The top picks from 50 great investors
By Yuval Rosenberg, David Rynecki, and David Stires,
FORTUNE
Monday, Dec. 8, 2003
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Their track records speak for themselves. Take, for starters, fund manager Bill Miller, who has outpaced the broader market for a stunning 12 straight years and counting. Or George Mairs, who has returned 12 percent annually to his fund's shareholders since ... 1958! For the 2004 Guide, we went all-out, seeking the best investors in the business -- 50 of them, in fact. Some, like Miller, are already legendary in name. Others, like Mairs, are less well-known. All, however, are worth listening to. FORTUNE asked each of them for his or her single best pick for 2004.
Pick
Expert
Affiliation |
Synopsis |
Ace Ltd.
David Williams
Excelsior Value & Restructuring |
Williams has high hopes for Ace Ltd. (ACE, $38), a Bermuda insurance and reinsurance company. Ace shares trade for just eight times next year's projected earnings and a little over book value. The stock is cheap in part because of concerns about the company's exposure to asbestos and terrorism. But Williams believes that asbestos fears are overblown, and that higher-priced policies are making it less vulnerable to losses from terrorist attacks. Analysts expect profits to grow by some 17% a year over the next three to five years. |
Altria Group
David Dreman Scudder-Dreman High Return Equity |
Dreman has loaded up on shares of Altria Group (MO, $51), which now account for more than 9% of his fund's holdings. The stock has been on a tear of late, rising 24% in the past 13 weeks. But Dreman says Altria, which trades for about 11 times earnings and pays a generous 5.2% dividend, should go higher as fears about tobacco litigation diminish. |
American Greetings
John Rogers Ariel |
Rogers is investing in stocks with low price/earnings ratios and out-of-favor companies he believes are dramatically undervalued by the market—like American Greetings (AM, $21), the Cleveland cardmaker. The second-largest holding in Rogers's fund, American Greetings has gained 34% this year, but Rogers thinks the stock's run is far from over. "It's still very cheap," he says. He adds that a new generation of management has cut costs and focused on growing the business, making its 2004 P/E of 13 that much more appealing. |
Anadarko Petroleum
Marvin Schwartz Neuberger Berman |
One economic shift Schwartz says investors shouldn't ignore is the impact of a raging global economy on energy prices. He's been plowing money into Anadarko Petroleum (APC, $47). The energy-exploration company has one of the best track records for efficiently finding oil and gas. Couple that with a P/E below ten and $14 a share in cash flow, and Anadarko looks even cheaper. |
Anglo-American PLC
Mark Mobius Templeton Asset Management |
Mobius navigates a treacherous world by focusing on companies with long-range business plans and a history of integrity. Right now that points him to gem purveyor Anglo-American (AAUK, $22). The parent of DeBeers dates itself back to 1917, giving it an unusual pedigree in developing markets. Revenues from its diamond business are up 49% this year. |
Astoria Financial
David Ellison FBR Small Cap Financial |
Ellison has long succeeded in buying conservatively run deposit-taking banks. He expects that strategy to work over the next 12 months, particularly at Astoria Financial (AF, 37). The $22 billion New York City-based thrift has 86 branches, stellar earnings, and a lending arm that will actually benefit from rising interest rates. |
Berkshire Hathaway Class B
Chris Davis Davis Financial |
One stock that Davis says is currently a bargain is Warren Buffett's Berkshire Hathaway (BRKb, $2,799). Individual investors might find the $84,000-per-share pricetag for Class A shares a bit rich, but Berkshire also offers "B" shares trading at a more modest $2,800 or so. The B shares (one-thirtieth of an A share) don't come with the same voting privileges, but they give you a piece of a golden franchise that is expected to prosper from a strong economy. According to Davis, what makes Berkshire attractive is that shares are only now getting back to their 1998 highs. And since then, Berkshire has increased its intrinsic value by 60%.
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British Sky Broadcasting
Edward Bonham Carter Jupiter Asset Management |
"The challenge in the U.K.'s mature market is to find top-line growth," says Bonham Carter, who runs Jupiter's undervalued assets fund. That's one reason he's keen on BskyB (BSY, $47), the British satellite broadcaster, despite some concerns about the recent appointment of James Murdoch, son of company chairman Rupert Murdoch, as CEO. "They're adding subscribers, and they're increasing the average revenue per subscriber."
