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Looking for Large Caps on Sale


Oakmark fund manager Bill Nygren explains his market outlook and his top picks.

Growing up in Minnesota, Bill Nygren loved baseball but quickly figured out that his talent didn't match his interest. Still, even now, the professional stock picker remains a dedicated fan of the game.

"I think us nerdy types tend to love baseball because of the statistics," he says. "Baseball statistical analysis is much more robust than other sports. That draws in the analytic types."

Fortunately for his investors, Nygren, who is a die-hard but frustrated Chicago Cubs fan, has proven much more skilled at picking stocks than batting homeruns as the longtime manager of the Oakmark Fund (OAKMX).

There, he hunts the indexes for large and mid-cap companies that trade at a significant discount to what he considers to be their true business value and have strong free cash flows and high levels of manager ownership.

Through January 28, the fund's total 10-year annualized return of 6.50% beats the S&P 500 by 6.95 percentage points and leads its Morningstar rivals by 5.84 percentage points, or 98% of its competitors.

The fund, with $3.5 billion in assets, has an expense ratio of 1.23%, and requires a minimum investment of $1,000.

Recently, we caught up with the 51-year-old Nygren at his office in Chicago. We chatted about the market as well as some of his top picks right now, including DIRECTV (DTV), Medtronic (MDT), and Intel (INTC), and what he and his team learned from a bad bet in the financials.

Minyanville: The public has been AWOL on this stock market rally. What will it take to convince Ma & Pa investor to jump back in?

Nygren: I don't know. Investors have aggressively pulled money out of domestic equity funds, and there have been very large flows into bonds funds. Frankly, if there is a bubble out there today then it is in the very safe part of the fixed income market, like the Treasury market. Investors grossly overpaid for safety last March. And we saw the penalty for that in the negative returns that Treasury bills had in the second half of the year relative to the returns in the corporate bond and equity markets.

So what is your advice for investors today?

Nygren: The thoughtful investor today, rather than thinking about how they missed the rally or remaining afraid of another lost decade, needs to get back to basics. They need to think about what target equity allocation makes sense for them. For most investors, equities are still the asset class of choice. They should still have long-term returns exceeding fixed-income returns. Most investors today are still beneath their target allocations.

Minyanville: What is the biggest risk for equity investors, as we move into 2010?

Let's start with where we see positives: Corporate earnings are already coming back. We see the end of inventory de-stocking and we've seen significant cost cuts. We are not starting at an unusually high P/E multiple. The big risk isn't with the company-specific fundamentals we're used to analyzing.

Minyanville: So what is it?

It's the political backdrop we see today. It's an administration that feels like it gains points by bashing business and whipping up anti-business populism that in the long run could be destructive to our economy. But, over the history of the United States, we have seen that politics swings like a pendulum. When it swings too far in one direction, natural pressures bring it back to a more moderate position. Hopefully, that is what we're seeing now.

Minyanville: Walk us through the fund's investment process.

Nygren: We focus on three factors that we believe are risk reducers and return enhancers. The first of those is the price we pay. Ballpark, we like to pay $0.60 on the dollar for what we think a business is worth today. When the price gets to $0.90, we sell it. Buying at a discount lowers the cost of your mistakes and it increases the returns, when you analyze the fundamentals correctly.

Minyanville: What's the second factor?

We want businesses that are growing per share value at least as rapidly as the market is. Third, we look for management teams that are incentivized to maximize long-term per share business value. We like to avoid situations where management incentive packages are based on growing the sales or income of the company. We like the metrics that are tied more to per share value or return on capital.

Minyanville: How long will you hold a stock?

Nygren: The typical holding for us is at least three to five years. Over that time, a management team can have the opportunity to make transforming transactions, maybe buying or selling a business. We want them focused on how they are changing the per share value of this company. If we have all three of these things -- a management team on our side, a value that is growing at least as rapidly as the market, and a significant discount from value for our entry point -- then we can be extremely patient.
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No positions in stocks mentioned.
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