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Fund Spy

Good and Bad Calls from Past Morningstar Conferences

A look back at Bill Miller's gambit, a prescient bet on Apple, more.

Every year at our annual Morningstar Investment Conference, fund managers and others in the fund world join us in Chicago to discuss their investment strategies and outlooks. With our conference set to swing into motion next week, I thought I'd use today's column to take a look back at some of the great and bad calls from conferences past. Over the next week or so, we'll also let you know what fund managers are saying at this year's gathering.

Miller's Gambit
 Legg Mason Value's (LMVTX) Bill Miller believes the only way to beat the S&P 500 over the long term is to stick your neck out with big bets that can be unpopular and even make you look foolish when they don't work out. That's certainly borne out by a number of his picks from summer 2001. He made an awful bet on telecom just as the sector was set to fall off a cliff. He was buying  Tellabs (TLAB) and  Corning (GLW). Yikes. Tellabs was trading around $18 at the time and now it's at $8. Corning has been better than that--it's trading about a buck above its price four years ago.

Miller also made a terrible bet on  Eastman Kodak (EK): "Miller said that Eastman Kodak is worth twice its current market price of about $47 per share." Today, Kodak trades for $27 as the digital revolution has left it further behind.

But I'll bet Miller more than compensated for all those weak picks with his inspired bet on  Amazon.com (AMZN). Although everyone was fleeing dot-coms at the time, Miller waded in and bought some winners amid the wreckage. When Amazon was trading around $13, he said it was worth $30. Today, the stock is at $36. Not bad.

Where are they now? Tellabs and Corning are long gone, but Amazon.com and Kodak are still big positions.

Byrne Bets on Apple
One of the better calls has to be Susan Byrne's ( Westwood Equity (WESWX)) bet on  Apple Computer (AAPL) in the summer of 2001. Byrne said: "In 2000, Apple had been hurt by the slowdown in the overall personal-computer market and by missing some key product features on its computers. Throughout this period, Apple maintained a strong balance sheet. Expectations are very low for Apple given the widespread weakness in the personal-computer market, but the company has managed to work down inventories and introduce a number of new products.

"We do not see the current slowdown in the personal-computer market as a sign of saturation in the United States and see demand picking up as excesses created by 2000's spending bulge are worked through. Apple currently has upside potential that outweighs the limited downside risk by a factor of four to one."

Where are they now? Byrne and Apple parted ways when she trimmed the position in the second quarter of 2004 and sold the rest in the third quarter. The stock was a split-adjusted $11.62 around the time of her recommendation and traded between $14.57 and $19.38 in the second and third quarters of 2004. That's a fine return over a rough stretch for the market, but she left a lot on the table: The stock has roughly doubled since her selling point.

A Great Macro Debate
In the summer of 2002, bearish Jeremy Grantham, whose firm runs  Vanguard U.S. Value (VUVLX), debated Jim Oelschlager of  White Oak Select Growth (WOGSX). At the time, Grantham was largely thought to have won the debate. He came armed with reams of data on market history and valuations, while Oelschlager's arguments seemed thin and lacking in evidence. As it turns out, Grantham lost the battle but won the war. At that time the S&P 500 had fallen to around 1000. Here's a snippet from our report that year:

Oelschlager said signs suggested we had reached the bottom. "Investor sentiment is terrible--the kind of thing you see in bottoms, not tops," he said. "It’s similar to [the downturn in] 1990, which was on the eve of 1991’s bull market. I think stocks will rally quite strongly from here, led by tech stocks. Returns won't be as strong as they have been in the past, but I still expect good returns."

Grantham, however, was glum. "Forget it. It will take years to wash this from the system. We're in serious danger of eroding confidence in our wonderful capitalist system. If we lose confidence, the index may not stop at 750, it could run right [down] through it." Grantham also noted that at a multiple of 25, the S&P 500 is still more richly valued than in any previous bull market.

So far, it looks like Oelschlager was right. The market was near the bottom, and the S&P is now at 1,200. On an asset class basis though, Grantham made a great call. We wrote: "Grantham identified four areas he found attractive: Small-cap value international stocks, emerging-market stocks, REITs (real estate investment trusts), and timber. He said the first three still looked attractive despite recent rallies. Emerging-market stocks, he said, can go from a P/E of 13.5 to 15.5, while REITS are still yielding 6.25%. Small-cap value international stocks are priced to yield 6%, with a currency advantage of 2% per year. (Grantham expects the dollar will continue to weaken)."

Those sector calls were brilliant. And as it happens, Grantham's funds have largely done quite well since then while Oelschlager has been held back due to bets on chip stocks. Vanguard U.S. Value is up an annualized 9.91% for the trailing three years while White Oak Select Growth is up just 3.3% annualized.

A Smoking Good Call
In 2001,  Altria Group (MO) (then Philip Morris) had already enjoyed a great run, but three value managers, David Dreman, Jim Barrow, and Jim Gipson, were in agreement that it had more upside left. Back then we wrote: " 'This is a company that is just a cash-flow cow,' said Dreman, who thinks Philip Morris, now trading at around $47, could be worth between $80 and $85 per share." Right now the stock is trading around $66. Add in the sizable dividends it has paid over the intervening years and you get a very nice return.

Where are they now? David Dreman is still very much in love. His  Scudder Dreman High Return Equity (KDHAX) has nearly 10% of assets in Altria. Gipson also has about 5% of  Clipper Fund (CFIMX) in Altria. Barrow has 2.5% of  Vanguard Windsor II (VWNFX) in the stock.

More Bets on Smokes
It's a little early to judge picks from last year's conference, but David Winters' pick of British American Tobacco (BTI) is looking mighty smart. At the time he said he liked the low valuation and the big dividend yield. The stock is up about 40% since then.

Where are they now? British American Tobacco is still in  Mutual Shares(TESIX) portfolio, but Winters is not. He left the firm and aims to set up his own fund in a couple of months.

Two Dividend Plays
Because he's returning for this year's conference, I couldn't resist looking at the picks made by  T. Rowe Price Equity Income (PRFDX) manager Brian Rogers back in 2003. He liked the dividends being paid by  Verizon (VZ) and  SBC Communications  (SBC). I hope he really liked the dividends because that's all he's gotten since then: Both stocks are slightly lower due in part to ambitious takeovers on their part. Where are they now? Both stocks remain modest positions in the fund. Although those two stocks have been blah, Rogers actually has an awesome 20-year track record. And I'm sure whatever picks he makes at our conference will do better this time ...

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.