Quick Take: The late 1990s were not kind to money managers like Richard Calvert, who try to ferret out otherwise attractive stocks that have been battered because of short-term difficulties.
These days, however, it’s finally good to be a value investor, said Calvert, who oversees the $671-million AmSouth Mutual Fds:Value Fund/A (AOEQX). Concentrating on undervalued stocks helped the fund gain 4.1% last year and 5.1% the year before, when the Standard & Poor’s 500-Stock Index was off 11.9% and 9.1%.
Through April this year, AmSouth Value lost 0.1%, but that still put it ahead of the S&P 500, which was down 5.8%, and the average large-cap value fund, which was off 2.0%. For the five-year period ended in April, the fund has returned 10.4% annualized, versus 7.5% for its peers.
The Full Interview:
The stocks Richard Calvert invests in tend to be slumping when he buys them.
However, he is willing to discount what he perceives as a temporary setback if he thinks the long-term outlook for a company or industry is bright.
“We try to do our research and look past the current problems and look down the road,” says Calvert, who manages the AmSouth Value fund.
Calvert focuses on stocks that are trading for significantly less than what he thinks the company is worth. He prefers stocks that look inexpensive compared to their history, industry peers, and the market. The 60-75 stocks the fund typically holds consist of large companies and those that have been beaten down into mid-caps.
He also hunts for businesses with strong cash flow and balance sheets, but says he will buy those whose finances look weak, provided they appear to be moving to strengthen them.
Calvert said he began buying energy companies late last year, and more heavily in February. These stocks had suffered during that period because of the Enron debacle and an unusually warm winter that reduced demand for power. As a result, they became “extremely cheap,” according to Calvert, who, nonetheless, sees them as “very attractive” over the long run.
Energy stocks account for 14% of the portfolio. His investments in the sector include Mirant Corp (MIR), which accounts for 3.6% of the fund’s assets. It is the fund’s No. 2 holding. The stock has been trading around $8-$9 lately, but Calvert thinks it can reach $18 within 18 months.
AmSouth Value also has recently added shares of Reliant Energy (REI), El Paso Corp. (EP) and Williams Cos (WMB).
Over the last couple of months Calvert has also invested in technology and telecommunications stocks, which have taken a beating since the spring of 2000. The fund has a total of about 24% of its assets in these stocks.
Among his recent investments in the sectors, Calvert cited Computer Assoc Intl (CA) and Solectron Corp (SLR).
Computer Associates, which makes software for mainframe computers and for electronic commerce, generates “good, decent cash flow,” Calvert said.
Solectron, which makes computers and telecommunications equipment, stands to gain as companies increasingly rely on contract manufacturers, although the firm will barely be profitable this year, Calvert said. He does not expect Solectron’s earnings to increase significantly until after 2003.
The top holding in the portfolio at about 3.8% of assets is Washington Mutual (WM), a financial services company that Calvert has owned for a long time. He believes the stock, now trading for about nine times projected 2002 earnings, “still has room to run.” The Seattle-based company’s mortgage business should continue to strengthen, he said.
Washington Mutual, Calvert added, should also benefit from rising rates for property and casualty insurance, as should St. Paul Cos (SPC), an insurer that ranks third in the portfolio. Calvert sees costs for coverage rising for another two years, and although it takes a while for the hikes to affect bottom lines in the sector, he thinks 2003 “will be a very good year” for the business.
The fund has 21% of its assets in banks and financial service companies, including J.P. Morgan Chase & Co (JPM), another recent addition to the portfolio. Calvert began buying the stock in February, when it had fallen because of the company’s exposure to Enron, Global Crossing and South America. To Calvert, though, J.P. Morgan was a “solid company,” and its stock, trading for about 11 times projected 2003 earnings, was attractively valued.
Elsewhere in the sector, AmSouth Value has stakes in ACE Limited (ACE), Bank of America (BAC), Chubb Corp (CB), and Citigroup Inc (C).