If the fundamentals remain intact, stick with it.
That's the message from Mike Shinnick, portfolio manager of Wasatch Advisors Long/Short Fund. The 4-Star fund specializes in a top-down focus, meaning Shinnick starts with the state of the economy and works backward to find companies and industries that stand to benefit from the current situation.
Case in point, Shinnick sees a high, but declining, unemployment rate, and he sees it working to the benefit of quintessential value retailers Wal-Mart (WMT) and Target (TGT), but also boosting the business of disability insurer Unum (UNM) simply because having more people in the workforce typically brings more premiums.
Interestingly, as much as Shinnick likes retailers, especially those that serve a wide set of needs, he's afraid that restaurants, which he's shorting, will be one of the first luxuries tossed overboard when family budgets are retooled to account for high gasoline prices. It's all part of a "very challenging environment" that's forcing shoppers to differentiate between their wants and their needs, he says.
On the retail side, the discount behemoths sell basics such as reasonably priced clothing, cleaning supplies and groceries -- items consumers need regardless of gas prices. While not oblivious to the fact that Wal-Mart's stock has been more or less dead money for more than a decade, Shinnick notes that the company has been improving earnings and sales at a steady clip.
To value guys like Shinnick, that means the stock is only standing still on a price basis. In terms of fundamentals, Wal-Mart has actually been getting cheaper.
"We're looking at strength of the business model," he says. "Steady, patient compounding of capital makes for good shareholder returns over time, both for the company and for the people who invest with us in our funds."
As Steven Wright said: "There's a fine line between fishing and just standing on the shore like an idiot." In the wrong hands, fishing for value stocks can be much the same experience. It takes a steady hand and the right temperament to make it work, and Shinnick's results speak for themselves.
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