Morningstar’s Jason Stipp interviewed Ron Muhlenkamp recently. Here are some high lights of the interview and video clips. To read the complete transcript, click here. Please switch off all the videos manually first and then start to play the video clip at your choice. Sorry for the inconvenience.
“In times of forced selling and financial panic, institutional investors often sell off indiscriminately without regard to intrinsic value”
“Behind all that we're finding great companies at cheap prices, and until '08, for 40 years, the thing that kept us in real good stead was when you find good companies at cheap prices, just go buy them, and don't worry too much about what the trigger might be or what the horizon might be. That worked very well up until '08. In '08, I got bagged.”
European Deleveraging Could Kill Confidence
Ron Muhlenkamp believes there is still a chance that European banks could be forced into another round of deleveraging, an event which may send investors sprinting to the doors again.
Cadillac Stocks Selling Cheaper Than Chevys
Ron Muhlenkamp sees high-quality businesses selling at a discount to lower-quality names.
“In the past any time stocks had done that poorly versus bonds or almost anything else, it was a great buying opportunity. We're seeing great – today inflation is nominal, treasuries are what 3.5%, corporate are 4 to 5, we're finding very good companies with free cash flow of 8% to 10%. So we're seeing better values than we've seen in a long time. We own things like Cisco and Hewlett-Packard and Oracle, which I've never owned because they were never at prices I could justify. So we're seeing the Cadillacs are selling cheaper than the Chevys these days. “
Opportunities in Tech and Health Care
Ron Muhlenkamp thinks tech and health-care firms, with their prodigious cash flows, are attractive today.
“In times of forced selling and financial panic, institutional investors often sell off indiscriminately without regard to intrinsic value”
“Behind all that we're finding great companies at cheap prices, and until '08, for 40 years, the thing that kept us in real good stead was when you find good companies at cheap prices, just go buy them, and don't worry too much about what the trigger might be or what the horizon might be. That worked very well up until '08. In '08, I got bagged.”
European Deleveraging Could Kill Confidence
Ron Muhlenkamp believes there is still a chance that European banks could be forced into another round of deleveraging, an event which may send investors sprinting to the doors again.
Cadillac Stocks Selling Cheaper Than Chevys
Ron Muhlenkamp sees high-quality businesses selling at a discount to lower-quality names.
“In the past any time stocks had done that poorly versus bonds or almost anything else, it was a great buying opportunity. We're seeing great – today inflation is nominal, treasuries are what 3.5%, corporate are 4 to 5, we're finding very good companies with free cash flow of 8% to 10%. So we're seeing better values than we've seen in a long time. We own things like Cisco and Hewlett-Packard and Oracle, which I've never owned because they were never at prices I could justify. So we're seeing the Cadillacs are selling cheaper than the Chevys these days. “
Opportunities in Tech and Health Care
Ron Muhlenkamp thinks tech and health-care firms, with their prodigious cash flows, are attractive today.
Stipp: Maybe more so than you had seen in the past. What are some of the other overweights or on the flip side, underweights in your portfolio right now? Where else are you really finding those values?
Muhlenkamp: We own probably more healthcare than we have. The people like a Pfizer have a free cash flow of 9% or 10%. I own AT&T and I probably haven't owned AT&T maybe ever. But the free cash flow is about 10%, 60% that's paid out as a dividend, so you got a 6% yield. The other 4% of that 10%, if they don't pour down a rat hole some place, you get value for that.
So, anytime we look at a company, we look at the bonds and we look at the stock. Now in the early '80s prospect of returns on bonds were as high as stocks, from '81 to '93 I was a third in bonds, because the numbers were there.
Today, there is an unusually wide spread between interest rate returns and prospective returns when I look at what the company is earning and their return on equity stands, so what I'm paying for stocks look much cheaper than bonds in here. So we always look at one versus the other. And we're seeing the best values in tech, we're seeing the best values in healthcare, everybody knows the problems. But if they're generating cash and don't as a say pour down a rat hole, sooner or later that comes to the shareholders. So those are the differences.
We don't own other utilities, because we don't think the returns are there, what else are we, after that it's kind of pick and choose. But unlike 2000, when the values that we were finding were small companies. Today, the Cadillacs are selling cheaper than the Chevys. So, we own--we did own a lot of IBM, we've rolled that into Hewlett-Packard, but the theme is the same. We don't own Microsoft, but we could. But we do own a lot of Cisco. I mean, there's not another Cisco in the world, and they're selling at 12 or 13 times earnings. When it sold at 70 or 80 times earnings, people thought we had to own it, we weren't interested, 12 or 13, yes, I am interested.
So, we found a long time ago that if we allow the numbers to tell us where to go, they do a pretty good job of it. And then you do your homework to be sure that the numbers are believable, and after that it's just a stomach problem. Is your stomach good enough to live through the--because the only time you can buy a good company cheap is when somebody didn't like it.”