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Cisco Systems
Jim Oelschlager White Oak Growth |
Where's Oelschlager putting his money now? Cisco Systems (CSCO, $23). Oelschlager says Cisco has virtually no debt, heaps of cash, and huge prospects for stealing market share in the lucrative storage and voice enterprises. |
Coca-Cola
Mike Painchaud Market Profile Theorems |
Painchaud's latest work suggests that the economic recovery will be very bright but short-lived. Stagflation, he says, is the operative word. In such an environment Painchaud says investors need global exposure to play off the weaker dollar, steady profit growth, and a product that people like to buy. That points to Coca-Cola (KO, $48). The last time insiders at Coke were this bullish, in 2002, the stock jumped 20%. |
Countrywide Financial
Louis Navellier Blue Chip Growth Letter |
One of Navellier's highest-rated stocks now is Countrywide Financial (CFC, $106), a mortgage lender that has benefited greatly from the refinancing boom. Even if that trend cools down, Navellier says, Countrywide will stay hot because of Wall Street's appetite for its steady growth and because it has less exposure to the weak bond market than other financial services firms. |
Electronic Data Systems
Stan Majcher Hotchkis & Wiley Mid-Cap Value |
Majcher searches for battered and bruised companies that few investors think are worth buying. He's been piling up shares of Electronic Data Systems (EDS, $23) for the past year, even though headlines about accounting irregularities have plagued the stock. Majcher says that investors have overlooked the ability of EDS to generate cash flow, and that at nine times his estimate for normal earnings power, the stock is a steal. |
Express Scripts
Rick Jandrain One Group Mid-Cap Growth |
An example of the kind of fast, consistent growth Jandrain likes is Express Scripts (ESRX, $64). The company manages pharmacy benefits for 16,000 health-care providers and companies. Express Scripts has grown revenues at a 30% annualized clip for three years. And it stands to do even better in 2004 if health-insurance reform becomes a hot-button political issue, as expected. Because Express Scripts helps companies save money, it is a rare beneficiary of more government oversight of health care.
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Freddie Mac
Jim Gipson Clipper |
Jim Gipson routinely stuffs his fund with beaten-up names. His biggest holding, Freddie Mac (FRE, $55), is a classic example. Following revelations of widespread accounting problems, the company could be forced by federal regulators to boost its capital requirements, hurting profits. Oh, and Freddie has yet to replace embattled CEO Greg Parseghian. But Gipson says the stock, trading for just nine times next year's projected earnings, is simply too cheap to pass up. By next spring he expects the company to have a new CEO and the regulatory issues to be resolved. "As those clouds are removed, people will again focus on the basic business," says Gipson. "And the basic business is excellent." |
Gamesa Corp. Tecnologica
Steven Cordell Cazenove Fund Management |
One of Cordell's favorite stocks right now is Gamesa (GCTAF, $29), Spain's leading manufacturer of wind-energy turbines. Cordell sees demand for wind power surging in Europe in the next few years, with governments across the region willing to subsidize companies delivering alternative energy sources. "Spain is the second-largest market in the world for wind power after Germany, and Gamesa has a near monopoly," he says. |
Gillette
Andrew McQuilling UBS |
Gillette (G, $34) is showing signs of a solid financial turnaround. Shares have lagged, however, on concerns that a new Schick razorblade will cut into Gillette's business. With 70% of profits coming from blades, that's a legitimate worry. But McQuilling says there is no risk of Gillette's losing its franchise. His analysis shows that every time Schick introduces a new product, Gillette shares suffer -- only to rebound months later.
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Honda Motor
Sarah Ketterer Causeway Intl. Value |
Right now Ketterer likes Honda Motor (HMC, $20), whose shares have come under pressure in part because of slumping sales in Japan. Ketterer, however, believes sales will pick up after new models are introduced at the Tokyo Motor Show in the spring. Honda is one of the world's most consistently profitable automakers, she says, yet the stock sells for just eight times her 2005 projected earnings.
