MFS' Fischman Keeps Pursuing Steady Growers

• Paul Katzeff
• On 6:28 pm EST, Tuesday November 3, 2009

Indiscriminate investors could have thrown darts at the stock tables in March and picked a portfolio that did as well or better than Eric Fischman's. But that's not his style.

Fischman's focus is on the long haul and quality. In fact, the manager of $2 billion MFS Growth (NASDAQ:MFEGX - News) feels the price of winning in the long run is avoiding volatility in the near term.

The fund lost 37.6% last year. That was 0.6 percentage points more than the S&P 500's setback. But it was 3.1 points ahead of its large-cap growth rivals' average. Trolling for consistent winners gives the fund a slingshot boost over the long run.

Under Fischman since April 2, 2002, the $2 billion portfolio was in the top 34% of its large growth category in performance this year going into Nov. 2, according to Morningstar Inc.

But it was in the top 6% over the past three years and top 8% over the past five years.

Fischman, who just turned 45 years old, spoke with IBD from his office in Boston.

IBD: Is it fair to say your mantra is consistency?

Fischman: We're not going to be the top fund in any given quarter. Yes, we're focused on consistency over long periods. We don't change our style to low quality stocks when they are cheap. We focus on year-in, year-out earnings power. When we look at a stock, we want to know what it's earning and what it's worth over time.

IBD: Some managers love small caps because they can find surprises in that space. You've got a mandate to buy in any cap size, yet nearly 75% of your money is in large and mega caps. Why?

Fischman: Smaller companies tend to be limited in their customer base size and products. Larger companies are more diversified. When a company can move from a small cap to a large cap, that's when you see revenues explode. They have much more earnings sustainability.

IBD: How do some of your big stocks, like Apple (NasdaqGS:AAPL - News) and Google (NasdaqGS:GOOG - News), fit that thesis?

Fischman: Apple develops new revenue sources as it grows. When we first bought it, it was going from being a computer maker to iPods and assorted media. We equated the iPod with what happened with the Sony Walkman 30 years earlier. It pumps huge new revenues into the company, which it can use to develop additional products. We asked what this would do to Apple earnings for three or four years.

The iPhone is Apple's latest new driver of earnings. It continues to take share. It has pricing power. Market opportunities are still large. So this story is as good now as it was back then. And the company is much larger and more diversified.

IBD: And Google?

Fischman: We've been in it since its IPO. Google is the dominant player in search on the Internet.

During the downturn when investors took Google down, we took advantage. And during the last year Google took market share.

Going forward, as advertising revenues bounce back, Google will benefit.

IBD: How does Cisco fit in?

Fischman: We've owned it a long time, up and down. The opportunity is that they are the pipes for building out the Internet. People buy routers and switches to increase bandwidth, and Cisco provides the pipes and plumbing for that.

As corporate spending slowed in the recession, the stock was hurt. We took advantage. We were focused on the three-, four- or five-year story.

IBD: In general, health stocks appeal to investors during a downturn. Even if people stop buying cars, they generally keep buying medicines they need. Medco's one of your top holdings as of your latest disclosure. What's the appeal?

Fischman: There is a lot of pressure on the health industry to cut costs. And Medco is a pharmacy benefits manager. We want to be on the side of companies saving money, cutting health costs, rather than being part of the problem.

Pharmacy benefit managers move people from brand names to generic drugs and mail order delivery. Most people have no idea if there's any difference between brand names and generics. But the cost difference is huge.

That puts companies like Medco on the same side as the government in trying to cut costs. I want to invest in companies that do that. That's why we've also invested in Express Scripts (NasdaqGS:ESRX - News) and CVS Caremark (NYSE:CVS - News).

IBD: Visa (NYSE:V - News) has been a beneficiary of the shift to plastic from use of paper money. And they showed cost-cutting ability to protect their margins during the downturn. Anything else you like there?

Fischman: No, you've got it. You know, the move to use of debit cards is also driving the switch to plastic. People in general and young people in particular like debit cards. They don't want to carry balances. People want to live within their means.

