When it comes to news, I’m not normally drawn to personal dramas. I like stories about achievers, like Dara Torres, the American woman who won her first gold medal for swimming in 1984 and is now--at age 41--back again and in contention for more medals. And I appreciate stories with irony; last week Andrea Pininfarina, 51-year old head of the company that does styling for Ferraris, died near Turin, Italy, when his Vespa motor scooter was hit by a Ford Fiesta driven by 78-year-old Giuliano Salmi.
But for the past two weeks I’ve been captivated by the unraveling mystery of “Clark Rockefeller,” who was arrested on a kidnapping charge after “allegedly” abducting his 7-year-old daughter in Boston and turning up in a newly-acquired Baltimore home where he hoped to start a new life and raise his daughter.
Trouble is, “Clark” had already started a new life ... several times before. The con man’s past, still being unraveled, was built on lie after lie. Combined with a convincing aristocratic European manner, his lying brought entry into society, connections and money. His past--he started as a boy named Christian Carl Gerhartsreiter--may even have included a murder or two in California! Last year, however, his wife of 13 years (a partner at McKinsey reportedly earning $1.4 million a year) divorced him. With that chapter of his life over, “Clark” could have picked up the pieces, taken his cash alimony of $1,000,000 and gone off to start anew again ... and today he’s probably wishing he had.
In the end he was brought down by his love for his daughter, by his inability to let her go. I sense the made-for-TV movie vultures circling.
And major questions remain unanswered,
What happened to the husband-and-wife that “Clark” rented from in California? Whose bones were dug up during construction of a swimming pool there 10 years later?
And finally, what story did “Clark” tell his most recent wife, a very successful graduate of Stanford University and Harvard Business School, that kept her married for 13 years to a man with no driver’s license, no social security number, no credit cards and no passport?
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Getting Out at the Wrong Time
OK, enough of that. Back to the serious stuff.
William Miller, portfolio manager of Legg Mason Value Trust, is famous for beating the S&P 500 for 15 consecutive years ... from 1991 through 2005. But he lagged the market in both 2006 and 2007, earning his shareholders 5.3% and 5.9% ... and for 2008 so far his fund is down 28.5%!
So last week the board of the Massachusetts pension fund, which manages some $51 billion in assets, voted to pull its money ($638 million as of June 30) out of Miller’s fund, as well as those of four other underperforming equity managers.
Michael Travaglini, the executive director of the fund, explained that the decision as a structural change in its approach, saying, “We’ve been managing money here for 24 years and our approach utilizing traditional long-only equity managers has not added value over that span.”
To me, it looks like they’re dropping the manager at exactly the wrong time ... at the end of a bear market. I think over the next five years, his stocks will shine and Miller will once again beat the averages.
An Early Believer
I had breakfast once with Miller, back when he was riding high on his triumphs with Amazon.com (AMZN). Bill was and is an optimistic investor who makes long-term bets and sticks with them, and I enjoyed talking with him, particularly because I, too, was a big fan of Amazon.
I bought the stock back in December 1997 because I was an early--and very satisfied--customer, because the stock was strong and because I thought that the company’s losses would eventually give way to profits. I added it to my “paper portfolio” here in the office in December 1997 and I still have a little left, with a profit of more than 1,600%. A month later, we bought AMZN for the Cabot Market Letter’s Model Portfolio, riding it to a profit of 1,291% at our final sale in January 2000 ... before the market topped.
Miller still has Amazon ... and he has a lot of it; as of the end of June, it was his second largest holding, accounting for 7.3% of the fund. The #1 holding was AES Corp. (AES), an electric utility, and #3 was Aetna, a growing insurance company that looks cheap. The #4 holding was eBay (EBAY), while #5 was Google (GOOG).
Obviously, these stocks have not been tearing up the charts in recent years, but Miller has confidence in the long-term. Unfortunately, a lot of investors don’t. Like the managers of the Massachusetts pension system, they’ve deserted Miller as his performance has soured. In the first half of 2008, they’ve pulled out $2.3 billion, or 15% of the fund’s assets. It’s tough when you’re forced t sell stocks at market bottoms!
The opposite happens near market tops. Just when a winning manager concludes there’s nothing of value left to buy, the public throws money at him, forcing him to buy something. He’s not being paid to hold cash.
But that’s how the mutual fund business works.
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Today’s investment idea is in the biotech field ... again. I’m stuck on these stocks for several reasons.
One, they’re strong; many have earned spots in Cabot Top Ten Report in recent months.
Two, many actually boast growing earnings trends.
Three, the group has failed many times in past decades to put together a lasting advance, so maybe now is the time. Psychologically, the fact that so many people are skeptical of biotech stocks is a big plus.
Four, there will be tremendous demand for health-improving products as baby-boomers age; biotechnology offers the best chance we have to stay healthy.
So take a look at Illumina (ILMN), the leading provider of the machines used to do genetic research. Whether it’s researching the genetic links of disease or developing new drugs, Illumina is there.
In a recent issue of Cabot Market Letter, editor Michael Cintolo wrote, “Illumina is a leading maker of equipment for genetic analysis and business is great. The company’s quarterly report on July 23 was a grand slam, with higher revenues and earnings than analysts had expected, plus a full-year profit forecast that handily topped expectations. Illumina is hardly unknown to investors, but its ability to routinely surpass expectations is remarkable. Part of the secret is the strong sales of consumables that follow each sale of an analyzer ... the long-term prospects are excellent for this technology leader in the business of analyzing genes.”
I look at it today and I see a company with revenues of $140 million in the last quarter, up 66% from the year before, and earnings of $0.44, up 52%. The stock has just pulled back from its high of 96 to a small base at 90, and I think it’s a good buy here.
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Yours in pursuit of wisdom and wealth,
Timothy Lutts
Publisher
Cabot Wealth Advisory
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