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By Laura Lallos | 04-01-2014 05:00 PM

Dodge & Cox Stock Finding Many Values in Tech

Comanagers Charles Pohl and Diana Strandberg are discovering growth advantages for certain players in the semiconductor and mobile data spaces, particularly in emerging markets.

Laura Lallos: Hi, this is Laura Lallos, a fund analyst here at Morningstar, and we have here with us today Charles Pohl and Diana Strandberg from Dodge & Cox. Several Dodge & Cox funds were nominated for Morningstar's Manager of the Year Award last year. They had a great year, and we're excited to catch up today. Thank you for coming.

Diana Strandberg: Thank you for having us, Laura.

Lallos: Obviously last year was a great year for all stock investors, particularly for the Dodge & Cox Stock investors. Some people may be wondering, particularly value-oriented investors, are there any values left in this market. And you are finding them. One area I understand, you are finding them is in the technology, media, and telecom space.

Strandberg: That true. I'd say across the globe, valuations are more reasonable today, and so they certainly have come up at reasonable levels around 14 to 16 times earnings in general in the developed world, depending on where you are, and probably about 10 to 12 time earnings in the emerging markets, depending on where you are, so quite reasonable today.

Where we see opportunities today across the globe is expressed in where we have overweights relative to the market in our portfolio, so tech, media, and telecom would be one area that we see a lot of investment opportunity, in technology in particular. In the U.S., we see opportunity in Internet and software companies. Internationally, we see opportunities in Internet and media, as well as telecom-equipment companies in particular.

We also have overweights in health care in the U.S., both in pharma and more recently in health-care services, where we see long-term growth at a very reasonable price. And more recently, we have been building positions in oil services in our domestic, international, and global portfolios.

Charles Pohl: We remain underweighted in utilities and consumer staples, both of which are still comparatively expensive because I think investors post-2008 have been attracted to things that were perceived as less economically risky and more stable, and the prices of some of those securities are up to levels where we don't think the returns have been as attractive. That may have changed a little bit with consumer staples over the last year, but they are still priced at a premium.

Lallos: Maybe we can start by following up on technology for example. Some of the names of course have been in your portfolio for years, like Microsoft. You added Samsung recently on the international side. That's a name that's in the headlines because of ongoing litigation with Apple. Maybe you can talk a little bit about how you factor that kind of external risk into your analysis?

Strandberg: Samsung is a Korea-based smartphone and consumer electronics company. They make DRAM components, as well as handsets, among many products that they make. We have followed Samsung actually for quite a long time. We've had meetings with managements, we have financial models, but as you pointed out, accurately in the third quarter last year, we started a position in the company for the first time.

What we see and how we think about some of these news items is that there is a lot of concern right now about the handset business at Samsung. And that concern whether it's because of recent litigation or the potential for competitive pressures to erode their high profitability, for example, we think have depressed valuation of the company, it's about seven times earnings. It trades at less than 100% of sales, the market cap of the company. They're net cash, have a high return on capital, and are profitable.

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