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Infosys Technologies
George Greig William Blair Intl. Growth |
At the moment Greig is positioning his $1.5 billion in investments to capitalize on what he sees as a long-term transition of economic leadership from Western nations to Asia. That's where India's Infosys (INFY, $84) comes in. Founded 20 years ago to write basic software programs at lower prices for U.S. tech companies, Infosys has developed a sophisticated programming division and now operates its own consulting business. Revenues are up sevenfold in five years.
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InterActive Corp.
Bill Miller Legg Mason Value Trust |
Miller expects strong profit growth, surprisingly low inflation, and low interest rates to fuel double-digit returns for the broad market in 2004. These macro trends bode well, he says, for one of his favorite holdings, InterActive Corp. (IACI, $31), the parent of Hotels.com, Lending Tree, and Home Shopping Network. Miller describes Barry Diller's web-focused conglomerate as the "Berkshire Hathaway for the new economy." And at $31 a share, Miller expects InterActive to generate around $10 billion in cash over the next five years. |
International Game Technology
John, John Jr., Angelo, and Nick Calamos Calamos Investments |
Slot-machine maker International Game Technology (IGT, $34) is a company that fits with the Calamos approach: Dominant in its industry, it has a business model that is easy to understand, a high and consistent return on capital, a large percentage of stock owned by management, and a track record of not overpaying for acquisitions. Revenue per share is up sixfold during the past ten years. "IGT is the quintessential company for us," says Nick.
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Johnson & Johnson
Amy Domini Domini Social Equity |
Domini predicts healthy returns for Johnson & Johnson (JNJ, $49). In addition to contributing 1.4% of pretax profits to charity, J&J's drug and Band-Aid businesses are durable enough to withstand the choppy market Domini expects for the coming year. |
Liberty Media
Wally Weitz Weitz Value |
As of late November, Weitz said he was having some difficulty unearthing new values. "At the moment I'm thinking stocks seem expensive, and I'm not finding very many interesting bargains," he said. One major holding he's still very comfortable with, however, is Liberty Media (L, $11), the cable company led by John Malone. Weitz values Liberty's media properties at about $15 a share and says he trusts management to come up with smart decisions, making the stock "a fairly easy call." |
Meritage
Ron Muhlenkamp Muhlenkamp |
Muhlenkamp has long been a fan of homebuilders, which he argues are not as cyclical as the market believes. Among the half-dozen homebuilders in his portfolio, he singles out Meritage (MTH, $65). The company constructs single-family homes, ranging from entry level to luxury, in fast-growing states such as Arizona, Texas, and California. Meritage's return on equity is north of 20%, yet the stock sells for just nine times its projected earnings for 2004.
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Millea Holdings
Mason Hawkins Longleaf Partners |
These days, Hawkins and his team say they are finding few outstanding values in the U.S. One name they do like is Japanese insurance giant Millea Holdings (MLEA, $57), which trades as an ADR. The stock, which makes up nearly 6% of the Longleaf International fund, has a current P/E of 16 and sells at nearly a 50% discount to what Hawkins thinks it's worth. |
Motorola
Eli Salzmann Lord Abbett Large-Cap Research |
Motorola (MOT, $14) could be Salzmann's latest example of successful bottom fishing. Recently hammered by competitors and frozen by an ineffective CEO, Motorola has overhauled management and is already showing positive signs of recovery following the announced spinout of the company's noncore semiconductor business.
