By Eric Martin and Adam Haigh
March 30 (Bloomberg) — Eric Cinnamond is beating 99 percent of rival fund managers with the maker of Cat’s Pride litter. ING Groep NV’s Uri Landesman snapped up Japan’s Denso Corp. as he outperformed 94 percent of his peers. Paul Wick is topping the Standard & Poor’s 500 Index by 18 percentage points, betting on technology industry takeovers.
While the U.S. economy contracted at a 6.3 percent annual pace in the fourth quarter, the worst drop since 1982, this year’s best-performing investment managers are buying stakes of companies that typically gain the most during a recovery. The S&P 500 began rising on average five months before recessions ended in 1975, 1982, and 1991, data compiled by the National Bureau of Economic Research and Bloomberg show.
Now, the index is rebounding from its worst annual start with the biggest monthly rally in 17 years. The S&P 500 has climbed 21 percent from a 12-year low on March 9, and is down 9.7 percent this quarter. Cinnamond of Intrepid Capital Management Inc., Landesman and J&W Seligman & Co.’s Wick are profiting after the S&P 500’s 57 percent drop from its October 2007 peak helped erase $37 trillion of equity value globally.
“I don’t want to say it was like shooting fish in a barrel, but you could buy all kinds of very high-quality names,” said Landesman, who oversees $2.5 billion as head of global growth at ING’s asset-management unit in New York. Denso, the biggest car parts maker by market value, was “basically being given away,” he said.
Landesman’s ING International Growth Opportunities Fund has fallen 6.2 percent this year, compared with the average of 11 percent for competing funds, according to data compiled by Bloomberg. The MSCI World Index had declined 9.7 percent in 2009 through last week including dividends, Bloomberg data show.
The S&P 500 declined 3.2 percent to 789.81 as of 11:12 a.m. in New York as the Obama administration warned that some banks will need more government aid and bankruptcy may be the best option for General Motors Corp. and Chrysler LLC.
Stocks started the year in free fall. Increasing concerns about finances at companies from Detroit-based GM to Fairfield, Connecticut-based General Electric Co. and $1.27 trillion of bank losses and writedowns at the world’s biggest financial companies shattered investor confidence. The Dow Jones Industrial Average fell to its lowest level since 1997 and all 10 groups in the MSCI World lost at least 15 percent.
Then, New York-based Citigroup Inc. and JPMorgan Chase & Co. and Charlotte, North Carolina-based Bank of America Corp. said they were profitable in January and February. The Federal Reserve pledged on March 18 to buy more than $1 trillion of Treasuries and bonds backed by mortgages to drive down interest rates. Treasury Secretary Timothy Geithner unveiled plans to finance as much as $1 trillion in purchases of banks’ distressed assets on March 23.
Equities gained last week after government reports showed new- and existing-home sales unexpectedly increased and the average rate on a 30-year fixed-rate loan fell to 4.63 percent, the lowest level since the Mortgage Bankers Association began records in 1990. The group’s index of applications to buy homes or refinance loans soared 32 percent in the week ended March 20.
The Dow needed 17 days to climb 20 percent into a so-called bull market on March 26 and ended last week at 7,776.18, while the S&P 500 closed at 815.94. Investors shifted $50 billion in two weeks from money market funds, whose assets swelled this month to $3.91 trillion, the third-highest level on record, data compiled by Washington-based Investment Company Institute show.
“It’s surprising how terminally bearish people are at the moment, and I find it hard to share their view,” said Philip Rodrigs, a London-based manager at Investec Asset Management, whose parent company oversees about $70 billion globally. “I’ve been moving into more cyclically exposed companies,” whose earnings are most dependent on economic growth, he said.
Roland Lescure, chief investment officer at Groupama Asset Management in Paris, says it’s too soon to wager on a rebound in demand with consumers and businesses still mired in the first simultaneous contractions in the U.S., Europe and Japan since World War II.
Companies will start reporting earnings for the first quarter in the next two weeks. Analysts, who have overestimated profits for every period since the third quarter of 2007, expect profits for S&P 500 companies to drop 36 percent on average, paced by retailers, automakers and semiconductors suppliers, according to data compiled by Bloomberg. They’re forecasting S&P 500 companies will halt the longest streak of declining earnings since at least 1947 in the fourth quarter, the data show.
Not Yet Time
“It’s not yet the moment of recovery,” said Lescure, whose firm is “underweight” equities and favors so-called defensive industries with earnings that are less affected by the economy. “A new correction can’t be excluded during the first half on bad earnings news from companies.”
