Finding strength in weakness

Kenwood Group's Larry Jones seeks intrinsic value

Sometimes stocks that otherwise should perform handsomely suffer a setback, whether because they missed earnings, are in an out-of-favor industry or failed to close important deals.

Larry Jones with The Kenwood Group in Chicago likes to find those stocks, ones with intrinsic value that have been beaten down by other investors. Jones, CFA, executive vice president, senior portfolio manager and market strategist with the firm, searches for companies with strong potential earnings growth and leading positions in their industries.

Seagate Technology (NYSE: SEG), a manufacturer of disc drives, fits that profile, says Jones. Although the disc drive industry “is on its back, Seagate is the only profitable one” now, he says, and it’s the dominant player.

He also notes the Scotts Valley, California, company’s investment in three publicly traded software firms should provide a lift to the stock. Seagate has stakes in Gadzoox Networks (Nasdaq: ZOOX), SanDisk (Nasdaq: SNDK) and Veritas Software (Nasdaq: VRTS). These companies have a combined market value of nearly $19 billion, exceeding Seagate’s $12 billion value, says Jones. Seagate also plans to introduce a new storage product-possibly for sale to VCR manufacturers-that will allow you to record several movies while you’re watching television.

United Asset Management (NYSE: UAM) also gets Jones’ nod. Last year, the Boston-based owner of several asset management firms tried to sell its Pilgrim Baxter unit to Nationwide Financial Services, but the deal fell through. Part of the reason was Pilgrim Baxter suffered big outflows as its aggressive-growth investment style temporarily fell out of favor; its assets under management dropped to as low as $11 billion from $22 billion. Now, it has $27 billion, and that increase is sure to benefit parent firm UAM. “The increase in UAM’s earnings as these assets [at Pilgrim Baxter] grow will be significant,” says Jones.

Alza (NYSE: AZA), a drug delivery firm based in Mountain View, California, is on the comeback trail. Its stock collapsed after pharmaceutical firm Abbott Laboratories’ (NYSE: ABT) takeover bid for the firm failed last year. Jones says Alza is one of the leading drug delivery firms and is expected to rake in $1 billion in sales in 2000. Also, the firm is developing its own pipeline of drugs to be used in conjunction with its medical devices, which should also drive earnings growth.

Santa Clara, California-based Networks Associates (Nasdaq: NETA) is the leading provider of security software programs for Internet and Intranet systems to corporations. Jones likes Networks Associates’ efforts to diversify its offerings. And it has stakes in two dotcom firms that provide antivirus software over the Internet: McAfee.com (Nasdaq: MCAF), which recently went public, and MyCIO.com, which is planning an initial public offering later this year-both of which could be worth more than their parent by year’s end, he maintains.

And Sterling Software (NYSE: SSW), a Dallas, Texas, provider of enterprise software mainly to government agencies, is being acquired by Computer Associates (NYSE: CA). Jones says buying Sterling Software is a cheap way to own larger firm Computer Associates.

Comeback Companies

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