Skip to Content
US Videos

Upgrade Picks in the Downturn

Matrix Advisors Value manager David Katz on the fund's upgrades amid the sell-off and the upside he sees remaining in the market.

Mentioned: , , , , , ,

Courtney Dobrow: Hi, my name is Courtney Dobrow. I'm a mutual fund analyst here at Morningstar. With me today is David Katz, portfolio manager for Matrix Advisors Value, which is a large-blend fund that David has managed since 1996.

David, thanks for being here.

David Katz: Nice to be here.

Dobrow: To start off with, let's talk a little bit about the roller coaster market that we've had since last year and some of the challenges that you faced in running a very concentrated portfolio. You own about 30 to 40 stocks at any given time. How has that been?

Katz: It's been a treacherous market. It's a treacherous market whether you owned 40 stocks or whether you owned 100 stocks. Last year was the worst bear market since the 1930s. From top to bottom, stocks were down about 50 or 60 percent. Basically it hit everybody, every industry.

So the key to being successful, we think, is for investors to take a longer-term time frame, to try to buy businesses that were surely going to be survivors, and focus a portfolio on that.

When the economy ultimately bottomed out, which is actually happening right now, you're going to see a pretty significant bounce back. That's what we're seeing and some of the more seasoned portfolios are seeing right now.


Dobrow: Since the rally in early March, are you finding it more difficult to find stocks that are trading cheaply? I know you like to buy 30 percent below your estimate of fair value. Has that been more of a challenge?

Katz: We're still finding a lot of stocks that have significant upside, not as many as six months ago. We screen about 1,500 companies. Normally there are 100 to 150 that are statistically cheap.

In the March lows, there were about 500 companies that were off-the-charts cheap that we thought on average had 100 to 120 percent upside. Right now, our upside target is lower. It's probably about 70 percent, 75 percent for the portfolio, so there's not as much upside.

You have to come to terms with the fact that you could buy a Dell at $8 a share six months ago. Today, you're paying $16 a share. But if we think a Dell is worth $25 to $28, we still think it's attractive.

We're still finding a pretty broad basket of stocks that are attractive, just not as attractive as they were a few months ago. The offset, however, is that a lot of the risk of the economy, and the wheels falling off, and going into a depression has been taken off the table.

Dobrow: It sounds from our previous discussions that you've been able to upgrade the quality of the portfolio. Can you give a couple of examples?

Katz: Absolutely. One of the things that happened as a result of the market sell-off is many stocks were cheap. You were able to find some of the best businesses at attractive prices.

We had Time Warner in the portfolio. We like Time Warner, but Disney at the same time, which is a little bit cleaner business, sold off from $32 to $19, so we took our Time Warner money and put it into a Disney. Wonderful business, great price.

Corning, Inc., which makes LCDs, glass, has a great history of making money. During the market sell-off and the technology sell-off, it got as low as about $8 or $9 a share. It was about six times earnings with $2 or $3 [per share in] cash, no debt. If you have any sort of time frame more than 12 months, this is a great business at a great price.

So we tried to buy things like that during the sell-off. We also added names like Coca-Cola, Procter & Gamble--very good businesses at 12 times earnings. We don't think they're going to have as much upside as a Corning per se, but we think you're getting a great business and long-term growth at a very attractive entry point.

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