After this past fall’s correction, you’d think things would be a lot easier for a bargain hunter like portfolio manager Michael L. Green. After all, Green, who supervises $150 million in assets for institutional investors, is a value manager — he likes his shares undervalued compared with the overall market.
Green wasn’t so lucky, though. No sooner had October 29 knocked a full 7% off the market, when investors rushed in and pushed the Dow Jones Industrial Average back up into the high 7000s. The zigzagging market made Green’s job of finding little-known stocks that have eluded the investment community, or even those that have temporarily fallen out of favor, all the more difficult. “In past years, with any stock market correction, you had time to search through the rubble and find names,” says Green, chief investment officer and owner of Ever-Green Capital Management in Omaha. Nebraska.
It’s not easy to make Green’s cut. He first narrows the field by concentrating on just large and mid-cap stocks because they tend to be less volatile and a bit more dependable than shares of smaller companies. Green then limits his sights to companies selling at a minimum discount of at least 20% of their industry’s average price-to-earnings ratio. So, if the average company in heavy industry sells at 15 times projected earnings, then he’s on the prowl for stocks that fetch 12 times that same figure. On top of that, Green says he’s also looking for companies with a low price to book value, preferably 20%-25% below their industry’s average.
The money manager then looks at earnings prospects. He favors companies that are projected to grow earnings at a 10% or greater clip during the next few years. Think that’s tough? There are still another couple of hurdles to clear. He’s partial to corporations that stick to core businesses while generating a lot of cash flow. And, finally, Green considers investing in a company if it pays dividends. “I’m most attracted to a company that not only pays a dividend but increases its payout over time,” he says. “After all, a dividend is great for a stock’s stability in volatile times.”
We asked the ever-picky Green for attractive three- to five-year holdings. He led off with First Union Corp. (NYSE: FTU), a super-regional bank that’s recently made headlines with acquisitions of the brokerage firms Wheat First Butcher Singer and Corestates. Green likes the fact that First Union now derives a larger portion of its sales from fee-based activity such as investment banking and asset management. He says those two businesses provide great insulation for banks given the fact that interest rate fluctuations can often wreak havoc on financial institutions. He sees the company earning $3.93 a share in 1998.
Green also likes Tidewater Inc. (NYSE: TDW), an oil services company that supplies boats to rig operators in the Gulf of Mexico, the North Sea and off the coast of West Africa. Green says the outlook for Tidewater is bright because the oil drilling business remains robust. For