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February 18, 2004 at 07:00 PM
Feb. 2, 2004 — George Davis Jr. doesn’t care how big or small a company is, as long as its top and bottom lines have the potential to grow and he can buy its stock on the cheap.
The $49 million Hotchkis & Wiley All Cap Value Fund/A (HWAAX) that Davis runs with Joseph Huber will hold companies of any size. What concerns the managers more is finding shares trading for less than what they think a business is intrinsically worth. Ultimately, they want those that are inexpensive relative to a company’s earnings, cash flow or book value.
At the end of last year, the stocks in the fund’s portfolio were trading at 13 times projected earnings, on average, while the Standard & Poor’s 500 index sported a P/E of 17.6. The median market cap of the fund’s holdings was $9.6 billion, putting the offering in large-cap territory.
One-year-old Hotchkis & Wiley All Cap Value was the best performer among large-cap blend funds in 2003, when it returned 69.6% and its peers gained 27.6%. By comparison, the S&P 500 was up 28.7%. The fund is too new to be ranked by Standard & Poor’s.
In picking stocks, the managers also scan for strong, sustainable cash flow and margins, as well as sound balance sheets. “We love dividends, although they’re not a requirement for gaining entry to the fund,” adds Davis.
Not many companies make their way into the portfolio. It held 22 late last month. This concentration is intended to make stock analysis easier, and to enable winners to significantly boost the fund’s returns, Davis says.
A major contributor to the fund’s performance last year was Sears,Roebuck (S). The retailer was the fund’s No. 1 stock at the end of 2003.
Sears sold its credit card operations last spring and used the proceeds from the deal to buy back its stock, a move “which is very attractive to us,” Davis says. On the retail side, the chain has been working to beef up margins, he notes.
Davis cites Electronic Data Systems (EDS) as an example of the kind of stock the fund owns. The managers bought a stake in the computer services company last year, and it held third place in the portfolio at the end of December.
