Those who are getting sick of constantly hearing about Apple (AAPL), Baidu (BIDU), or Chipotle (CMG) should listen to Bob Auer, whose Auer Growth Fund (AUERX) uses a three-point system to find underappreciated growth names. In part one of MoneyShow.com’s interview with Auer, he explains this system and shares two of his lesser-known picks.
Kate Stalter: I am speaking today with Bob Auer, Portfolio Manager of the Auer Growth Fund.
Bob, growth stocks often get hit especially hard in poor market conditions. Has that affected your investment decisions in the fund at all recently?
Bob Auer: It has not affected our investment decisions. It has affected our stocks.
We are very disciplined in how we approach the market. The stocks that have gotten hit hard lately are anything that is very economically sensitive; say, basic materials—you know, a steel company. Heavy, old-fashioned industry has been hit hard.
Even though our fund is only four years old, what we have done for 25 years—in private accounts, before the fund started—we look at every stock.
So we think that investors should try to broaden their approach. Not just go into names that they’re very comfortable with—say a household name like Johnson & Johnson (JNJ) or Microsoft (MSFT)—but what we try to do is force ourselves to look at every stock after it reports its earnings.
And what we are looking for is a company that is flashing a 25% and up profit for the quarter versus last year’s quarter and, as well as that, did 20% and up sales for the quarter versus last year’s quarter.
So we are open to buy anything once it starts growing rapidly, even if it had done nothing, nothing, nothing, and now, all of a sudden in the fourth quarter—boom! It is up 25% on earnings, 25% on sales, and—this is key—we can pay less than 12 times profits, or 12 P/E for the stock.
So we are looking for fast-growing companies that we can buy inexpensively.
- Also read: 17 Growth Stocks with Bullish Charts
Kate Stalter: I was looking at was the prospectus for the fund, and noticing that this is a multi-cap. How do you make asset-allocation decisions regarding market capitalization?
Bob Auer: We have no pre-determined set percentage, like so much in large, medium, or small caps. We go simply where we can buy the growth for the cheap price.
Typically, that leads us to more small-cap stocks, but our average—again, doing this for 25 years—we have typically been about 25%, or a quarter of the portfolio, in large cap; a quarter in medium cap, and the other half small cap. In which that half is split in half, between true small cap and true microcap, which we would define as companies below $200 million in market value.
So we don’t target any such thing. You know, we could be 100% large cap, if that’s the only companies that we could find that met those high-growth metrics that we’re trading inexpensively.
By the way, we buy every stock that meets these criteria, and it’s usually less than 1.5% of all the companies that trade. There are about 8,000 stocks that trade. Right now, we only have about 100 stocks in our portfolio, which is more than a lot of funds. But to us, 100 stocks out of 8,000—there were 7,900 stocks that didn’t meet our very stringent criteria.
Kate Stalter: Another thing I noticed on the prospectus is that the fund was in a very small amount of cash—about 2% or so. Has that changed at all more recently, given some of the sell-offs that occurred in recent weeks?
Bob Auer: We are not market timers, so we are very upfront with telling our clients and our advisors we have no idea what the market is going to do. We tend to be bullish if you hear us on an interview somewhere. We are bullish, but that’s just because we have faith in America, and if we can find good-growing companies that are trading at inexpensive prices, we buy them.
If, for example, we could not find a single stock that had upwards of 25% earnings, upwards of 20% revenues, at below 12 P/E, then we would be 100% in cash. But we don’t go to cash because of what is happening in world events.
So right now, we would like to go to cash. It might sound counterintuitive—it looks like Europe may not get out of this malaise, and politicians all over the world don’t know what to do, and they’re all out of bullets. But we would maintain that’s probably why you’re able to get some of the good buys that you can. So we just kind of grit our teeth and stay fully invested.
So, for example, when you mentioned we have 1% to 2% cash, we always have a little cash, because we have—just as an open-ended mutual fund—we have to be able to accommodate any redemptions that may hit. And we always like to have a little cash laying around, just in case we find one new idea today, so that we can get a little weighting in that stock. But we typically never have more than 2% cash, no matter what, unless we can’t find the companies to buy.
- Also read: Pack Your Own Parachute
Kate Stalter: Well, speaking of companies, let’s drill down a bit and talk about some of the holdings. I noticed that you did have quite a large investment in the materials sector. Is that still the case?
Bob Auer: Yes. We hope we won’t find any more materials stocks. We don’t want any more, but if we do, we still are going to buy them, which is also kind of unique, because we have no control over it.
Right now, we are 40% materials and we’re finding that they are cheap stocks that are growing. Typically, we are not that heavy in any one sector, so we are uncomfortable.
I will just be very upfront: we are uncomfortable when we get so over-weighted. But we just go where the profits and the sales are, and we try to leave the emotion out of it.
If we can find a good, growing company…and I’ll give you an example: Cliffs Natural Resources (CLF). The stock is trading today at $70. It is at five times earnings, so that totally meets our criteria, and its quarters are going up—again, over the 25% revenue and over the 20% sales.
This is a company that is estimated to earn $12 a share this year, and it’s just a $70 stock. We think it should be trading at 12 times earnings. We’re not analysts, and we don’t put out research reports, but in our opinion, why is some other company’s dollar bill of profit more holier-than-thou than Cliffs Natural Resources?
Sometimes you have to be careful, because the company is going to earn $12, and then it’s just going to fall off a cliff. Maybe the analysts think, well, it’s only going to earn $5 in 2012. Well, that’s not the case; the analysts are projecting $13.80 a share, and there’s 16 analysts, and in 2013, they are projecting $14.80. So we would argue that this stock is probably very undervalued.
But yet, fear has kept people out of it because they mine iron ore, and it’s seen as: If the economies around the world are in the doldrums, no one is going to buy iron ore to make steel. But the fact is, people are buying iron ore.
We go by the numbers, not by the sentiment of the investing public, or the sentiment of the politicians, or what you read in the paper.
Kate Stalter: Bob, tell us about some other names you like right now.
Bob Auer: Another one that I really like, because I think it’s an interesting story, is Goodyear Tire (GT), trading around $14 a share. This stock, in its heyday, was a $70 stock. We really don’t care about that; we’re just caring if the profits and the sales are up, and is it below 12 times earnings.
But what’s happened with Goodyear? They’ve got some great concessions from their unions, and they’ve agreed to take that money that they’ve saved, or part of the money that they saved, and plow it into new equipment so they can make state-of-the-art tires.
The CEO started this process in 2009, and he has turned the company from making an average of $50 or $60 tires to their average last quarter of $130 tires. So they have moved totally upmarket, and they are letting go of somebody that’s going into Walmart (WMT), and they want the cheapest set of $30 tires that they can get—they’re not competing in that loss-leader part.
- Also read: 4 Compelling Contrarian Choices
They’re able to keep their factories humming on very profitable tires, and so something that I just noticed was: I was looking around and I saw on a BMW, it had Goodyear tires. This was a brand-new, 2011, $100,000 BMW. The top of the line, the 7-Series.
I don’t own one, I am just saying I was looking at it, and I asked the car dealer, “What’s going on?” And he’s like, “Oh, they’re all Goodyear now. They’re not Michelin or Pirelli.”
So this company isn’t the old Goodyear Tire; it’s the new Goodyear Tire, and they had a record quarter. It’s over a 100-year-old company, but they had a record quarter of the company’s history. Yet the stock trades for one-fifth of what it traded for before, and it is only trading at about six-and-a-half times the 2012 earnings estimate.