The subprime-mortgage crisis, pushed along by the high-profile collapse of two Bear Stearns Cos. Inc. hedge funds this summer, is turning out to be a boon for money managers looking to pick up bargains.
The subprime-mortgage crisis, pushed along by the high-profile collapse of two Bear Stearns Cos. Inc. hedge funds this summer, is turning out to be a boon for money managers looking to pick up bargains.
Value managers in particular are having a field day. Not only are investors selling off stocks directly associated with the subprime mess — such as Countrywide Financial Corp. of Calabasas, Calif. — but they also are selling stocks in all kinds of industries, said David J. Winters, president of Wintergreen Advisors LLC of Mountain Lakes, N.J., and manager of its $1 billion value fund, Wintergreen Fund (WGRNX).
“We’ve basically had people just selling, and at times, it became kind of indiscriminate,” said Mr. Winters, who made a name for himself as a manager at Franklin Mutual Advisors Inc. in Short Hills, N.J., which manages the Mutual Series Funds, before going it alone almost two years ago.
overreaction
As a result, Wintergreen has been a “buyer,” he said.
Not wanting to tip his hand, Mr. Winters declined to identify what he’s buying. He did indicate, however, that financial stocks — many of which have taken a pounding because of perceived ties to the subprime crisis — are more attractive.
“They are more interesting now that they have sold off,” Mr. Winters said.
One such stock, according to two managers, is Allstate Corp. of Northbrook, Ill., one of the nation’s largest insurance companies.
Although the stock has rebounded somewhat, it took a hit, because it held a $4.8 billion subprime portfolio that represented about 4% of its total investments, said William J. Nasgovitz, president and founder of Milwaukee-based Heartland Advisors Inc. and a manager with the well-regarded $1.87 billion Heartland Value Fund (HRTVX).
In his view, the market overreacted.
Despite Allstate’s exposure to the subprime market, analysts at Raymond James Financial Inc. in St. Petersburg, Fla., continue to rate the stock a “strong buy.”
Another believer in Allstate is Blake R. Howells, who is a vice president and director of equity research for Becker Capital Management Inc., a boutique firm in Portland, Ore., with $2.6 billion under management, including $65.6 million in the Becker Value Equity Fund (BVEFX).
“We have been adding to the position,” he said.
But Allstate is only one financial stock Mr. Howells said he likes. U.S. Bancorp of Minneapolis is another.
It started to sell off in the early summer, a result of concerns regarding subprime mortgages, but U.S. Bancorp is not heavily exposed to that part of the mortgage market, Mr. Howells said.
Mr. Howells has the right idea focusing on such companies, said James Swanson, chief investment strategist with MFS Investment Management of Boston.
There are quite a few regional banks that got “tainted” as a result of the subprime mess, even though they weren’t involved, he said. “A lot of banks are doing real lending to real nuts-and-bolts companies,” Mr. Swanson said, and they may be worth buying.
Not worth buying — at least not yet — are companies like Countrywide that are directly involved in the subprime mess, he said.
“The arithmetic is just getting worse by the day,” Mr. Swanson said.
There are record inventories of unsold homes, he said. That’s a big number that
doesn’t bode well for those involved in the housing industry, Mr. Swanson said.
At least one investment manager, however, said he’s willing to bet on Countrywide.
Although it’s true that Countrywide could drop in value even further as a result of the
subprime mess, it’s unlikely to drop too much further, said George Schwartz, president of Schwartz Investment Counsel Inc. The Bloomfield Hills, Mich., firm has $800 million under management, including $75 million in the Schwartz Value Fund (RCMFX).
“It’s selling at distressed levels,” he said. “The bad news may not be all out, but it has already bottomed out in my view.”
Other managers aren’t so sure.
“We don’t mind being early, but we don’t want to be way too early,” said Russell Croft, manager of the $24 million Croft Value fund (CLVFX), advised by Croft-Leominster Inc., a Baltimore firm with $600 million under management.
When hunting for bargains stemming from the subprime mess, it is best to stick to companies that are indirectly associated with it, such as Bank of America Corp. of Charlotte, N.C., he said. It made news recently by making a $2 billion investment in Countrywide to help the mortgage lender weather the subprime crisis.
If investors are looking for companies outside the financial sector, Mr. Croft suggested Weyerhaeuser Co. of Federal Way, Wash.
Weyerhaeuser is a timber company that produces lumber, plywood and other building materials, he said. It got caught up in the subprime mess indirectly, because it also develops housing, though that is a small part of its business, Mr. Croft said.
Another name connected only indirectly with the subprime mess and presenting itself as a buying opportunity is Redwood Trust Inc. of Mill Valley, Calif., Mr. Howells said. It invests in high-quality residential real estate loans.
Redwood’s stock was badly hit, but Mr. Howells said he believes that the market overreacted.
