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Longleaf Leaders See Sunny Days after the Storm

Veteran managers say bottom near, opportunities abound.

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Don't panic, urge veteran  Longleaf Partners (LLPFX) managers Mason Hawkins and Staley Cates. Rather, they stated in a special conference call to clients and shareholders on Oct. 7 that there's every reason to think that the stock market is close to a bottom.

To those who say that the global economy could be heading for a depression, Hawkins offered a terse response: "We strongly disagree." Hawkins, who said that this is the seventh bear market that he's encountered in his career, contrasted the dire conditions of the Great Depression, when high tariffs cut off trade and waves of bank failures left depositors penniless, with the current situation, where trade is much freer and insured deposits cushion the blow for savers. With bearish sentiment rampant, media reports spreading gloom, and nearly 2,000 stocks hitting 52-week lows the day prior to the call versus just 13 scoring new highs, he said, the market was likely near its low point.

In fact, he said, there are great opportunities available in the market. (Note: The Dow Jones Industrial Index closed at 9447 the day that he was speaking.) As an illustration, he and Cates pointed to the fund portfolios run by their firm, Southeastern Asset Management: Longleaf Partners Fund,  Longleaf Partners Small-Cap (LLSCX), and  Longleaf Partners International (LLINX). They said that their team estimates that the portfolios are all trading at just above 40% of their true value--the lowest figure in the history of the funds, save for a brief period in the spring of 2000. (That history extends back to 1987 for the oldest, Longleaf Partners Fund). They said that the average range is 65% to 70% of estimated value.

Moving to the portfolios themselves, Hawkins and Cates expressed confidence that their holdings will perform respectably well even if the economy enters a serious recession. For example, they argued that companies such as  FedEx (FDX) and  Sun Microsystems (JAVA) will gain business by helping companies wanting to cut costs in tough times, and environmental concerns will lead investors to natural-gas leader  Chesapeake Energy (CHK) and other portfolio holdings. They like the fact that many of their companies have been buying back shares. They noted that they had been adding to the funds' stakes in many current holdings.

In addition, the Longleaf managers said that they themselves, along with other Longleaf personnel, had made substantial investments into Longleaf funds during the previous week, following earlier additions to their already-heavy stakes made since the downturn began in 2007.

It's not hard to imagine why the managers felt compelled to make the conference call. Although the Longleaf funds have impressive long-term records and flagship Longleaf Partners Fund had held up relatively well--all things considered--for much of the downturn, that fund has been hammered in the past few months as the reversal in energy prices crushed the stock prices of its energy firms, which until then had offset the portfolio's many decliners. As a result, Longleaf Partners Fund is now down 47% for the year to date through Oct. 10, one of the worst showings in the battered large-blend category and far behind the S&P 500.

The managers noted that, notwithstanding the funds' 2008 declines, all are likely to make taxable capital gains distributions in early November owing to profitable sales made earlier in the year. The estimated amounts will be posted on Longleaf's Web site in late October.

 

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