Market-Beating Managers Buy ABB, Fanuc as Stocks Fall

By Eric Martin and Michael Patterson

Dec. 1 (Bloomberg) -- In the worst year for global equities, the best money managers say Swiss industrial companies, Texas oil drillers and Japanese robot makers are too cheap to pass up.

Phillip Davidson, whose American Century Equity Income Fund is outperforming the MSCI World Index by 20 percentage points, snapped up Switzerland’s ABB Ltd. as the stock fell to its cheapest level since at least 2002. Stephen Docherty is counting on Japan’s Fanuc Ltd. to help his Aberdeen World Equity Fund top its benchmark index for a fifth year. Intrepid Capital Management Inc.’s Eric Cinnamond, who beat 99 percent of his peers, bought Patterson-UTI Energy Inc. as it dropped to a seven-year low.

Since the MSCI World peaked on Oct. 31, 2007, its 47 percent slide through last week erased $32 trillion of market value, leaving shares trading at an average 11.4 times earnings, the lowest since at least 1995, according to monthly data compiled by Bloomberg. Now that all 68 industries and 96 percent of the index’s 1,697 companies dropped, investors are buying shares they say were unfairly punished.

“I’m catching them as they fall,” said Cinnamond, who helps manage about $350 million at Intrepid. His small-cap fund, which is down 12 percent this year, outperformed the Russell 2000 Index by 25 percentage points. “People are selling regardless of valuation.”

Falling Profits

The money managers don’t expect equity markets to surge next year after almost $1 trillion in financial-company losses and writedowns froze credit and pushed the U.S., Europe and Japan into recessions. Davidson predicts a “throwaway year” for most stocks and says analysts’ consensus forecast for Standard & Poor’s 500 Index profit growth of 9 percent is “too high by some magnitude.”

The economic slump dragged down earnings at companies in the MSCI World by 16 percent last quarter and profits for companies in the S&P 500 dropped 17 percent, the fifth straight quarterly retreat. Global growth will slow to 2.2 percent next year from 3.7 percent in 2008, the Washington-based International Monetary Fund said in its World Economic Outlook report last month.

Even after an 8.5 percent rally from an 11-year low on Nov. 20, the S&P 500 is poised for its worst annual drop since 1931. The index fell 7.5 percent last month and retreated 17 percent in October, after credit market losses drove New York-based securities firm Lehman Brothers Holdings Inc. into bankruptcy.

The S&P 500 lost 8.9 percent to 816.21 today, while the MSCI World dropped 7 percent.

Infrastructure Bet

“Everything has fallen,” said Brian Shepardson, who helps manage $2 billion at Xenia, Ohio-based James Investment Research. The firm’s James Balanced Golden Rainbow Fund and James Advantage Market Neutral Fund beat more than 90 percent of their peers this year.

Shepardson says he’s buying Oak Brook, Illinois-based McDonald’s Corp. and Bentonville, Arkansas-based Wal-Mart Stores Inc. even as he braces for “more trouble” in stock markets during the first half of 2009.

McDonald’s, the world’s biggest restaurant company, trades for 15.9 times reported profit, down 30 percent from a six-year peak of 22.6 in December 2007. Wal-Mart, the largest retailer, fetches 15.5 times earnings, compared with its weekly average of 28.4 during the past decade. McDonald’s dropped 4.7 percent this year and Wal-Mart advanced 12 percent, making them the best performers in the Dow Jones Industrial Average.

McDonald’s dropped 4.4 percent to $56.17 and Wal-Mart declined 5.1 percent to $53.01 today.

‘Indiscriminate Selling’

American Century Investments’ Davidson snapped up Zurich- based ABB, the world’s largest builder of electricity grids, as the shares tumbled 56 percent this year on concern infrastructure projects will be delayed. The stock trades for 6.7 times reported profit, 82 percent cheaper than the Swiss Market Index, according to data compiled by Bloomberg. ABB dropped 8.7 percent to 14.32 francs today.

During “this last leg down in October there was indiscriminate selling in some of these names,” said Davidson, who oversees about $17 billion as chief investment officer for value equities at American Century in Kansas City, Missouri. His Equity Income Fund beat 98 percent of similar funds this year and 94 percent in the past five years. “Security selection has really been key,” he said.

Aberdeen Asset Management’s Docherty said he’s buying Japan’s Fanuc because the robot maker’s 577 billion yen ($6.04 billion) of cash will help it weather the credit crunch while rivals may be unable to raise money. The company, based in Japan’s Yamanashi prefecture, trades for 1.4 times net assets, close to the cheapest level since at least 2001, Bloomberg data show. Fanuc shares lost 2 percent to 5,770 yen today, bringing the 2008 decline to 47 percent.

‘Best Companies’

“Next year economically is going to look very poor and earnings expectations are probably still too high,” Docherty said in an interview from Edinburgh. “It comes down to valuation. You can find some of the best companies in the world now, which are normally too expensive, looking quite attractive.”

Cinnamond of Intrepid Capital said about 27 percent of his fund’s holdings were in cash before a two-month collapse in U.S. small-cap stocks that dragged the Russell 2000 to the lowest level since 2003. He’s now fully invested in stocks such as Snyder, Texas-based Patterson-UTI, a driller that traded for 0.9 times the company’s net assets at the end of last week.

Patterson-UTI has tumbled 73 percent from its peak this year to $9.72 as the S&P SmallCap Energy Index lost 66 percent from a June record. Cinnamond says Patterson-UTI may be worth $20 a share. Patterson-UTI tumbled today, losing 22 percent to $9.72 and ending a five-day advance.

‘Unload On Us’

“You had to own energy earlier this year or you got smoked relatively, so people piled into this stuff,” Cinnamond said in an interview from Jacksonville Beach, Florida. “Now it all implodes and there’s no one left to buy. Fortunately we didn’t own it, and we were happy to let these people unload on us.”

Neil Hennessy, whose Focus 30 Fund has beaten 96 percent of its competitors this year, is buying Corinthian Colleges Inc., the Santa Ana, California-based operator of North American colleges and trade schools. The stock was priced at 1.23 times sales at the end of last week, a 49 percent discount to the weekly average since 1999, according to Bloomberg data. Corinthian retreated 7.5 percent to $14.87 today, giving the stock a 3.4 percent decline in 2008.

Corinthian will benefit from increased demand as accelerating job losses force workers to go back to school, Novato, California-based Hennessy said.

“The perception among investors is that companies are losing money, and that’s so far from the truth,” said Hennessy, who oversees about $600 million as president of Hennessy Advisors Inc. “There’s a lot of value out there.”

To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net.