Portfolio managers are human too. They feel pressures. They worry about results. So when there’s a sense that the country is on the path to a recession, they move rapidly to make adjustments and protect their positions. Over the past 16 months, Monica Walker, president and chief investment officer of equity at Chicago’s Holland Capital Management (No. 9 on the BE ASSET MANAGERS list with $2.2 billion in assets under management), has made that daunting task her primary focus.
As the full impact of the subprime mortgage crisis unfolded throughout 2007, Walker and her team got to work. For example, they compressed the firm’s exposure to financial stocks to 9%, down from some 20%.
Walker’s strategies led the firm’s Lou Holland Growth fund (LHGFX) to a 9.4% total return in 2007 compared with 5.5% for the S&P 500. As of early February, the fund had
a five-year average annualized return of 8.6%. Walker says her firm typically angles for companies that are projected to boost earnings by 10% or more a year. At the same time, the house rule of thumb is to sidestep stocks whose price-to-earnings multiple is more than 1.5 times their projected earnings growth rate–referred to as a stock’s PEG ratio or price-to-growth ratio.Just how bad do you think an economic downturn will be?
We should continue to see volatility in 2008, at least for the first two quarters. One of the biggest threats to stock market returns is the risk of recession, something that has increased as last year’s credit crisis has intensified and a slowdown in consumer-related spending has taken hold. In January we saw unemployment and payroll numbers decline for the first time since August 2003. It’s one thing that the banks are having problems. It’s now apparent that consumers are also being affected.
What steps are you taking to batten down the hatches?
Even in a recession, we’re conservative growth managers, so we look for companies with double-digit earnings growth potential and that are selling at decent valuations. We think our style does better than more aggressive styles of growth investing during a recession.
Are there still good values in the financial sector?
We went about reducing our weighting in financial stocks in order to get out of names that were exposed to mortgages. We have owned the insurer AFLAC (AFL) for a long time and continue to do so. It has virtually no exposure to the mortgage and credit crunch. The company is a supplemental insurance provider that does business in the U.S. and Japan. In the near term, AFLAC will get a big boost from deals to open
Healthcare is a defensive position–what do you like in the group?
We purchased shares of the pharmaceutical outfit Schering-Plough (SGP) several years ago when its margins and earnings were depressed. The company had just lost a patent on its blockbuster allergy drug, Claritin. Schering-Plough changed course and hired a CEO who looked to turn the company’s direction around. Management has worked to fill the company’s pipeline of medications, and it doesn’t face a major patent expiration until about 2015.
Its November acquisition of the biotech company Organon promises to lift earnings as well. Annual earnings growth should average about 20% over the next five years, and we think the stock is a compelling story since its P/E multiple is well below that.
What about outside of the traditional drug makers?
Hospira (HSP) makes generic versions of injectable medicines and medication delivery devices that are sold to hospitals, such as IV pumps and infusion systems that administer medications and fluids to patients. In 2004 Hospira was spun off from Abbott Laboratories where it wasn’t run optimally and never achieved the margins it could have made. Since then, management has been focused on getting its house in order and pushing margins higher. We like Hospira’s acquisition of the Australian injectable drug manufacturer Mayne Pharma, which closed in February 2007, and we see the company growing earnings at a 15% annual clip.
Walker’s Picks
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52-week Price Range |
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| Company (Ticker) | Price | Low | High | 2008Est. EPS | 2008P/E Ratio | Comment |
| AFLAC (AFL) | $60.70 | $45 | $67 | $3.87 | 15.7 | The insurer sidesteps financial industry woes thanks to a more conservative investment portfolio. |
| Hospira (HSP) | $41.75 | $35 | $45 | $2.47 | 16.9 | Hospira is a defensive healthcare pick that benefits from management’s focus on margins. |
| Schering- Plough (SGP) | $20.37 | $17 | $34 | $1.52 | 13.5 | A restocked pipeline and recent acquisition should prime the pharmaceutical maker’s earnings in the next year. |
DATA AS OF 2/1/08 SOURCE: YAHOO FINANCE