Putnam New Value (PANVX). “There is so much potential in the better ones, they more than make up for it.”
Indeed, value managers are seizing the day with a few names among the most pummeled sectors this year. One such group is mortgage insurers, which provide insurance to lenders in case homeowners default on their loans. Rising foreclosure rates sent investors running for the exits, and now, some companies’ trade below book value. Even if those values were fair, they would imply economic conditions not seen since the Great Depression–or maybe never–King says.
Both King and Giroux have scooped up shares of Genworth Financial Inc. (GNW), down more than 25% since July. Genworth’s mortgage insurance division accounts for a relatively small portion of its business. The vast majority of its operations–areas such as life insurance, long-term care insurance, and retail and institutional investment products–are doing fine and generate about 84% of the company’s revenue. Even without the mortgage insurance division, Giroux estimates that shares of Genworth will be worth $35, well above the $25 share price as of early November. It also has a strong balance sheet to weather any storm, with a low debt-to-equity ratio of 0.62.
Housing woes have also tarnished home improvement retailers such as Home Depot Inc. (HD) and Lowe’s Cos. (LOW), both trading at multiyear lows as of early November. About 25% of their business is exposed to existing and new-home renovations. “This part of the business has taken it on the chin,” says Giroux, who adds the good news is that it’s unlikely that revenues will face another significant hit. What’s more, some 50% of their sales come from so-called replacements–home items that eventually need replacing, from appliances to fuses and light bulbs. And Giroux says the remaining 25% comes from sales of non-cyclical items such as gardening equipment, lawn mowers, plants, and seasonal sales that provide steady revenue streams.
Giroux says he expects a deceleration in the decline of same-store sales growth this year. That means earnings growth can probably resume if the companies buy back stock. He expects the housing market to stabilize in 2009, meaning all areas of the company will see growth. Giroux also estimates a 50% appreciation potential over the next 18 to 24 months.
Banks also present opportunities for those with strong stomachs. Fidler, portfolio manager of Ariel Focus (ARFFX), has bought shares of UBS AG (UBS), the Swiss investment bank and wealth manager. The stock, trading at less than 10 times 2008 earnings, has taken a beating in part due to the subprime debacle that resulted in a $3.4 billion write-down in October. Still, Fidler sees a silver lining: UBS’ asset management business, the world’s largest with $2.6 trillion in assets, accounts for 50% of the bank’s revenues.
“It’s really a company that has been left to rot by the investment community,” says Fidler. Meanwhile, its wealth management business, with operating margins in excess of 40%, is poised to make big gains around the world, especially with the accumulation of wealth in