A correction is commonly defined as a stock-market decline of 10 percent or more.
J&W Seligman’s Wick says takeovers will accelerate as the economy recovers and is investing in technology companies he thinks will be bought. U.S. acquisitions in all industries have increased 12 percent to $178.1 billion this year, compared with the same period in 2008, Bloomberg data show.
S&P 500 technology companies have $244 billion in cash and short-term securities and are the only non-financial industry with reserves that exceed debt, according to Bloomberg data.
Merger speculation increased this month after Armonk, New York-based International Business Machines Corp., the world’s biggest computer-services provider, started talks to buy Santa Clara, California-based Sun Microsystems Inc., the fourth- largest maker of server computers.
Wick is buying shares of NetApp Inc., the Sunnyvale, California-based maker of storage computers for customers such as Redwood City, California-based Oracle Corp.
NetApp was among 16 technology companies that Zurich-based UBS AG identified this month as potential targets. It has risen 8 percent in Nasdaq Stock Market trading this year, compared with a 4.9 percent gain in the S&P 500 technology index.
The company’s so-called enterprise value, or the amount needed to buy all its equity and debt, fell to 88 percent of revenue over the past 12 months during its fiscal quarter ended October. That’s the lowest since NetApp went public in 1995.
“At some point in the next year or so things will pick up,” said Wick, whose $2.18 billion Seligman Communications and Information Fund has gained 11 percent in 2009. The fund has lost 19 percent in the past 12 months, about half the 37 percent decrease for the S&P 500, including dividends, and less than the 33 percent average loss for competitors. Many companies are “digestible for quite a few likely acquirers,” he said.
ING’s Landesman is finding bargains in so-called cyclical stocks such as Kariya, Japan-based Denso, which he said was too cheap to pass up.
Denso was valued at $2.31 in stock-market value for each dollar it generated in cash flow at the start of the year, the cheapest since at least 2001, monthly data compiled by Bloomberg show. Its stock capitalization shrank to 56 percent of assets minus liabilities, the biggest discount since at least 1998.
About half of Denso’s sales go to Toyota Motor Corp., the largest carmaker by market value. Toyota is based in Toyota City, Japan. Denso has jumped 44 percent on the Tokyo Stock Exchange in 2009 after falling 69 percent the last two years.
‘At the Vanguard’
“Clearly, the auto business is going to bounce back to some extent at some point,” said Landesman. “The Japanese manufacturers are almost certainly going to be at the vanguard.”
Investec’s Rodrigs and Cinnamond at Intrepid Capital are turning to smaller companies. The Russell 2000 Index of small- cap stocks outperformed the S&P 500 by an average of 27 percentage points in the first year after bull markets began in 1982, 1990 and 2002, according to data compiled by Bloomberg.
Rodrigs bought Smiths News Plc at about 50 pence (72 U.S. cents) this month, when the Swindon, England-based magazine and newspaper wholesaler plunged to the lowest level since it was split from W.H. Smith Plc in 2006. Then, the stock surged 74 percent following Smith’s announcement that it expanded its contracts with two U.K. magazine distributors.
“It traded as if it didn’t have a future,” said Rodrigs, whose Investec U.K. Smaller Companies Fund gained 6.5 percent this year, outperforming 95 percent of competitors. The U.K.’s FTSE 100 Index has lost 12 percent.
Cinnamond is betting that the 73 percent decline in the S&P GSCI Energy Total Return Index of fuel prices since July will increase operating income as a percentage of revenue at Chicago- based Oil-Dri Corp. of America, which makes Cat’s Pride and Jonny Cat litter.
“You have to change that cat litter, man,” said Cinnamond, whose Intrepid Small Cap Fund has declined 6.6 percent in the past year, versus 37 percent by the Russell 2000 and the average small-cap value fund. “It’s not something you can stop buying.”
Since falling to a five-month low this month, Oil-Dri has rebounded 8.2 percent to $14.06 in New York Stock Exchange trading. Cinnamond says the stock is worth $22, implying an advance of 56 percent.
“This decline is very good from a buyer’s perspective in that the higher-quality companies are getting sold as well,” he said. “We’ve participated in this recent rally because we’ve been fully invested.”
To contact the reporters on this story: Eric Martin in New York at firstname.lastname@example.org; Adam Haigh in London at email@example.com.
Last Updated: March 30, 2009 11:28 EDT