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Oshkosh Trucking
Brian Berghuis T. Rowe Price Mid-Cap Growth |
Right now Berghuis is excited about Oshkosh Truck (OSK, $49). The Wisconsin company makes specialty trucks used by the military, garbage haulers, and cement layers. It also has a 29% share of the U.S. fire truck market. And sales are sizzling: Profits have grown 30% annually over the past five years. |
Principal Financial Group
Colin Devine Smith Barney |
The most important question facing financial services analysts like Colin Devine right now is this: Which companies will best take advantage of the transition of the baby-boomers into retirement over the next decade? One important trend is that the vast majority of boomers are preparing for retirement without a traditional pension plan and will have to manage their own retirement income. That is why Devine likes the prospects of Principal Financial Group (PFG, $34), which has a booming 401(k) business—and plenty of chances to sell boomers other financial products. The financially healthy company also gushes excess cash flow. |
Rayonier
Susan Byrne Westwood Holdings Group |
Byrne likes to find companies that let her play off ongoing themes in the economy. The red-hot economic rebound, for example, has persuaded her to move money into Rayonier (RYN, $37), a forestry company with more than two million acres of timberland that recently converted itself into a real estate investment trust, or REIT. Shares of the company, which must now pay out 90% or more of its profits to investors, are expected to yield a rich 6.4% in 2004. But the real opportunity for appreciation, says Byrne, is that Rayonier's financial results—and its share price—should ramp up as demand for commodities increases. |
Rent-A-Center
Sam Stewart Wasatch Ultra Growth |
Stewart says the key is finding unknown small- and micro-cap stocks that are about to take off. A perfect example: Rent-A-Center (RCII, $32). The leader in rent-to-own household furnishings has 2,400 stores, generates operating cash flow in excess of $300 million a year, and is trading at a steep discount to the market. Says Stewart: "This is the Wal-Mart of rent-to-own." |
Sara Lee
Nicholas Gerber Ameristock |
One of Gerber's favorite companies now is Sara Lee (SLE, $21), the $18 billion parent of brands Hillshire Farm, Hanes, and Wonderbra. Investors have punished the conglomerate for its flagging earnings, as well as for management missteps like overpaying for the 2001 acquisition of bakery Earthgrains. But Gerber likes Sara Lee's healthy cash flow and thinks that its restructuring moves will pay off long term. In the meantime he's happy to buy the stock while it trades at a projected 2004 P/E of 13 and offers a dividend yielding 3.6%. Says Gerber: "We're putting our money where our mouth is right now and adding to our position."
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Sears Roebuck & Co.
David Fried Buyback Premium Portfolio |
Fried focuses on companies that are repurchasing shares. His favorite stock right now is Sears (S, $55), which sold off its credit card business earlier this year and said it will return some of the proceeds to shareholders in the form of a $3 billion buyback. With a market cap of $14 billion, Fried notes, that amounts to a 20% reduction in outstanding shares, making this retailer a bargain.
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Silicon Valley Bancshares
Rick Aster Meridian Growth |
Shares of tech banking firm Silicon Valley Bancshares (SIVB, $36) have doubled this year, but Aster believes they will climb further as earnings continue to rebound. "They kept their loan portfolio in good shape," he says, "and you just have to feel that they are going to benefit substantially as the economy picks up and tech comes back."
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Sypris Solutions
Joe Frohna First American Small Cap Growth |
Frohna has keen instincts for spotting up-and-coming companies with market capitalizations below $1 billion. Sypris Solutions (SYPR, $13) is a perfect example. The company's truck axles are being purchased by manufacturers in order to comply with new environmental standards. It is also a subcontractor to defense contractors working to modernize U.S. weapons systems. |
Tenet Healthcare
Bob Olstein Olstein Financial Alert |
Olstein's latest counterintuitive move is to take a big position in Tenet Healthcare (THC, $15). The stock of the California hospital company has been hit hard by a Medicare billing scandal -- shares were trading at around $50 before the news broke in the fall of 2002—and accusations of unnecessary surgeries. Olstein says Tenet is selling off assets to reduce debt and is showing signs of restoring its profitability.
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The St. Joe Co.
Marty Whitman Third Avenue Value |
Veteran value investor Marty Whitman has two overriding criteria for his buys: They have to be safe, and they have to be cheap. Whitman buys companies with strong balance sheets trading at a steep discount to their takeover value. Then he waits patiently for their price to catch up to the intrinsic worth he sees. That deep-value philosophy has helped Whitman's Third Avenue Value fund gain nearly 13% a year over the past ten years. One of Whitman's favorite long-horizon holdings is the St. Joe Co. (JOE, $35), a Florida real estate developer whose stock he believes has more than 25% upside. "We know we're getting a well-financed company at a sizable discount," Whitman says. That is to say, safe and cheap.
