Hot Managers of Small-Stock Funds Still See Bargains
As small-company stocks continue to surge, the question for many investors isn’t whether to buy--just what, and when.
Given the powerful rally in smaller stocks since October--pushing that market overall to record heights--many investors naturally fear that buying now is buying at the peak.
Not so, say three of last year’s hottest small-stock mutual fund managers. Despite the big gains for small stocks in general since 1990, these three argue that they can still find--and are buying--great stocks at great prices.
You’d probably expect a stock fund manager to be bullish, of course. But if they really felt a need to protect their stellar profits from 1992, these managers could just be sitting on the sidelines now, or taking profits to raise cash. Instead, they’re actively buying. Here’s what, and why:
* Hugh Denison, Heartland Value Fund, Milwaukee: Denison’s $46-million fund, which rocketed nearly 40% last year, concentrates on the “value sector”--that is, stocks that sell for low prices relative to earnings per share.
That usually means solid little industrial companies and retailers that have little or no following on Wall Street. From his Midwest base, Denison says, he can still find plenty of these overlooked gems, despite the apparent frenzy for small stocks in general.
“We just buy and wait for Wall Street to discover them,” Denison says. As the domestic economy improves this year, he figures that more Wall Street pros will be stumbling over themselves to grab the kind of cheap stocks he already owns.
Heartland’s largest holding is auto parts retailer Trak Auto, which at $18.25 a share now sells for a mere 13 times last year’s earnings. Similarly, Denison has a big holding in Autotrol Corp., a largely unknown Milwaukee-based producer of controls for commercial water treatment devices.
* Michael Di Carlo, John Hancock Special Equities Fund, Boston: Di Carlo’s stock-picking discipline is high growth, which puts him at the opposite end of the spectrum from Denison. Di Carlo will pay a high stock price relative to a company’s earnings if he believes that the firm’s growth rate warrants a premium. Last year, Di Carlo picked high-growth companies well enough to boost his fund 30%.
In a still moderate-growth economy overall in 1993, Di Carlo is betting that the stocks most in demand will be those whose earnings are growing at an above-average pace. So he has been adding to such holdings as Bell Sports, a maker of safety bike helmets (which are being mandated by a growing number of states and localities); Ohio-based appliance retailer Sun Television, a low-price, high-service outfit, and Tommy Hilfiger, a men’s casual clothing maker that Di Carlo says is “taking market share away from Ralph Lauren.”
All three companies should grow at 25% or better this year, Di Carlo says.
* Carlene Murphy, Strong Common Stock Fund, Milwaukee: Like Denison, Murphy sees her Midwest base as an advantage in ferreting out good regional small-stock stories before Wall Street gets wind of them. Her fund posted a gain of about 20% in 1992.
One of her favorites now is Wisconsin Central Transportation, which has been buying up short freight rail lines across the Midwest, piecing together what is now the largest regional railroad in the nation. With help from the healthy Midwest manufacturing economy and an improving economy nationwide, Murphy believes that Wisconsin Central’s earnings ($1.55 a share over the last four quarters) can grow at least 30% a year for the next few years.
A more recent Murphy purchase is John Nuveen, one of the biggest names in municipal bond fund management. With federal income tax rates virtually certain to rise under the incoming Clinton Administration, Murphy expects demand for Nuveen’s tax-exempt muni products to continue to balloon.
Finally, Murphy remains bullish on Newbridge Networks, a Canadian company that has emerged as one of the hottest players in the computer networking business. Though the stock sells for a stratospheric 70 times last year’s earnings, Murphy says that “its earnings estimates keep going up as fast as the stock.”
Could these three managers be kidding themselves about small stocks’ record prices--and whether they’re worth paying? Maybe. Small stocks were similarly hot a year ago, only to stumble in late winter and spring. But then, these managers pulled out a great year in 1992 despite that first-half slump.
Best advice: Don’t buy now for a quick profit. But if you can take a one- to two-year view (at least), this small-stock rally should have legs.
Small Still Beautiful?
Here are 1992 price ranges and current prices for eight stocks favored by some top-performing small-stock funds.
52-week Tues. Stock high/low close Autotrol Corp. 17 1/2-8 5/8 15 3/4 Bell Sports 26-16 1/2 23 Newbridge 43 1/4-7 5/8 39 3/8 Nuveen 30 3/8-15 1/8 25 1/8 Sun Television 38 3/4-14 1/2 38 3/4 Tommy Hilfiger 27 5/8-17 26 1/2 Trak Auto 18 1/2-9 1/2 18 1/4 Wisconsin Central 37 1/4-20 36 1/4
All on NASDAQ except Hilfiger and Nuveen (NYSE).
