Neil George: A Banker's Bets
08/22/2003 12:00 am EST
Neil George is the editor of KCI's flagship publication, Personal Finance. Published since the early 1970s, and long one of my favorite newsletters, it has always been known for its well-balanced approach to investing. At the KCI Panel in Atlantic City, Neil explained his philosophy regarding stock selection.
"My approach is to look at a company as a company--not just as a stock or as part of a market. The idea is that each one of us, when we are buying that stock, is becoming an owner of that company. And management of that company has the responsibility to work--not for themselves--but for us, the shareholders. Therefore, I want to own companies that are working for those of us who collectively own the company. Unfortunately, there really haven't been a whole lot of companies over the last few years that really embody that sort of philosophy. As a result, I think we are seeing a major reckoning in the market. More and more of us--as owners--are going to be taking the time to go through the companies to figure out if we really want to own them. I prefer to hone in a few companies that we know really well.
"Right now, I'd like to focus on companies that for the time being--given an uncertain, muddled economy--can fare well, pay their bills, keep their operations running, and still have something left at the end of the day to pay out to us as the owners. We are looking for cash cows. In addition, given some of the changes that have been occurring regarding tax laws, investing in some of these companies even works out better for us, because Uncle Sam is letting us keep more of that cash that's being sent our way. In addition, we're not looking for companies that will do well only if a certain forecast about a certain part of the economy does well. I would rather invest in companies that will still do well even if things don't go right. My background as a banker has always been focused on that. I look at a company and the first thing I ask is. "Would I lend them money?' If not, I wouldn't buy their stock. Looking at the worst case scenario in any situation allows us to avoid a lot of pitfalls.
"From my perspective, we have a very, very difficult marketplace. Going forward, I am very cautious about the economy. I see more muddling. I see the growth rate of the US domestic economy rallying by about only 1% to 1 1/2%. That's not all that exciting and it's not enough to sustain a lot of very expensive stocks of companies that lead many of the indices. However, while US growth may be somewhat subdued, there are various pockets beyond the US, that are offering growth. There are areas of the globe with burgeoning bases of consumers, tremendous amounts of investments in infrastructure and capital equipment, and therefore, there is always someplace where we can make money."
"My returns over the past three years have been about 20%--mostly from concentrating on companies that are very much oriented toward their shareholders. I've been sticking to basic companies that operate their businesses, generate cash and pass them on in the form of dividends to their owners. For the time being as well as for the foreseeable future, I think this will remain the area that you should focus--companies that are fairly straight-forward in what they do, and where it is easy to understand why you own those shares. Our game plan is to not lose gobs of money on any one investment. Following us will generally provide you with steady and consistent performance. Maybe not some of the whiz bang million percent gains advertised by others, but at the same time, you won't lose your nest egg by following our advice."
Two of George's favorite stocks are special situations in the mortgage banking sector. He explains, "There are two companies in particular which I have followed and owned for some time. One is Thornburg Mortgage (TMA NYSE), which has changed the way it runs the bulk of its portfolio. Thornburg, as opposed to most of the rest of the universe of mortgage lenders, focuses on adjustable rate mortgages, which tend to be much more defensive during a period of rising interest rates. By their very nature, interest rates on adjustables can be reset. In addition, the quality of the borrowers of the mortgages that Thornburg originates tend to be very high credit-scoring borrowers, and therefore the stability and creditworthiness of the portfolio tends to be above just about everyone else in the business. I think it's a very attractive company, trading at about 1.3 times the underlying book of assets. We would buy up to $30.
"The other company which on the surface appears to be exposed to rising interest rates is a property company known as W.R. Carey (WPC NYSE), which is involved in the sale and leaseback of corporate assets. In other words, major corporations that have things such as plants and distribution centers will often--during troubled times--seek to liquefy some of these assets. As a result, they will sell the properties to Carey and then lease them back on a long-term basis. Carey has carved out a niche in this business. During tougher economic times, Carey is able to buy properties at relatively attractive levels, as other companies will tend to be more agreeable to better terms of sale. Given that its clients are generally major corporations, the default rate tends to be quite low. Carey is also expanding internationally in Europe and Asia, particularly in China, where the concept of sale-leaseback programs is newer. Meanwhile, the company really isn't followed by anyone on Wall Street. I see this as a very good bargain. I would buy the shares up to $35."