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Commentary

Research Highlights: Our Recommendations This Week

Our analysts regularly talk to some of the best investors in the world, and this week we have a bounty of new Analyst Reports on funds run by great managers. This week they published new reports on funds run by Marty Whitman, Bob Rodriguez, Bill Nygren, and Chuck Royce--four of the best stock-pickers in the business and among the most colorful. Whether you invest in stocks or funds, you’ll find these writeups fascinating (see below). Whitman’s buying distressed bonds, Nygren’s loading up on large caps, Rodriguez is sticking with his top picks, and Royce is selling his firm.

In total on Morningstar.com this week, we published 300 new Analyst Reports. That’s a record. Our stock analysts have been updating all their top companies recently--more than 200 this week alone--to keep our stock coverage as up-to-date as possible. Our fund analysts published reports on almost 100 funds, as well as a new Fund Analyst Picks piece for the large-blend category (we kicked out one fund from among our picks to make room for one of our all-time favorites). Also published this week: a Special Report on hot small-cap funds like those run by Wasatch and Royce, and Our Favorite Retail Stocks.

Among those 300 new Reports, here are some you won’t want to miss.

Great Funds, Great Managers

 Third Avenue Value (TAVFX), by Christopher Traulsen
Manager: Marty Whitman
"Whitman is busy finding a home for at least some of that cash. He's been active in the distressed debt market this year, buying PG&E mortgage bonds at a 25% yield."

 Oakmark (OAKMX), by Scott Cooley
Manager: Bill Nygren
"…so far in 2001, the fund has beaten the average large-value offering by more than 20 percentage points."

 FPA Capital (FPPTX), by Christopher Davis
Manager: Bob Rodriguez
"Former shareholders who dismissed this offering's contrarian approach as hopelessly old-fashioned in 2000 have probably removed their feet from their mouths by now."

 Royce Premier (RYPRX), by Dan McNeela
Manager: Chuck Royce
"Royce's industrial picks have made large gains so far in 2001, with several posting gains of 20% or more…."

Stocks We Like

 SuperValu (SVU), by Josh Peters
"It's the stock's low valuation (five times trailing cash flow from operations) that makes SuperValu an attractive pick."

 Guidant (GDT), by Travis Pascavis
"The stock trades at only 18 times First Call 2001 earnings estimates, a substantial discount to Medtronic's 39."

 Cigna (CI), by Rob Plaza
"Our opinion after that sell-off is the same today. It's an over-reaction and a buying opportunity because Cigna's stock still trades well below our fair-value estimate of $121."

 Toys R Us (TOY), by T.K. MacKay
"The stock is also buffered by about $11.50 per share in real estate, or more conservatively, $5 per share including all of the company's debt and cash."

 Callaway Golf (ELY), by T.K. MacKay
"Conservative assumptions about Callaway’s long-term sales growth and expanding margins yield a fair value of about $25 per share."

Other stocks we liked include American Express (AXP), Citigroup (C), and Kemet (KEM).

Funds We Like

 Janus (JANSX), by Christine Benz
"Janus Fund still has its luster."

 Pennsylvania Mutual (PENNX), by Dan McNeela
"The fund's risk scores, which measure a fund's downside volatility, rank the fund in the category's least risky decile over the past five years."

 Fidelity Dividend Growth (FDGFX), by Scott Cooley
"He declined to mention specific names, but he said that he has been buying badly beaten-down tech convertibles in recent months."

 Third Avenue Small Cap Value (TASCX), by Christopher Traulsen
"Third Avenue Small Cap Value Fund's management change doesn't detract much from its charms.

Other funds we reviewed and liked were Columbia Balanced (CBALX), Franklin Balance Sheet Investment (FRBSX), and Keeley Small Cap Value (KSCVX).

Stocks We Have Concerns About

 Estee Lauder (EL), by Craig Woker
"We see few compelling reasons to buy this stock. Trading at 26 times our forward earnings estimate, Estee Lauder is expensive relative to its peers."

 Qualcomm (QCOM), by Todd Bernier
"A company without growth isn't worth 60 times forward earnings."

 Verizon (VZ), by Michael Hodel
"While we think this performance is for good reason--the company has some of the strongest assets in the business--we do believe the stock has gotten a bit ahead of itself."

 Palm (PALM), by Amy Arnott
"Our analysis pegs the stock's fair value at about $4 per share, even assuming a decent level of sales growth and margin improvements."

 Mattel (MAT), by T.K. MacKay
"Total debt as a percentage of debt plus shareholder equity now stands at 57% and interest payments are a hefty $150 million per year."

Other stocks we’re lukewarm on: Merck (MRK), DST Systems (DST), and Bausch & Lomb (BOL).

Funds We Have Concerns About

 Putnam OTC Emerging Growth (POEGX), by Kelli Stebel
"…its abysmal performance isn't the only reason shareholders should consider cutting the ties."

 First American Large-Cap Growth (FFDGX), by Bradley Sweeney
"We believe that investors who wouldn't face serious tax consequences by bailing out of this offering should do just that."

 Franklin Small Cap Growth (FRSGX), by Russel Kinnel
"The bad news is that the fund is also reopening to new investors on September 1. That's perplexing, because the fund is already the biggest mid-growth fund by a margin of $2 billion."

 Frontier Equity (FEFPX), by Bradley Sweeney
"If anyone was curious, this is what one of the worst mutual funds in the world looks like."

 Fidelity Value (FDVLX), by Kelli Stebel
"For the majority of Fentin's five-year tenure, this fund's performance has been mediocre to subpar."

Other funds we’re less than thrilled with include Pioneer Growth (MOMGX).

What’s Up Next Week

If you read research you love or hate on the site, let me know at haywood.kelly@morningstar.com. Also note that you can keep up with Morningstar.com through two of our weekly e-newsletters: Weekly Wrap and SmartInvestor. They’re both free.