Oakmark's Nygren Buys Fallen Growth Stocks

Bearish about the market? Oakmark Fund's (OAKMX) Bill Nygren isn't. In a just-released letter to shareholders he argues that recent market turbulence "is creating an unusual opportunity to purchase high-quality, large-capitalization growth companies at value prices."

Still, Nygren isn't buying the sorts of stocks investors often associate with large growth--names like JDS Uniphase (JDSU) or Pfizer (PFE). Rather, he has picked up shares in more-conservative growth issues, some of which have fallen because of fundamental operating problems.

Here's the list of Nygren's additions during the third quarter: American Express (AXP), Fannie Mae (FNM), Gap Stores (GPS), Honeywell International (HON), Interpublic Group (IPG), Phillips Petroleum , and Safeway .

In Nygren's letter to Oakmark Select (OAKLX) shareholders he did not discuss any portfolio changes in detail.

At Oakmark Fund, however, it appears Nygren picked up shares of at least a couple of these companies in the wake of the September 11 terrorist attacks. He wrote that American Express has long been one of the premier growth stocks in the financial sector, but has suffered recently because of "a cyclic decline in travel, declining results for the financial advisory segment (their fee is a percentage of assets and the stock market is down sharply), and some bad investments in bonds. The last 10 points of the decline occurred after September 11, a decline we view as extreme relative to a further reduction in profits which we consider to be temporary. American Express now trades below 12 times our estimate of 2003 earnings."

Similarly, Nygren viewed Honeywell's recent, precipitous drop as a buying opportunity.  "Honeywell stock fell to $35 when the deal broke, then fell to $22 in September on fears that reduced air travel would sharply cut Honeywell's aviation profits," Nygren noted. "We think air travel will return to normal levels and on that basis, believe Honeywell is now selling at just nine times likely 2003 cash earnings."

Two of Nygren's other big-name additions to the fund were Fannie Mae and Gap Stores. Nygren contends that Fannie Mae's recent share-price losses, which result from fears the housing market will slow, have been overdone. That stock currently trades at just 13 times Oakmark's estimate of its 2002 earnings. Meanwhile, he picked up shares in Gap Stores because the firm's CEO, Mickey Drexler, has once again taken control of the firm's merchandising decisions, which have often been poor in recent years.

Rounding out the list of Nygren's additions, he said Phillips Petroleum offers an appealing valuation and would make an attractive takeover target, Safeway trades at less than 13 times Oakmark's expected 2002 earnings, and Interpublic Group is priced at less than 10 times the "recovery earnings" it should post in 2003.