May 1, 2003
Searching For A Pure Portfolio
Portfolio manager Drake J. Craig senses the presence of a rebound, but he’s not taking chances. Craig, who is part of a team that invests $55 million for ALIC Investment Advisors, a subsidiary of Atlanta Life Financial Group (No. 3 on the BE INSURANCE COMPANIES list with $98.7 million in assets), is a growth manager. He’s someone who would typically be enthused about a turnaround, but this time, he’s a bit more cautious. He has modified his approach to the market, gravitating toward companies with a market value of more than $1 billion that have the potential to boost earnings past Wall Street’s expectations. From that group, he selects candidates he believes will raise sales 10% or more this year, compared to the 6% revenue growth he projects for the companies in the stock market. He also uses return on equity (ROE), which shows how well company management puts its resources to use. Craig aims for a ROE of 18% or higher, a few notches above the 15% average he foresees for the broad market this year.
Craig then searches for what he calls “pure” earnings. Whenever the economy stalls, many companies opt to impress investors by cutting costs to increase profits. Craig calculates what percentage of a company’s profits come from day-to-day business and what portion is from write-offs or other cutbacks. He generally chooses companies that expect to derive 80% or more of profits from their business.
Craig has had plenty of time to hone his skills. Equipped with a bachelor’s degree from Morehouse and a master’s degree from the University of North Carolina, he worked as an analyst for Edward Jones in 1990, and later as director of equities for NCM Capital, where he eventually supervised a group that managed $5 billion in assets. He moved to ALIC Investment Advisors at the beginning of 2002.
Craig’s Private Screening picks begin with Harley-Davidson (NYSE: HDI). He says the company’s stock has languished a bit after management gave Wall Street conservative vehicle production estimates. Still, he thinks the motorcycle maker should boost sales 12% this year and earnings 17%. Mortgage company Freddie Mac (NYSE: FRE) is another choice that he says has been misunderstood. While the market worries about how future earnings compare to past profits, Craig thinks 10% earnings growth is attainable.
The portfolio manager also expects big things for online continuing-education firm the Apollo Group (Nasdaq: APOL), and Fair Isaac & Co. (NYSE: FIC), which dominates the credit-scoring business. Apollo, which runs the University of Phoenix, is an outfit that teaches Internet courses on subjects ranging from nursing to computers, and should grow sales and earnings 30%. Fair Isaac, which is used by 75% of mortgage lenders, is tapped to grow revenues a little less than 10%, but earnings by as much as 20% this year, says Craig.
To round off his picks, Craig selected Affiliated Computer Services (NYSE: ACS), an information-technology outsourcing firm with a handful of government contracts, including deals with NASA, the U.S. Postal Service, the Federal Aviation