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UTStarcom
Kevin Landis Firsthand Technology Value |
Landis, Firsthand Technology Value's chief investment officer, targets lesser-known tech stocks that he feels have higher growth potential. One of Landis's current favorites is UTStarcom (UTSI, $37), a telecom equipment provider with extensive operations in China. "I'm going to go out on a limb here and say you're going to hear a lot about it in the next year," says Landis, who expects revenues to grow at a better-than-40% clip. "It's a great growth story at a fairly attractive price."
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VCA Antech
Conrad Herrmann Franklin Flex Cap Growth |
Herrmann likes to find battered growth stocks, often ones that are based right in his California backyard. The stock he sees with the best prospects right now belongs to a health-care company. Not just any kind of HMO or hospital operator, however: Herrmann likes VCA Antech (WOOF, $32), the country's leading veterinary-clinic manager. With revenues growing in the high double digits and limited risks of government controls compared with human health providers, VCA is gobbling up market share in a fragmented business.
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Washington Mutual
Bill Nygren Oakmark |
Bill Nygren often finds value in the intangibles. Take Washington Mutual (WM, $44), his biggest holding. Shares of the nation's largest savings and loan trade for just 10 times next year's projected earnings because investors fear the company is too dependent on mortgage lending, which many believe will suffer as interest rates rise. But Nygren thinks WaMu's two decades of experience targeting retail banking customers—an asset that does not show up on its balance sheet—is helping the company remake itself into a more diversified financial-services company. As evidence, he points out that the number of checking accounts grew 11% in the third quarter. "Washington Mutual is well on its way toward becoming the leading nationwide retail bank for the middle class," he says.
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WebEx
Mike Markowski Stockdiagnostics.com |
Markowski has determined that stock prices can almost always be predicted by the direction of operating cash flow. It's a good indicator that a struggling business is about to turn positive. One of his current favorites is WebEx (WEBX, $19). The video- and web-conferencing company has seen revenue jump 40% and cash flow double over the past 12 months.
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Wells Fargo
George Mairs Mairs & Power Growth |
Mairs has held his average stock for 20 years. One that he has no plans ever to sell is Wells Fargo (WFC, $57). Now headquartered in San Francisco, the Gopher State's former Norwest has earnings that are less volatile than other major banks because it still acts, he says, like a small-town lender that avoids risky business lines and focuses on customer service.
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Pick
Expert
Affiliation |
Synopsis |
Bank CDs
Eugene Flood Smith Breeden |
There's something telling in the fact that Flood is recommending bank CDs. As CEO of Smith Breeden, Flood oversees $29 billion in fixed-income investments, and his firm's flagship hedge fund is up nicely year-to-date. But despite the strong results, Flood is wary of making big bets in bonds. Inflation is just around the corner, he says, and that means higher rates. For average investors, he thinks earning 3.5% in a CD is a great way to make -- and protect -- money.
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Bet against the dollar
Jim Rogers Rogers International Commodity Index |
Rogers, a self-described "adventure capitalist" expects that U.S. stocks will trade sideways to lower in coming years and that the dollar will stage a multiyear slide. That's why Rogers is betting against the dollar by investing in foreign currencies like the euro. It's also possible to short the dollar directly by buying futures contracts. A simpler route is to open a money market account at a major bank that lets individuals keep their money in non-U.S. denominations and wait for profits to accrue. Don't worry about being too late to the party. "The decline in the dollar is major and horrible, and it's going to go on for a long time," says Rogers.
