Patience Pays Off

Your financial advisor Contrarian investor Thomason always stays calm

It’s times like last summer when a cool temperament comes to the aid of Parnassus’s William Thomason. When the days grow warm and long, technology stocks lag–which the investment business calls the “June effect.” Portfolio managers sell off semiconductor, computer and biotech stocks to cash on gains those snares made earlier in the’ year. socially- responsible firm t hat has taken on big stakes of computer chip makers like AMD, saw its portfolio lag in a market that was racing to new highs. But instead of panic, Thomason, who heads portfolio management of the $290 million in assets Parnassus handles for institutional and retail clients, sensed a bargain. He began buying semiconductor makers as many in the group drifted toward their lows for the year. Later, when those stocks rose, the investment helped Thomason’s portfolio bounce back from a 4% drop to a 15% gain to close out the year.

Calm logic of that sort is required daily at Parnassus. In order to boost gains, the San Francisco money management firm follows what’s called a “contrarian investment scheme.” Thomason looks the market over for stocks that are woefully neglected by investors. It’s a quest that takes him to out-of-favor industry sectors, often leading to companies long abandoned by Wall Street. He relies on several statistical criteria to help round up a list of companies . First off, Thomason sets his sights on stocks that are near their lowest price in the past five years. He examines a company’s price-to-book ratio, calculated by dividing the price of the stock by its book value. That gauge helps him determine a company’s rock-bottom worth, with a ratio of two or less enough to truly pique his interest. He also keeps his eye on growth prospects ahead, aiming for companies that are projected to post 15%-20% average annual growth during the next five years.

Thomason then scrutinizes management. “If you plan to take a long ride in a vehicle,” he says, “you’ve got to check out who’s driving.” He looks to see how long a chief executive and management team have been in place, and goes over their experience in the industry or related fields. Thomason feels most at ease with a team that’s taken a large stake in the company’s success by investing heavily in its shares or by tying their compensation to stock or stock options. And finally, for a stock to truly win over Thomason’s heart, the company has to pursue a social agenda. “That eliminates certain industries,” he notes. “Tobacco, weapons and nuclear power are out, but beyond that we look at hiring practices to see if companies are actually trying to recruit and promote people of color and women.”

Advanced Micro Devices (NYSE: AMD) is a Thomason favorite (even though it climbed steadily the week this article was written). Can a chip maker other than Intel survive these days? Thomason says yes, and for reasons other than the booming demand for computers. AMD may have been late with a clip to compete

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