between price and value," he says. "That's the driver. It's a Pavlov response, where the selloff rings a bell that tells us we can buy a security for less than what it's worth. Whenever you have people responding out of fear, they make mistakes."
Travis says his firm has been more active in the past two weeks acquiring securities as it has been in the past year. Intrepid focuses on private-market valuations, as prices change a lot quicker than business values do, Travis says.
"Maybe the businesses aren't sexy from the outside, but they generate a lot of cash," he says. "If we can find that business at a $1-billion market cap with $100-million in free cash flow, we might value that at $1.2-billion. So we're getting something for close to a 20 per cent discount. If we can buy it for $900-million, we will sit on it and wait."
Three companies have become more attractive during the past week, Travis says. The firm picked up shares of World Wrestling Entertainment for $9.50. Travis says the company is worth about $12.50, and he'll be happy getting paid a 5 per cent dividend while he waits for the price appreciation.
Intrepid has owned the debt of Collective Brands , the owner of retailer Payless Shoes, for a couple of years and Travis used the market selloff to add an equity position. He argues that investors are missing the opportunity in the company's international growth.
Lastly, Travis has been nibbling at Teleflex , a medical-technology-products company. "Shares are around $51, we think they're worth something in the mid $60s," he says. "And again, you get a dividend north of the 10-year at 2.6 per cent."