February 1, 2003
The Value Of Discounting
Harold Singleton was right last year when he proclaimed that there is value in any market if you know where to look. The senior vice president of Metropolitan West Capital Management in Newport Beach, California, explained that his firm is “looking to buy stocks that are selling at a discount of their intrinsic value,” meaning Singleton focuses on a company’s tangible worth, such as the real value of a stock. His firm looks for stocks with a three-year investment time horizon in mind.
Most people would want to have Singleton’s selections in their portfolio. To calculate the total return for Singleton’s portfolio, we excluded Conoco (now ConocoPhillips) as a result of its August 2002 merger with Phillips Petroleum. The remaining stocks from his Private Screening scored a modest 3.57% gain during the period of Dec. 11, 2001, to Dec. 6, 2002. By comparison, the Dow Jones industrial average fell 12.57%, going from 9,888.40 to 8,645.77 and the Standard & Poor’s 500 index dropped 19.75%, going from 1,136.76 to 912.23 during the same time period.
“I’m still optimistic about all these stocks, and I still hold them in my portfolio,” says Singleton. He was particularly hopeful about Clear Channel Communications (NYSE: CCU), which lost ground, dropping 14.62% from $48.3 to $41.30. Singleton says the company, which owns 1,200 radio stations across the country, was an unfortunate casualty of the down market, but he expects it to get a boost when the advertising climate picks up.
Singleton chose two bank stocks, which rode the wave of lucrative loan refinances to steady performances during the third consecutive year of market declines. Wells Fargo Bank (NYSE: WFC) saw an 8.43% increase in its stock price, moving from $42.47 to $46.05 as it continued to expand its customer base.
The nation’s leading residential mortgage lender, Washington Mutual (NYSE: WM), also experienced a solid gain. Singleton says the refinancing boom and Washington Mutual’s reputation as a conservative lender contributed to a 16.89% gain in share price, going from $30.72 to $35.91. He believes the nation’s seventh-largest bank is still undervalued and sees more growth ahead. “If the economy strengthens a bit then there’s potential for moderate loan growth in its commercial portfolio.”
Singleton’s selection of oil company Conoco provided the most excitement because of its merger with Phillips Petroleum. The new company, ConocoPhillips (NYSE: COP), actually posted a loss for Singleton after the conversion. Conoco shareholders received .4677% of each share they owned when the firms merged in the third quarter, which means the new stock’s $49.92 trading price as of Dec. 6, 2002, translates into $23.35 in old Conoco shares. But, Singleton says, “The stock has a bright future because the merged company is expected to realize a cost savings of $1.2 billion.”