As the economy gets back to normal, spending and card swipes will accelerate -- Visa gets a fee on each swipe

Another thing I like: Visa and MasterCard (NYSE:MA - News) are processors. They don't take any credit risk.

IBD: Adobe (NasdaqGS:ADBE - News) was another of your top holdings. What was your thesis?

Fischman: They provide a lot of the things that you need to use the Internet and do business. It's everything from Photoshop to PDF files and watching videos. They've got new products coming out in 2010.

Typically, you want to own Adobe in front of that new-product cycle because the company gets a big earnings kick.

Their last cycle began 12 to 18 months ago. It came right before the big slowdown in the economy. A lot of buyers held back. But it's hard for corporations to skip two cycles, so many of them will have to take this new product.

They cut a lot of costs during the downturn. So growth in revenues in this new cycle will do a lot for their bottom line.

IBD: Starwood Hotel & Resorts (NYSE:HOT - News) was one of your top buys.

Fischman: Things will get better as business travel comes back.

They've also shifted to an asset-light model. They're moving towards selling properties, licensing their name and managing properties.

IBD: Sort of the McDonald's (NYSE:MCD - News) of hotels?

Fischman: Exactly right. It moves Starwood from a capital-intensive, lower-returns model to a higher-return model.

IBD: CME Group (NasdaqGS:CME - News) had pretax margin of 63% last fiscal year. That's about double what it was in 2001.

Fischman: We've owned it off and on since it came public five years ago. They're the largest player in electronic exchanges, from futures and derivatives. And as they get more scale, more volume goes to them. People want to trade where the volume is. It's almost impossible for anyone to take it away.

The biggest piece of CME business is interest-rate futures and derivatives. If we see an uptick in rates, it would be a big kicker for CME. Institutions do a lot more hedging.

This year, as hedge funds deleveraged, things slowed for CME. Things will normalize over the next couple of years.

IBD: You've got TiVo (NasdaqGM:TIVO - News), which is up nicely this year. But earnings per share were negative the past three quarters.

Fischman: They are the technology behind digital video recorders. Their patents were recently upheld in court, so they will get licensing fees with some cable operators like Comcast (NasdaqGS:CMCSA - News). Others will probably have to sign contracts.

TiVo's licensing fees are super high margin. EchoStar (NasdaqGS:SATS - News) was recently found to be infringing and ordered to pay a penalty and fee for abuse of TiVo technology, and is appealing. But TiVo has never lost a suit related to patents. It's probably just a matter of time until more cable and satellite operators sign contracts.

IBD: Owens Illinois (NYSE:OI - News) was a top buy by the fund. Through 2008 return on equity has climbed each of the past five years. It has basically doubled since 2005.

Fischman: They make glass containers for beverages. They had an awful end of last year. Stores cut inventory, which meant fewer products in glass. And they're losing share to aluminum and plastic containers.

But we don't expect to see beverage and food sales fall off that much going forward. So business should normalize at some higher level than it was. We took advantage of what we saw as an opportunity.

IBD: Goodrich (NYSE:GR - News) was another top buy. As of the end of last year, return on equity had doubled since 2003. It's up this year, but recently has been bouncing along its long-term moving average.

Fischman: We bought at the bottom of a cycle. This is an aerospace company. They make landing gear. They fix things on airplanes. They do after-market repairs. They're going to take share because of leveraged growth platforms like the Airbus A320.

IBD: Walgreens (NYSE:WAG - News) is yet another recent top buy. They've had several weak quarters EPS-wise.

Fischman: It's a turnaround story as much as anything. They're more focused on returns. They're less focused on opening a certain number of new stores each year.

They've improved the look of stores, and of some merchandising. They want a better customer experience to drive returns. There's nothing unique about what they do. But they should start to have positive comps. And they don't depend on the economy so much. Buying drugs is less economically sensitive than buying a shirt.

IBD: You focus on three things: stock picking, stock picking and stock picking?

Fischman: Right, we don't make macro calls. We're never going to be the top of a category for one year. But hopefully we don't have a bad year either. We look for stocks with consistent performance.

Buzz up!