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Wall Street Transcript Interviews with Manager Steve Selengut - Part 3 |
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Submitted by Steve Selengut
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TWST: What are some of your recent buys? Some new opportunities that you have identified and what are the reasons?
Mr. Selengut: My buy list today, for example, contains a pretty diverse group of companies, Air Products and Chemicals, Bell South, Clorox, Coca-Cola, Franklin Resources, IDEX Corp., ITW, TRW Corporation, Lennar, and Roper. There's not a whole lot of sector similarity there, which tells me (something that has been pretty apparent, I would say, since September 11th ) that pretty much all companies are "down" except defense contractors. I had Raytheon, I think, for a total two days before I took my profits on it. So generally, through September, most of the good quality companies, were down and I was buying as many of them as I possibly could. I filled up my portfolios pretty much during the month of September. And during October, so far, I've already been able to take a lot of profits. For example: MBNA CORP, ALLSTATE, BRISTOL MEYERS, ROYAL DUTCH, CITIGROUP, HARLEY DAVIDSON, and several more. Actually, I've taken profits on over 120 different companies this year, which is just a hair better than usual.
I know you're going to ask why I sell such great companies when they are just starting to move back up. I sell out of "love", not of the companies, but of profits! I hate to see a profit disappear because someone has greedily looked to make even more. I establish trading targets and stick to them
TWST: How do you determine if these companies have just gone down for valuation reasons rather than underlying fundamentals?
Mr. Selengut: Well the fundamentals are pretty well reported in the S&P Guide weekly. I mean, you could look in the S&P Guide and each month they tell you if a stock has fallen in rating. It can also get a pretty quick clue if you hear about changes in their dividend policy. So those are the things that I look for to determine if it's no longer an investment grade security. Frankly, when you see companies like Illinois Tool, or Clorox, or one of those companies, when they are falling in price, it's really very rare that you see it accompanied by a change in the S&P quality rating. In fact, back in 1987, and my strategy has pretty much not changed since I started back in 1979.
Back in 1987, these companies were all down 30%-40%-45% and not one of them lowered its dividend. And many even raised their dividends during that period of time. So, I've found over the years that so long as you place quality with a capital Q as your first selection criteria, you rarely wind up buying a company that's in financial trouble. Most investors react to negative news about a company with a "knee-jerk" market order to sell. I always have a wheelbarrow ready to catch shares of good companies that others are tossing out the window. Is it easier for a company to improve on a record quarter or a dismal one? Think about it. How do I react to positive earnings, or other news surprises? That's where a buy list comes from.
TWST: Dividends are important in your selections, I believe. Can you talk about the dividends as an investment criterion?
Mr. Selengut: The dividend is an important thing because I feel is it's a measure of the financial capabilities of the company. If a company has the ability to pay a regular dividend each quarter, out of its operating income, I want to invest in it because it's obviously profitable, as opposed to possibly profitable. I chuckle a lot when I hear "growth" companies posture that they maintain their growth by plowing back profits (or, more likely, cash flow) into the company. Well, most of the companies that I invest in have grown pretty well while paying dividends. The only thing that you can be sure is growing in the "growth companies" that don't pay dividends is the salaries of top executives.
TWST: What is your approach to the more volatile sectors like technology and telecommunications?
Mr. Selengut: Well, I own many technology companies, all of which meet my quality, diversification, and income parameters. I own Hewlett Packard, for example, I own Nokia and SBC Communications, and companies of that nature. Again, as long as they meet my selection criteria, I’ll invest in them, particularly when they’re weak. And when they go down in price as these have, I will buy more. My initial position in a stock is never my maximum position. If I’m looking to get as much as 5% of a portfolio into, let’s say, a Canon or any company, not necessarily just a technology company, I don’t start off at that point. I buy, maybe, half that amount, knowing that I’m buying a stock that’s been going down. If it goes down further, I’ll want to buy more of it. And if it doesn’t go down further, I’ll sell it as it rebounds. But I am always happy to add to my holdings in a company when it becomes cheaper.
Wall Street’s a strange place. The normal sales pitch from a broker is: “Come on and buy this security! It’s at it’s highest price in history, and if you buy it now you’ll pay more than any human being has ever paid.” Well, I don’t consider that a proper investment strategy, so I stay away from that type of security: those are the ones I’m selling.
I’m buying more Tiffany right now. I just put in an order, just before you called me to buy some more American Express because they’re down from what I paid for them by enough that I want to buy more. And I don’t mind holding them for a year or more if it takes that long for them to rebound to a point where I can exit with my target profit. So many of the companies I trade turnaround rapidly, so a few 18 or 24 month “slugs” don’t impact my target turnover rate, which is to keep the portfolio average under six months. Most years, my average turnover is between three and four months.
TWST: Would you say that this is an easy time to find these opportunities?
Mr. Selengut: Well, it’s certainly an easy time to find things that I expect will turn out to have been good opportunities, okay? I mean that I never anticipate a very, very long down market in the quality sector. That sort of bit me hard during the time period I mentioned earlier when the speculation in the NASDAQ just went crazy. I had people sell portfolios of municipal bonds to jump into priceline.com and other IPOs. Some even started doing futures and options! It was really crazy, and scary. A said “good bye” to a lot of people who eventually got financially murdered just because they were being greedy. Many were old management friends who became convinced that my conservative approach was broken.
Those who stayed the road think I walk on water. Not quite, but they appreciate the fact that I didn’t change strategies. So, during that period of time, I certainly didn’t think that the quality sector was going to stay down as long as it did. I stuck with it, and I bought more of positions that had lost more than 30% of their value, and eventually I was exonerated. I wasn’t right or wrong, investing is not a guessing game or a competition, and I didn’t attempt to predict the future. I only know this one conservative strategy, and it has always come through any adversity in the market or in my client base.
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