Jason Stipp: You mentioned tech is something that where you had found some values recently.
Ron Muhlenkamp: Yes.
Stipp: Maybe more so than you had seen in the past. What are some of the other overweights or on the flip side, underweights in your portfolio right now? Where else are you really finding those values?
Muhlenkamp: We own probably more healthcare than we have. The people like a Pfizer have a free cash flow of 9% or 10%. I own AT&T and I probably haven't owned AT&T maybe ever. But the free cash flow is about 10%, 60% that's paid out as a dividend, so you got a 6% yield. The other 4% of that 10%, if they don't pour down a rat hole some place, you get value for that.
So, anytime we look at a company, we look at the bonds and we look at the stock. Now in the early '80s prospect of returns on bonds were as high as stocks, from '81 to '93 I was a third in bonds, because the numbers were there.
Today, there is an unusually wide spread between interest rate returns and prospective returns when I look at what the company is earning and their return on equity stands, so what I'm paying for stocks look much cheaper than bonds in here. So we always look at one versus the other. And we're seeing the best values in tech, we're seeing the best values in healthcare, everybody knows the problems. But if they're generating cash and don't as a say pour down a rat hole, sooner or later that comes to the shareholders. So those are the differences.
We don't own other utilities, because we don't think the returns are there, what else are we, after that it's kind of pick and choose. But unlike 2000, when the values that we were finding were small companies. Today, the Cadillacs are selling cheaper than the Chevys. So, we own--we did own a lot of IBM, we've rolled that into Hewlett-Packard, but the theme is the same. We don't own Microsoft, but we could. But we do own a lot of Cisco. I mean, there's not another Cisco in the world, and they're selling at 12 or 13 times earnings. When it sold at 70 or 80 times earnings, people thought we had to own it, we weren't interested, 12 or 13, yes, I am interested.
So, we found a long time ago that if we allow the numbers to tell us where to go, they do a pretty good job of it. And then you do your homework to be sure that the numbers are believable, and after that it's just a stomach problem. Is your stomach good enough to live through the--because the only time you can buy a good company cheap is when somebody didn't like it.
Stipp: That's right.
Muhlenkamp: In late '08, early '09, we had a great chance to do that, that bounce back. People want to talk about, how much stocks have come up from that period. We think those were nonsense prices to start with. We think they were forced selling prices. So, we don't relate to that, but when we look at companies today, we continue to see great companies selling at good values, unless we really mess up this broad economy. And the American economy is pretty hard to kill, we tried to kill it in the '70s, we didn't quite succeed. We're penalizing it somewhat today, but from there we'd just have to see how some of that stuff comes out.
Stipp: Ron, thanks so much for your insights today.
Muhlenkamp: It's been a pleasure.
Stipp: From Morningstar, I'm Jason Stipp. Thanks for watching.