Bigger Fish on Sale in the Recession
Morningstar 2008 Manager of the Year Charlie Dreifus discusses going up the market-cap ladder for three picks during the severe market downturn.
John Coumarianos: As many good value investors know, you find most of those anomalies, those mispricings, those inefficiencies, in the small-cap area of the market. You've certainly dedicated most of your career to small-cap stocks. But very recently, you have picked up some larger names, with the market carnage earlier this year. I think Cintas was one, Tiffany, and Bed Bath & Beyond. Could you speak about one of those and what you found attractive?
Charles Dreifus: Well, all of them, particularly Bed Bath & Beyond and Tiffany, are names that are pretty much household names. Cintas, if you go to a supermarket or someplace, you often see their trucks in front because they're putting in the new replacement carpets and so forth.
Those companies were always sort of admired, but they were always too expensive. They were too expensive on two levels. The valuation--again, I don't use a P/E, but to put it in terms of P/Es, were too high for me, and therefore the shares times the share price gave it a market cap that was beyond my normal reach.
The carnage that the market went through did bring companies like that down to the level that, yes, they were above my normal cutoff point, but reasonable in terms of adding to... I wasn't buying IBM or something like that. Clearly, it wasn't a large cap. It may have been... Wall Street has developed a SMID cap, between small and mid-size.
At times, when the market's undergoing severe pressure, entire industries are dumped. The two prevalent industries that I observed, or sectors that were being dumped, were consumer and industrial. In that pile of what is discarded, call it the junk heap, most of it, indeed, is junk that has been discarded. But it's like scouring a recycling center. You'll find some gems, also. That's my job, to go through and discern which ones are the real gems.
In my work, certainly, the balance sheets of both Tiffany and Bed Bath & Beyond, and for that matter Cintas, were very strong. What was also clear to me in the Tiffany situation, to take an example, Bed Bath and Beyond may be even an easier comparison in this sense, was that the landscape was changing.
Bed Bath & Beyond's main competitor, Linens 'n Things, actually shuttered all their doors. They went bankrupt. So, yes, the retailing environment was getting more difficult. But Bed Bath & Beyond was going to gain market share just by the absence of one of their competitors.
Now, that's not to say that Target or anyone else couldn't come in and get business that Linens 'n Things formerly had. But the notion is that in these troubled times, I want to be opportunistic. If I can find a company that has the potential of being opportunistic, and certainly true of Tiffany, also. Jewelry stores are going out of business. So, in these kinds of situations, you should be able to find companies that actually can make lemonade out of lemons.
Coumarianos: Make it through the tough times, maybe.
Dreifus: Right. And then actually benefit when you come out of it. Or even, if it's going to take a while, the point is that, yes, maybe the total spending for jewelry or the diverse products that Bed Bath & Beyond sells will be less, in total, in the total United States, but their market shares will be greater.
John Coumarianos has a position in the following securities mentioned above: RYSEX. Find out about Morningstar’s editorial policies.