January 3, 2003 roundtable discussion
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For the New Year's program, Wall $treet Week with FORTUNE invited back two of its top pickers over the past year. Since Larry Haverty and Bob Millen originally appeared on Wall $treet Week with FORTUNE, their picks have gained, on average, 21.3 percent and 12.5 percent respectively. The S&P 500 has been flat since Haverty appeared on the Aug. 9 program, and up 9.9 percent since the Sept. 27 show, which included Millen.
GIBBS: Want a more qualitative approach? Let's turn to our roundtable for their look at 2003. These guys have nerves of steel and the discipline to stick with an investing strategy. Bob Millen's 5-star Jensen Fund has consistently beaten the S&P, and Larry Haverty of State Street Advisors is known as the money manager's money manager. They turn to him for investment advice, as we do now. Gentlemen, welcome.
Bob, let me start with you. Do you think the same problems that plagued investors in 2002, such as the economy and possible war, and corporate governance issues of course, will follow us into 2003?
MILLEN: Well, Karen, I think corporate governance issues are probably going to subside. Certainly the economy is still a little bit soft and questionable about how fast it will recover, and war is obviously something that's concerning the market right now. But as you know, our strategy doesn't depend on forecasting those issues, and so we don't do it. I think investors who focus on quality this year, quality stocks bought at reasonable prices, will do quite well.
GIBBS: Let's talk about the stock picks that you have. We have a full screen that shows Stryker, MBNA, Pfizer, Automatic Data Processing and Colgate-Palmolive. Let's go through those. Why Stryker?
MILLEN: Well, Stryker is in an industry that's nearly recession-proof. It's a company that leads the market for orthopedic implants. They also have medical surgical equipment that they sell to orthopedic surgeons, and they have a genetic bone growth protein that is quite attractive and should show promising growth going forward.
GIBBS: And it did very well this year, Stryker up 15 percent. But MBNA was down about 19 percent. What's going on there?
 MILLEN: It's in a tough industry, a lot of concerns of course about credit quality. And one of the nice things about MBNA is that they focus on the high end of the credit market, very high net worth, high income people. And so they really avoid some of the problems that that industry has experienced. But unfortunately their market price has been tainted a bit by it. We anticipate they'll have nice growth going into this year.
GIBBS: Larry, let me turn to you and find out what are the headwinds you see that are facing investors for 2003.
HAVERTY: Well, I think the headwinds are likely to be transitory. The price of energy of course up at $33, the Iraq situation and the corporate uncertainty. This is the third year of the presidential cycle, and people, once they get to Washington, like staying there. And it's been since 1939 when in the third year of the presidential cycle the market's actually declined. So we've got a lot of history suggesting that the market should go up. And there's going to be tremendous fiscal stimulus introduced next year. The last time we had big time fiscal stimulus in the Reagan period was a great time for investors. So I think it's going to be a great time to be a
fundamental investor.
GIBBS: And based on that outlook, the stocks that you have that are your picks: USA Interactive; IGT (International Game Technology), I know that was a favorite of yours; Kohl's; Disney; Carnival; and MGM Mirage. Talk about those.
HAVERTY: Well, I think all six of them have the characteristic that they can survive in this miserable environment with the high energy prices and the fear of war. Two of them I think are bulletproof.
USA Interactive -- the Internet continues to gain share and transactions. Barry Diller's people dominate the fastest growing, most profitable parts of it in ticketing, travel and matchmaking. The cash flow's growing 50 percent or more. It's all free. It's just a wonderful situation. It looks very undervalued.
GIBBS: Do you care about the advertising environment, USA Interactive down ...
HAVERTY: Not in this, no.
GIBBS: How about IGT?
HAVERTY: IGT, again, it benefits from the proliferation of gaming. We've had casinos open in New York. We think they're going to open in Pennsylvania. Next year they're going to open in Britain to a tremendous scale. All the cash flow is free. It's probably going to grow north of 20 percent for years and it looks very, very undervalued. It went up last year. It's up four times in the cycle. I think it's got at least another 30 or 40 percent in it.
