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Value Investing in Out-of-Favor Stocks: An Experienced Portfolio Manager Discusses His Investment Strategy with The Wall Street Transcript

67 WALL STREET, New York - February 21, 2013 - The Wall Street Transcript has just published its Investing Strategies Report. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Value Investing - Long-Term Investing - Longer-Term Investing - All-Cap Growth Investing - Bottom-up Investing - Global Investing - Emerging Market Growth Dynamics - High Quality Companies - Investment Strategies - Investing in Emerging Markets

Companies include: Apple Inc. (AAPL), MetLife, Inc. (MET), Herbalife Ltd. (HLF) and many more.

In the following excerpt from the Investing Strategies Report, an experienced portfolio manager discusses his portfolio-construction strategy and investment philosophy.

TWST: What does value investing mean to you personally?

Mr. Lehrer: It means looking at securities where the p/e ratio is unusually low. Investment philosophies on Wall Street are analogous to women's fashions; they can change without any real reason. Certain groups that are out of fashion sell at disproportionately low p/e ratios.

For example, many years ago companies that were conglomerates and were highly diversified were the favorites of Wall Street. These days, Wall Street wants to break everybody up. Fashions change, and we've found that if we buy out-of-fashion stocks when the fashions change, it is highly probable that the investments will be profitable.

If you are a trend follower sometimes that works, but if something you own goes out of fashion, you could be trapped in stocks that have high p/e ratios and are subject to sharp declines, such as we've seen with the recent decline in Apple (AAPL). If one's portfolio includes many high p/e stocks, then regression to the mean could cause substantial losses.

TWST: Tell us a little bit about your research process.

Mr. Lehrer: We tend to look at the published data and the predicted earnings of companies, and many times you can find an anomaly between what the stocks sell for if they are out of favor and what the expectation value is. If you look at the predicted earnings, the stocks are selling disproportionately low. We would take a close look at these out-of-favor stocks.

An example might be MetLife (MET), which I think is selling in the high 30s, and yet they have predicted earnings of $5.00 to $6.00 a share. Right now Wall Street doesn't like them; they've had a few problems. They are out of fashion...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.