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Brazilian bonds
Mohamed El-Erian Pimco Emerging Markets Bond |
Emerging markets have been sizzling this year, and Mohamed El-Erian has been just as hot, racking up a 28% gain in his fund. Investments in Brazil have been key to generating those heady numbers, and El-Erian remains keen on the Brazilian economy. "We think that within two years you will see Brazil as investment grade," he says. He particularly favors government issues maturing in 2012 and 2040 that carry yields of 8.6% and 10.4%, respectively. |
First Trust Value Line 100
Samuel Eisenstadt Value Line |
With its trademark single-page summaries, Value Line has been praised by Warren Buffett and Peter Lynch as a one-stop source for comprehensive company research. Since Value Line started ranking stocks in 1965, the firm's list of best ideas has returned 13.9% a year, clobbering the S&P 500's 6.5% annual gain. It's a remarkable feat that no mutual fund can match. The firm owes its success to Samuel Eisenstadt, a statistics major from Brooklyn who joined the firm in 1946 as a proofreader. Eisenstadt created a computer model that remains a secret but relies most heavily on earnings growth and stock price momentum. A new closed-end fund, First Trust Value Line 100 (FVL, $15), invests in the 100 stocks with Value Line's highest timeliness ranking. |
High-quality tech junk bonds
Margie Patel Pioneer High Yield |
Margie Patel creates extraordinary returns by taking a top-down approach and searching for out-of-favor sectors poised for a turnaround. She then buys either regular bonds or convertibles, which behave more like stocks and give her fund added upside. These days Patel is moving her portfolio into higher-grade junk. "You only have to give up a little bit of yield to be in much, much better quality," she says. She is heavily overweight on technology bonds, such as those of semiconductor companies like Conexant and Sanmina-SCI. "The industries within technology are definitely growing faster than the economy overall." |
iShares DJ Select Index Fund
Jeremy Siegel Wharton School of Business |
Siegel's 1994 tome, Stocks for the Long Run, is considered a seminal work on the history of the market. So what does he say about market conditions today? First, the good news: The S&P 500, even after its 21% rise this year, is reasonably priced, Siegel says. Excluding technology, "it might even be a little cheap." What's more, that stocks will best bonds over the next ten years is a "slam dunk." But that doesn't mean there aren't clouds on the horizon. "The biggest threat to the stock market is higher interest rates," Siegel says. He also sees certain emerging markets outpacing domestic stocks. For investors looking to put money into U.S. equities, Siegel suggests investing in high-quality, dividend-paying stocks that will get a boost from the dividend tax cut. One way to load up on those dividend-rich names, Siegel says, is the new iShares Dow Jones Select Dividend Index fund (DVY, $52), which invests in 50 of the top dividend-paying stocks and currently has a 4% yield. |
iShares Lehman TIPS
Bill Gross Pimco Total Return |
Bond guru Gross' concern is that the economic recovery will spark inflation and spike interest rates. As a result, he's moved billions of dollars into Treasury Inflation-Protected Securities, which automatically adjust principal and interest to the rate of inflation. One vehicle he likes is the recently launched iShares Lehman TIPS (TIP), an exchange-traded fund that is bought and sold like a stock. Low fees will let investors capture most of the upside. Says Gross: "It's not very sexy, but safe and sensible -- sort of how I think of myself."
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Timber
Jeremy Grantham GMO LLC |
Based on his analysis of previous bubbles in various asset classes, Grantham predicts the stock market will lose more than a third of its value over the next couple of years. That's why the bearish investor is talking up his favorite asset class, timber. Yes, timber. As in wood. He brandishes a chart that plots the price of a unit of Southern yellow pine and the price of the S&P 500 during the three great bear markets of the 20th century. While stocks fell more than 50% during each period, Grantham eagerly points out, the price of timber went up during each one. "Timber is the only asset class that's very negatively correlated with the stock market," he says. For individual investors, Grantham recommends buying a REIT that owns timberland. |
Turkish Investment Fund
Rudolph-Riad Younes Julius Baer International Equity |
Younes is talking Turkey. He sees big opportunity in the improving economy of our Near Eastern ally. On top of that, the odds of Turkey's joining the European Union look to be rising steadily. One good way to play those trends, Younes suggests, is the Turkish Investment Fund (TKF, $7.59), a $47 million closed-end fund managed by Morgan Stanley. The fund has nearly doubled in 2003, but if Turkey continues on its current path, Younes sees it racing higher still. And if Turkey eventually adopts the euro? "That," Younes says, "would really be a grand slam."
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REITs
Robert Shiller Yale University |
It should come as no surprise that the man who wrote Irrational Exuberance is still somewhat bearish on the stock market. It might be even less of a surprise that Robert Shiller, the Yale University economics professor who deconstructed the late-1990s boom, is still stressing the need to diversify, diversify, diversify. One major asset class he says people too often ignore is real estate. Shiller recommends buying REITs (real estate investment trusts), which pay out over 90% of their profits in dividends. "It's a big class, and it should be a major part of people's portfolios." |
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