GIBBS: It was up 11 percent last year and it wasn't bad. Bob, the drug sector got hit really badly last year. You see some light at the end of the tunnel, otherwise you wouldn't be picking Pfizer.
MILLEN: Well, we do, and Pfizer of course is the world's largest drug company. They have the best patent protection to generic drugs. Some of the patents go out as far as 2013 and they have eight of the top 30 selling drugs, and two more are coming on stream with the addition of the Pharmacia acquisition. And, yes, its stock price is depressed relative to its true value.
GIBBS: ADP (Automatic Data Processing), that's an interesting pick there. Why?
MILLEN: Well, it's one of those somewhat bulletproof companies, as Larry talked about. And I agree with Larry, by the way, that I think this is a great time to be a fundamental investor.
GIBBS: It got shot this year, down 33 percent though.
MILLEN: And that means it's a good time to buy ADP. They've had 41 straight years of double-digit earnings growth. And while they won't quite do that this year, with probably a single-digit earnings growth, they'll be back to it sometime in the near future.
GIBBS: Larry, you had also picked Kohl's and Disney. They're both in very difficult industries now, the retail, and of course Disney with its conglomerate media. Why do you see upside there?
HAVERTY: Well, I think Kohl's is the Wal-Mart of the 2000's. It has lower costs, it uses those lower costs to give the consumer lower prices, and it relentlessly gains market share against its competitors. We think it can grow for years at 30 percent. It can finance that growth. It had a reasonably tough fourth quarter. It's down 30 percent from its high. The price is real attractive. That's really like IGT and USA, a stock for all seasons. It's just a wonderful, great business.
Disney and the other stocks I'm going to talk about, I think from here can defend themselves if this environment continues. But if the war in Iraq ends, or the worries about it do, Disney's cash flow is going to go up enormously. Tremendous leverage at ESPN, ABC, and of course the theme parks. And it's very, very cheap.
GIBBS: Bob, you do have Colgate-Palmolive on the list, and that's an interesting choice. Is it insulated again from the market vagaries?
MILLEN: It's a wonderful company. The company's been around for a long time. They're one of the most consistent earning companies, as is the case with all of the companies in the Jensen portfolio. And we're anticipating that they will continue that growth in the low teens, well into the future. And Colgate's an example of a company that we've tracked for a long time, but it wasn't until this year that we could buy it because of the relationship between its price and what we estimate its full value to be.
GIBBS: Larry, you have two other very interesting picks, Carnival Cruise Lines, of course, and they were involved, at least the whole industry there is worried about the virus that seems to be plaguing it, and MGM MIRAGE. Are we gambling that much now?
HAVERTY: Well, both of these companies I don't think are gambles. They have very solid assets.
 I just went on a cruise and didn't get sick, which is what 98 percent of the people currently are doing. The company (Carnival) had tremendous headwinds last year, actually had higher cash flow with all the uncertainty. It's got tremendous unit growth, over 15 percent probably for the next three years. All of that growth is financed. It's going to do a merger that's both strategic, accretive, and it dramatically improves the company's market position. In normal market environments, that leads to an increasing multiple. So this is a stock that could go up a lot.
MGM Grand is the high end of the food chain in Las Vegas. Las Vegas has two things going for it that aren't really appreciated. The first is, it's gaining tremendous amount of market share in the convention business, and the second thing -- this is for all the ladies -- I think in July of this year the Rouse Co. is going to open the world's largest shopping mall in Las Vegas, even bigger than the Mall of America. And I think this is going to cause tremendous visitation to Las Vegas.
Room rates are going to go up. MGM also I think is going to make some money out of the tremendous wealth being created in China with the Chinese economy doing what it's doing.
GIBBS: Larry, we've got to leave it there. Thank you for joining us. And Bob Millen, thank you, too.
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