The Globetrotter

Portfolio manager Kenneth Holley sets his sights on foreign companies, looking for a combination of growth and value

GlobetrotterKenneth Holley cringed last winter every time he heard someone on the television news compare the current U.S. recession to the Great Depression of the 1930s. “They went too far,” says Holley. “Unemployment was 25% during the Depression, and there were thousands of banks that went under. The parallels aren’t there.” (The nation’s jobless rate at press time: 8.9%)

Holley is chief investment officer at Atlanta Life Investment Advisors, a black-owned institutional money manager that manages more than $1 billion for 50 institutional clients. He oversees the firm’s Large Cap Core International Equity fund, a collection of investments focused on big companies in emerging and developed economies outside the U.S. Even as Holley is put off by the hyperventilating in the financial press, he has used the atmosphere of hysteria to his advantage, buying up stakes in a number of good companies that were unreasonably battered by the slumping market. Now, with the markets in a seeming springtime rebound (as of early May), Holley is thinking defensively again. He believes the markets could revisit some of the lows of last January and February.

What’s your problem with this market rally? You don’t think it can last?

It’s a very strong rally. To my mind, this is the “This-Isn’t-the-Second-Great-Depression” rally. But this is not the beginning of the next bull market. To learn that things are getting worse at a decreasing rate is significantly better news. Certain things will happen that will tell us the economy is improving. The inventory of unsold homes will get back to normal—to around 10 months. We’re still higher than 12 months now. Senior loan officers are still tightening lending standards—still more banks tightening than loosening. Things like corporate earnings, they are still in a serious recession. You can’t have that when the economy is recovering. Right now, there’s a sense of relief because the pace of worsening has slowed. This is a relief rally, but the economy is still slowing. Corporate earnings in the first quarter were slowing too. It’s like having a 103-degree fever. Now, we’re at 100. But we’re still sick.

So when do you expect a full recovery in the economy?

If things continue to get better, we expect a recovery in late 2009. That’s the consensus and it makes sense that the market is anticipating the recovery. I believe the lows in the Dow and S&P 500 that came in March will remain the lows. I don’t think we’ll blow them out. I do, however, think a sobering may come, and we may test those lows again.

Does that mean you’re now in defense mode, searching for recession-proof buys?

We’re back in that mode. I think things have begun to get overdone. The euphoria of this rally has driven things to unsustainable levels. We got pretty defensive last year and became a little more cyclical in February—looking at sectors like financials, consumer discretionary, and other names unfairly shunned by the marketplace. During that time, for example, we increased our exposure to emerging market banks in Brazil, China, and India. Those investments have just screamed, running up 30% thus far (as of early May).

Where are you looking now?

To get into my portfolio you have to have strong characteristics of growth and value. We’re now seeing a lot of energy stocks we like. The energy companies have taken a hit because oil prices have been low. Still, we like Petroleo Brasileiro (PBR), the Brazil-based oil and gas company. Its case is straightforward. The company’s had several recent discoveries, including one back in November 2007 off the Brazilian coast, which are expected to be somewhere between 5 billion and 8 billion barrels of oil. That was big news. It’s one of the better companies in the world at bringing in offshore oil. It’s also done it in West Africa and in the Gulf of Mexico. The problem for many of its competitors is that finding oil to dig up is becoming harder and harder. PetroBras has a stronger hand and has a better opportunity to grow its reserves with those recent finds. The big question for oil companies is: Are we running out of oil? If you have your own reserves you don’t have to worry. The stock has a price-to-earnings ratio of 10, revenue growth was 26% in 2008, and earnings growth was 53% year-over-year. The company has the top-line growth and value we’re looking for. We’ve got a target price of $50 per share looking forward 12 months.

Are there any Asian companies that have remained strong?

I like Nintendo (NTDOY). The company has had a bit of a rough run lately. From the time the Wii was released in 2006 up to mid-March it has dominated Microsoft’s Xbox and Sony’s PlayStation 3. However, in the last few weeks it’s sold fewer Wii games than the Sony PlayStation 3 in Japan. Bad news, but remember: 81% of the company’s revenues come from selling the Wii overseas. Nintendo didn’t participate in the March/April rally because of that bad news, but it’s a well managed company, with a tightly run marketing team and solid historical performance putting machines in stores and generating demand very quickly. With the Wii, Nintendo basically said, “We can’t continue to make bigger and faster machines like our competitors, let’s try something different.” Grandmothers will play Nintendo bowling with the kids. The company has an upside because they are not just trying to sell to the world of gamers. That was its out-of-the-box thinking. Sony and Xbox can fight over the small portion of U.S. consumers who spend more than $50 on a game, while Nintendo goes after all the rest. We think Nintendo’s value is 62% higher in 12 months.

Any other technology plays interest you these days?

Telecom, and not just any telecom: China Mobile (CHL), the No. 1 cell phone company on earth. Think about it. It’s providing cell service in China. Here in the U.S. we’re seeing that people straight out of college don’t bother to get a landline telephone. That’s happening throughout rural China. China Mobile has a 74% market share among people who have telephones, some 436 million subscribers. That’s a little more than a third of China’s population.  So, there’s room to grow. It was first in the marketplace; the company had an opportunity to gain a stranglehold. It has two competitors—one that’s relatively new. The biggest plus? The company has a 53% profit margin. It recently bought a 12% interest in Far EasTone, the third largest telecom provider in Taiwan. That gives China Mobile a foothold in an area that will be of greater interest to China. There are tremendous opportunities. My 12-month target is 20% higher than today’s price.

This article originally appeared in the July 2009 issue of Black Enterprise magazine.

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