April 23, 2004

David Katz of the Matrix Value Fund

S&P Rank: 5 StarsContrarian Approach Wins Admirers

Quick Take: David Katz says he manages the portfolio of the Matrix Advisors Value Fund (MAVFX) as if it were his own money. "A lot of it is," he says of the $305-million fund.

As an investor, Katz can't complain about the fund's performance over the over the long or the short run. Matrix Value rose 44.6% in 2003, versus 21.8% for its large-cap value fund peers, and 28.7% for the Standard & Poor's 500 index. For the ten years ended in March, Katz's fund returned 13.5% annualized, versus 10.5% for similar funds, and 11.7% for the index.

More recently, Matrix Value gained 1% in the first quarter of this year, while its peers rose 2.5%, and the index gained 1.7%. Katz says the fund cooled off because its technology and health care stocks weakened, but that he sees good things ahead for both sectors. While the fund has achieved excellent long-term results against its peers with lower than average expenses, volatility is high with the portfolio concentrated in about 35-40 stocks.

Though fund's board and shareholders approved moving fund into the Strong family of funds last August, the reorganization has been put on hold indefinitely while Katz waits to see what happens with Strong Financial Corp., which is seeking a buyer following its involvement in the scandal over "rapid trading" of mutual funds. Katz, however, will continue managing the fund if it does change hands.

The Full Interview:

If you want to know what David Katz is investing in, check to see where Wall Street is directing money. Chances are he'll be going the other way.

"More often than not, we're buying when everyone has turned neutral to negative," on a stock, says Katz, who runs the Matrix Value Fund. "And we're selling when everybody else has warmed up to a name."

Katz's investment approach does involve talking to analysts' at brokerage houses, but only to get information on companies, not to hear which ones they're touting or downgrading, he says.

Before consulting people who follow companies, or corporate executives, Katz hunts for undervalued stocks of profitable, financially sound businesses.

He looks at share prices compared to a company's earnings, sales, book value and dividend yield on an absolute and relative basis, and over the short and long term. He wants equities that are inexpensive based on at least two of those measurements. Companies with little or no debt and strong cash flow pique his interest, too. In addition, Katz keeps an eye out for a catalyst, like a new product, that can drive stocks higher.

Of the 1,500 or so large-cap stocks that Katz initially screens, 35-40 make their way into the portfolio. He feels that number provides adequate diversification.

On the last day of 2003, Katz began buying Genl Mills (GIS). The food producer's prospects in the long run are bright, according to Katz, who cites its well known brands, such as Cheerios, Wheaties and Betty Crocker. But the stock has suffered for the last 12 months because of investors' concerns that the popularity of the low carbohydrate Atkins diet would slow its earnings growth, he says.

Matrix Value's General Mills shares cost $45.43 on average. The stock closed at $46.81 today.

In January Katz bought a stake in MedImmune Inc (MEDI), the first biotechnology stock the fund had ever owned. The stock now ranks fourth in the portfolio.

"This is definitely out of the ordinary for us, but the valuation is so compelling that it pops up," says Katz, whose analysis shows the stock is trading at 16 times projected 2004 earnings. He adds that, unlike many similar companies, MedImmune is profitable and its cash flow is positive.

Katz paid $22.69 for his Medimmune shares on average. They closed today at $23.98.

Another recent addition to the fund is Microsoft Corp (MSFT). Katz invested in the software giant in February. At that point, its stock valuation had fallen to its lowest level in the "last decade," says Katz, who sees the value as on the verge of increasing. The fund manager also admires Microsoft's global reach, and what he calls its "tremendous" cash flow.

The fund's Microsoft shares cost $26.24 on average. They closed at $25.22 today.

The fund, whose sector weights are a result of Katz's individual stock selections, has a bit more than 26% of its assets in technology stocks like Microsoft. These include its second and third-largest stocks: Symbol Technologies (SBL), which makes portable data terminals and bar code scanners; and Novellus Systems (NVLS), a manufacturer of equipment used to produce semiconductors.

"The investment is making some money," Katz says of Symbol. "But we think the best is yet to come." Similarly, he believes Novellus' shares, which have been trading for around $33-$34 of late, could reach the mid-to-high $40s in 12-18 months.

Elsewhere in the tech sector, Katz owns cellphone maker Nokia Corp ADS (NOK), which is one of his top ten holdings. Nokia has come under pressure lately because of a disappointing first quarter forecast. Katz, however, thinks the company can overcome its near term difficulties. He maintains that its balance sheet is one of the best in its industry, and that its cash flow remains healthy.

The fund's No. 1 stock is Morgan Stanley (MWD), which Katz likes because of its leading position among commercial banks, as well as its stock's P/E of about 12.7 and its 1.9% dividend yield.

Financial stocks account for about 26% of the fund's holdings. These investments, Katz says, are biased towards investment banks, which he reasons will be hurt less than other financial services companies if interest rates begin rising this year. Among his holdings in the sector are Citigroup Inc (C), J.P. Morgan Chase & Co (JPM) and Merrill Lynch (MER).

Approximately 23% of the portfolio is given over to health care stocks. Katz says he has been finding opportunities in drug makers, many of whose shares have gotten beaten down to the point where they look good to him. Investors have soured on the industry because of short range problems like competition from lower cost Canadian imports, and the expiration of patent protection on pharmaceuticals, Katz says. "We think that they're good businesses with good long-term growth prospects," he adds.

Drug companies like Bristol-Myers Squibb (BMY), Merck & Co (MRK), Pfizer, Inc (PFE) and Wyeth (WYE) have shelf space in the fund.

Assessing the stock market, Katz thinks the rebounding economy and strengthening corporate profits will enable it to post gains of 10%-12% this year. While he expects the Federal Reserve to begin tightening interest rates in the second half of the year, he does not think they will rise so high as to choke off a modest rally.

"Ultimately, earnings will drive stock prices," Katz says. "And if the earnings are improving, as they are, then stocks are poised to do a whole lot better."

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