‘Value’ Investors Who Play Tortoise May Win the Race
Two big back-to-back takeover bids are giving hope to beleaguered investors of the “value” school of investing. And though it’ll take many more deals to make up for the value folks’ awful performance of late, they’re content to wait. Remember the tortoise and the hare?
Value investors historically have championed stocks selling for low price-to-earnings ratios, high dividend yields and cheap prices relative to the value of their assets. In recent years, the stocks meeting those criteria have mostly been in two groups: cyclical industries and financial services.
Coincidentally, those groups have been among the market’s worst performers since the 1987 market crash, and particularly during the past 12 months. The value investors say the stocks are great buys. But overall, Wall Street has said no thanks--preferring instead to chase more expensive “growth” stocks whose earnings seem more certain, such as food and drug stocks.
During the past week, however, Japan’s Matsushita has sewed up a deal for MCA Inc. and AT&T; launched a bid for NCR Corp. Matsushita will pay about $71 a share for MCA, which had traded for $35 in September. AT&T; is offering $90 for NCR, which traded for $54 in September. So the suitors see 66% to 100% more value than the market gave the stocks.
Although neither MCA nor NCR is a classic cyclical company, both had been treated that way by Wall Street, which had priced them at about 10 times annualized earnings at their lows, versus the price-to-earnings ratios of 15 to 20 afforded many growth stocks.
So is this the redemption of the value school? Maybe not yet. But the sages of value investing say they will stick with their discipline. Some insist that there is no question that many major industrial companies will come to the same conclusion in the ‘90s that Matsushita and AT&T; reached: “If they have to make a decision whether to buy or build, as long as the stocks are laying there cheap, you buy,” argues Stephen A. Lieber, a well-known value investor who chairs the Evergreen group of mutual funds in Harrison, N.Y.
John Neff, who runs the Vanguard Group’s Windsor stock mutual fund in Valley Forge, Pa., agrees. Many big chemical, paper and metal stocks are selling for 40% to 50% of the companies’ replacement values, he says.
Yes, a recession in 1991 might further hurt the companies’ earnings, he says. But at current prices, anyone with a view that extends at least into 1992 ought to see such stocks as Alcoa, International Paper, GM and Dow Chemical as classic values, Neff says--even though, he concedes, he and others may have been too early in the stocks in the late-’80s. They can’t stay down forever, he says.
To some of the value investors, potential takeover bids are only a minor consideration, even though a welcome one. “I don’t really think the ‘90s are going to be the takeover decade,” says Charles Brandes of Brandes Investment Management in San Diego. “But value players don’t have to have takeovers to make money.”
Look at it mathematically, he says: If you can buy a leading industrial company now at eight times earnings, why even consider a consumer-goods “growth” stock at 30 times earnings? The consumer-goods firm might have more visible earnings potential looking out 12 months. “But over the long run, you’re going to make a lot more off a cheap stock than if you pay 30 times earnings,” he argues.
That is, you’ll make more if the cheap industrial stock sees its earnings recover sharply after the current recession. Most investors on Wall Street are betting on a tremendous industrial recovery. It’s just a question of timing. True value investors would rather buy the stocks slowly now, rather than try to jump in at some key point next year.
Says value investor Bob Gintel, who runs the $175-million Gintel mutual fund family in Greenwich, Conn.: “Sometimes you can win the race if you’re just slow and methodical.”
Cheap Price for a Dynasty?Carson-based Dynasty Classics Corp., one of the nation’s leading home lighting-fixture makers, took a sharp stock hit Tuesday: A Morgan Stanley & Co. analyst, L. Keith Mullins, cut his “buy” rating on the stock to “hold,” citing the lousy retail climate. The stock plunged $2 to close at $5, a 29% drop on over-the-counter trading volume of 785,000 shares.
Mullins ought to know Dynasty pretty well--it was Morgan Stanley that underwrote Dynasty’s initial public stock offering last May at $11.25 a share. The stock soared to $18.75 in the summer but has slowly sunk this fall as recession fears have gripped the economy.
Mullins now figures that Dynasty will earn 51 cents a share this year and 70 cents next year. He had previously forecast 60 cents and $1.
Dynasty CEO Craig A. Winn makes no apologies for the strategy that led to Mullins’ estimate cuts. As consumer spending tightens and retailers grow more cautious, Winn says, he is aggressively working to increase the market exposure of Dynasty’s 400-some lamps and lighting fixtures (brand names include South Coast and Classic Advantage) and 300 Christmas lighting products. That means absorbing some of retailers’ expenses for advertising, for example.
Winn believes that Dynasty is in a great position to grab market share from weaker competitors, so he is willing to sacrifice some profit margin to keep important retail customers such as Price Co., Wal-Mart, Home Depot and Sears happy, he says. “It’s much easier to maintain your momentum than to rekindle lost momentum,” he says. If the retail lamp market is temporarily shrinking as consumers cut back, Winn says, “we want a larger share of that smaller pie.”
Winn, 36, is a former manufacturer’s sales rep who has presided over Dynasty’s stellar growth since its founding in 1986. Sales in the nine months ended Sept. 30 hit $54.6 million, up 30% from $42.1 million in the year-earlier period. Net income was $2.16 million, or 31 cents a share, versus $1.28 million, or 22 cents.
Dynasty’s success is noteworthy in part because of Winn’s rather bold decision to move most manufacturing to Carson during the past two years from sites such as Taiwan and South Korea. Though labor costs are cheaper overseas, Winn says Dynasty has found that it can produce “a much better-quality product (here) for very little more money,” after factoring in shipping and duty costs that would be involved in overseas manufacturing.
Winn, who owns 40% of Dynasty’s 8.4 million shares, has big plans for the company during the next few years. He wants Dynasty to become the largest home decor products maker in America, in addition to its lamp business. The company already makes such non-lamp products as ceiling fans. Winn says the only way to keep on track is to go for market share now, even if profits dip.
“One-third of our direct competitors are either out of business or almost out of business” because of the current retail slump, he says. Winn smells opportunity. Whether Wall Street smells opportunity in the stock--now selling for just seven times Mullins’ reduced earnings estimate for 1991--will be interesting to see.
Faded Glow Carson-based lamp designer and marketer Dynasty Classics saw its shares plunge $2 to $5 on Tuesday after an analyst pulled his buy recommendation. The stock’s path since it went public in May: Weekly close, OTC trading, except for latest Dynasty Classics Tuesday: $5.00
