Quick Take: Why is Rod Wright, in his words, “very enamored” of medium-sized companies? Because, he explains, they can grow as fast as small ones, and faster than large ones, while offering the successful track records and seasoned management of their bigger brethren.
Wright, the lead portfolio manager of Pioneer Mid-Cap Value Fund/A (PCGRX), hunts for investments among mid-cap stocks of companies that feature above-average earnings and profit margins, and sound balance sheets. He wants to buy shares priced at a discount to what he thinks a company is really worth. Then, he looks for something that will boost their valuation.
Under Wright, the $1.1-billion fund has stayed ahead of its peers by a nose. Pioneer Mid-Cap Value lost 3.8% this year through March, while the average mid-cap value fund was off 4.5%. The fund gained an average annualized 1% for the three years ended in March, compared to a return of 0.8% by its peers, while exhibiting slightly less volatility.
The Full Interview:
In 1998, a year after taking over his fund, Rod Wright asked to change its profile by switching from small to mid-cap stocks.
That’s because Wright, who focuses on companies with market capitalizations of $1 billion to $10 billion, believes they offer the best attributes of big and little businesses.
“You’re choosing from a pool of winners,” he says.
Compared to small enterprises, medium-sized ones have longer operating histories, which enables management to gain experience in dealing with competitors and the economy’s ups and downs, Wright says. Their established positions also make banks more willing to provide financing when needed, he says.
At the same time, mid-sized companies can grow faster than those that have already become giants, and they’re easier to analyze since, by and large, they have fewer business units, he argues. “Their financial statements aren’t incredibly obscure or complex,” he says.
In picking stocks, Wright looks for those whose earnings, balance sheets, market shares, and top executives are better on average than companies that comprise the Standard & Poor’s 500-stock index. Next, he looks for shares selling at a significant discount to what he thinks a company is actually worth.
The fund’s portfolio, Wright says, currently sports a price-to-earnings ratio of 12.8 times projected 2003 earnings, versus 13.8 for his benchmark, the Russell Midcap Value index, and 17.9 for the S&P 500. Pioneer Mid-Cap Value’s price-to-cash flow multiple is 9.8, compared to 10.8 for the benchmark, and 15.9 for the S&P 500.
Finally, Wright tries to identify something that will drive a stocks’ valuation upward. It may be improving fundamentals; a catalyst, like an asset sale; or a clear strategic plan that will help a business overcome any problems it may be experiencing.
In the first quarter this year, Wright bought shares of Sears,Roebuck (S), which have since appreciated to become his No. 1 holding. The fund manager describes the retailer as neither the best nor the worst among similar chains. “They’re somewhere in the middle,” he says, adding that the stock was trading for about four times earnings when he purchased it, so that he was “able to get a pretty good business at a fantastic price.”
Sears’ sales of products like appliances, tools and auto parts also give it advantages over competitors, according to Wright.
Two other retailers — Foot Locker (FL), which sells athletic footwear and apparel, and a pharmacy chain, CVS Corp (CVS) — are among the fund’s top holdings. Wright likes both because of their large market shares.
The fund’s major stocks also include Manor Care (HCR), which Wright describes as the largest and most profitable nursing home operator in the U.S. He also finds the stock’s valuation attractive. Manor Care shares are trading at about 13 times projected 2003 earnings, and for less than 12 times next year’s expected earnings, he says.
The biggest chunk of the fund’s assets — just under 19% — are in financial services companies. The sector features stocks of companies with sound fundamentals that are selling at a discount to the market, he says. His investments in this area include insurers RenaissanceRe Holdings (RNR) and White Mountains Insurance Grp (WTM), and Countrywide Financial (CFC), a holding company whose units provide mortgage loans.
However, Wright says he owns fewer financial stocks than similar funds, because he is concerned that they may be hurt if consumer spending slows or interest rates rise.
The fund’s typical turnover rate of about 70% is “a bit higher” than other value-oriented funds, says Wright, who will trim or unload a position if a stock becomes too pricey, or a company’s financial picture darkens.
For example, Wright says he sold Imation Corp (IMN), which makes equipment for storing electronic data, in the first quarter this year because its stock had run up.