Growth, growth and more growth. It seems that everywhere you turn, there are mutual funds and investment advisors telling you to aim high and reach even higher. So how’s this for a bit of contrary stock market advice: keep your expectations low and you’ll make out well in the end.
Those seemingly paradoxical words are the wisdom of Quinn R. Stills, a senior portfolio manager for the Boston Company Asset Management L.L.C. in Los Angeles. Stills, who supervises $8 billion in funds for institutional clients such as the City of Detroit, Calvers and Motorola Inc., says that’s a worthy credo for a value investor like himself. Low expectations- that is a low price-to-earnings (P/E) multiple-means that the market has given up hope that a particular company will blast off to the moon. It also means a stock can be bought practically on sale, compared with the broad market.
Stills backs that up with a solid record. For the first half of the year to date, funds that he supervises in his Dynamic Equity Fund are up 12.6%, compared with 12.1% for the Standard and Poor’s BARRA Value Index, a benchmark for value managers. On a three-year basis, he recorded an average annual total return of 27.1%, compared with 26.9% for the same index.
Not that there was much for Stills to choose from in the market until a tailspin and mini-crash in August. “What you saw was a tale of two markets,” he says. “The largest growth companies like Microsoft, Coke and General Electric drove the market, while the rest of the pack lagged by a gap as big as we’ve seen in 20 years,” notes Stills. “I think that patient investors should find very good opportunities in mid-cap and smaller companies, while anyone investing in the largest names should be careful.”
That means slim pickings for Stills, whose portfolio ranges from a mid-level $1 billion in market capitalization (number of shares outstanding multiplied by the share price) to a high of $155 billion for the biggest companies (while the average is $22 billion).
But to hear Stills tell it, plenty of opportunities remain, even considering that he’s aiming for stocks selling at a P/E multiple 20%-30% lower than that of the overall market. The remainder of Stills’ criteria are the stuff most frugal value investors demand. First, he’s looking for a low price relative to a stock’s book value, or the worth of a company’s assets. Stills says he generally gravitates toward stocks selling at 60% less than the market’s price-to-book value, which is currently at 4.3.
Cheap is good, but only if a company is turning a corner and its stock is on the verge of commanding a higher price. Stills says he looks at a host of items to see if things are getting better. These include checking for wider sales margins, cash flow and decreasing sales relative to inventory.
Stills’ list of picks starts off with Tosco (NYSE: TOS), one of the largest independent oil refining companies. Tosco had risen as high