It is all about valuation and company fundamentals for fund manager Michael Cuggino as he rummages through the battered markets looking for investment bargains.
Mr. Cuggino, president and portfolio manager of the Permanent Portfolio Family of Funds Inc. in San Francisco, said that he sees opportunity in certain stocks in the energy, copper, technology and real estate sectors for investors who are in it for the long haul.
"Our investment objective is to provide low-risk growth to our investors" in this environment, he said. "Rather than trying to predict how the long the recession is going to be or how deep, we're trying to position our investors to benefit regardless of what happens."
BEATING THE S&P
The Permanent Portfolio Fund, which has $3.18 billion in assets under management, had generated a return of -14.8% year-to-date through last Monday, outpacing the Standard & Poor 500 stock index's return of -33%, according to Morningstar Inc. in Chicago.
"We're trying to stay diversified among different asset classes," which include Treasuries, stocks, bonds, precious metals and fixed-income instruments, Mr. Cuggino said.
Over the past year, he has overweighted the fund with Treasuries and gold to soften the blow from the market's sell-off. These sectors currently make up 58% of the fund's assets, Mr. Cuggino said.
However, the market sell-off offers buying opportunities for companies with solid management teams, good balance sheets and long-term growth potential, he said.
"They're relatively cheap going forward if you believe economic growth is going to resume at some point in the near future and you believe that our economy is strong enough to overcome the issues that we're currently dealing with," Mr. Cuggino said. "I personally believe that in the long term, we will resume a growth track."
Mr. Cuggino is particularly bullish on certain companies in the energy and natural-resources sector, such as ConocoPhillips Co. (COP) in Houston, Chevron Corp. (CVX) in San Ramon, Calif., and BP PLC (BP) of London.
Indeed, ConocoPhillips was off 43% from its 52-week high through last Monday, BP was down 36%, and Chevron was off 26%.
"They're long-term-growth stories," with good dividends, Mr. Cuggino said.
"Some of the integrated oils that had great earnings last week can make money even if oil is at $50, $60 or $70 a barrel. They have safe dividends based on cash flow and hard assets in the ground," Mr. Cuggino said.
'BANGED UP'
"On a long-term basis, these are attractive investments" that investors can snap up on the cheap right now, he said. "They've been banged up more than they need to be in this environment," Mr. Cuggino said.
He also likes copper producer Freeport-McMoRan Copper and Gold Inc. (FCX) of Phoenix, which was off 75% from its 52-week high through last Monday.
"It's a well-run company ... and there's more demand for copper and energy than there is supply," Mr. Cuggino said.
The portfolio manager is also bullish on certain technology names, such as Hewlett-Packard Co. (HPQ) in Palo Alto, Calif., and Symantec Corp (SYMC) in Cupertino, Calif. HP was down 29% from its 52-week high through last Monday, while Symantec was off 39%.
Mr. Cuggino also favors apartment real estate investment trusts, which were off 29.4% in the trailing 12-month period ended last month, even though demand, rents and occupancy have weathered the economic storm relatively well. His top picks are BRE Properties Inc. (BRE) in San Francisco and AvalonBay Communities Inc. (AVB) in Alexandria, Va.
Mr. Cuggino is more selective when it comes to office REITs because of their exposure to the faltering financial services industry and declining valuations.
"The underlying economic activity that drives leases in those areas [is] potentially slowing," he said.
LONG-TERM HOLDINGS
Mr. Cuggino said he sees Boston Properties Inc. (BXP) and Vornado Realty Trust (VNO) in New York as good long-term holdings. But he is shying away from hotel REITs for now and avoiding airlines and automakers altogether.
The latter two have a tough time selling their products and can't control profit margins because of rising labor, energy and raw-material costs, Mr. Cuggino said.
"I think this is a tough time to be invested in those areas," he said.
E-mail Janet Morrissey at [email protected].
