Pasadena Fund Waits for Turn in Growth Stocks
If managing money is coping with a series of feasts and famines, Roger Engemann may be one of the hungriest people in the business today.
His Pasadena-based investment firm, Roger Engemann & Associates, has long been the most vocal cheerleader for America’s big-name consumer growth stocks--issues such as Coca-Cola, Walt Disney, Wal-Mart and Philip Morris.
From the mid-’80s until 1992, Engemann practically minted money by owning those stocks, as they rocketed in value.
But for the past 2 1/2 years, the brand-name consumer companies have been Wall Street’s biggest dogs. And because he has been unwilling to abandon those stocks, Engemann has suffered more than perhaps any other major money manager.
His flagship Pasadena Growth mutual fund is in its third consecutive year of sharply underperforming the average stock fund. In 1993, when the average stock fund rose 12.5%, Pasadena Growth dropped 5.9%. So far this year, Engemann’s fund is off 5.3%, versus a 3.1% loss for the average fund.
Worse, Engemann’s losses have been magnified by what he admits have been some particularly onerous blunders. He owned medical device firm U.S. Surgical, for example, which became “the worst stock in our 25-year history,” he says. The stock has crashed from nearly $80 last year to $17 now.
Engemann may also have been a victim of his own hype. He aggressively touted the consumer stocks in 1992, even as some Wall Street pros warned that the shares were overvalued and that many of the companies were losing pricing power in the weak economy.
As Merrill Lynch and other major brokers plowed $2.5 billion worth of new clients’ cash into Engemann’s funds during 1992, he was forced to buy the consumer stocks at what turned out to be peak prices for many of them.
Now, after two years of losses, Engemann faces the downside of rapid success: an equally rapid fall from grace. His firm’s assets, which leaped from $1.3 billion in 1991 to $5 billion a year ago, have tumbled to $4 billion now as disgruntled investors have pulled out.
Yet the 53-year-old Engemann remains unapologetically bullish on the consumer products giants he owns. In fact, he is telling clients that if they stick with him, their gains could be as large as 70% over the next two years.
Engemann brought that message to the Anaheim Hilton on Friday and Saturday, where he held his annual client conference. For years, the show was a happy affair that gave Engemann’s mostly retiree clients a chance to thank him for the money he’d made for them.
This year, not surprisingly, Engemann spent most of his time on the defensive, explaining what has gone wrong and when he expected to begin making money again.
Born in Hollywood to a relatively poor family, Engemann earned his college degrees in economics and worked as a stock analyst in the 1960s, before launching his own investment firm in 1969.
Virtually from the start, his philosophy has been disarmingly simple: Buy shares of the biggest, most successful consumer-oriented growth companies, and hold them. Avoid industrial firms, bonds, most smaller stocks and other less predictable investments.
Over the past 20 years, Engemann’s strategy has worked exceedingly well, as brand-name firms such as Coca-Cola, Pfizer and Colgate-Palmolive have mushroomed in size with the aging of free-spending baby boomers.
Even after his dismal performance of the last few years, $100,000 invested with Engemann in 1978 would be worth $1.4 million today--about $500,000 more than if you had invested in the Standard & Poor’s 500 blue-chip stocks.
Still, Engemann admitted to his clients at the Anaheim show that he has never endured as long a period of lousy performance as the past 2 1/2 years.
Engemann blames his troubles on the convergence of three factors. First, Wall Street has been chasing cyclical stocks such as car and machinery makers in anticipation of a growing economy--which is finally here. So the steady-growth consumer stocks have taken a back seat to the cyclical issues, and for longer than Engemann believed was possible.
Second, fear of rising competition--and thus slower earnings growth--has clipped drug, food, tobacco and retail stocks. Some of those fears have been rational. Drug firms’ earnings have indeed been slammed by the advent of health care reform. Tobacco firms’ pricing woes are well known.
Even so, Engemann argues that earnings concerns have been exaggerated for most of his stocks.
Third, Engemann concedes that he stuck with some companies whose problems were deeper than he understood. U.S. Surgical, which lost a major patent suit, was Engemann’s biggest loser, but he admits that Tampax maker Tambrands and waste management firm WMX Technologies also turned out to be mistakes.
So why does Engemann believe the worst is over for his stocks? For one thing, he sees investors’ long love affair with cyclical stocks waning, now that Wall Street has bid up the stocks’ prices to reflect much or all of their expected earnings rebound in the near term. The recent slide in auto stocks may foreshadow the end of the cyclicals’ winning streak, he says.
More important, Engemann says, is that many of his consumer-growth stocks have become cheap by historical standards, as their earnings have continued to rise over the past two years while the stocks have been flat or fallen.
“The stocks of America’s best companies are being avoided,” Engemann told his clients. “But this situation won’t last.”
Coca-Cola shares, for example, have been stuck around $40 since 1991. Yet Coke’s earnings grew 17% in both 1992 and 1993, Engemann notes.
Engemann says the average stock in his portfolios now is priced at 16 times estimated 1994 earnings per share. If the companies’ collective annual earnings growth is 15% over the next two years, Engemann says, then the stocks’ prices must rise 30% over that period just to keep their price-to-earnings ratio (or P-E) at 16.
And if Wall Street again becomes willing to pay a premium for classic growth stocks, Engemann says, the gain in his stocks should be much larger. If the average P-E of his stocks rises to 20 in two years, he says, his portfolio would rocket 70% from current levels.
Of course, those calculations are based on many assumptions, not the least of which are that interest rates and inflation remain low. Any rise in rates or inflation would assuredly depress stock P-Es, even for the best growth stocks, Engemann concedes.
But his central message to clients is that the market is forever going through cycles, and that his stocks have done their time, and then some. “I firmly believe you will get paid for waiting,” Engemann says.
So far, most of his clients are giving him the benefit of the doubt. Jack Cave, a Coronado retiree at the Anaheim conference, said Engemann has produced terrific returns for him since 1974. Cave credits Engemann’s willingness to stick with his plan. “He believes in hanging in there,” Cave said.
His wife, Betty, also is a big Engemann fan, despite the losses of recent years.
“It’ll go down, but it’ll come back,” she said--holding up crossed fingers and grinning.
A Tough Two Years
Here are some of the classic growth stocks owned by money manager Roger Engemann, how the stocks have fared versus their peak prices of 1992-93, and the stocks’ price-to-earnings ratios today based on estimated 1994 earnings per share.
‘92-’93 Fri. Pct. P-E on Stock peak price close change ’94 earnings Gillette $63 3/4 $66 3/4 +5% 22 Fed. Home Loan Mort. 56 3/4 58 1/4 +3% 12 Reuters 42 5/8 43 5/8 +2% 24 Coca-Cola 45 3/8 40 7/8 -10% 21 Walt Disney 47 7/8 43 1/8 -10% 21 Toys R Us 42 7/8 35 1/2 -17% 18 Pfizer 87 63 1/4 -27% 16 Wal-Mart 34 1/8 23 1/4 -32% 19 Philip Morris 86 5/8 53 3/4 -38% 10 Circus Circus 49 3/4 24 1/8 -52% 12
P-E ratios based on Value Line Investment Survey estimates. Prices adjusted for splits where applicable.
The Engemann Record
Roger Engemann’s Pasadena Growth stock fund, which invests almost exclusively in big-name consumer growth stocks, had a spectacular run between 1988 and 1991. But many of Engemann’s favorite stocks have fallen out of favor sinc then, causing the fund to badly lag the market.
