Investor's Business Daily, March 13th, 2007
Predictable may be boring, but it's preferred by Janus Enterprise Fund.
Jonathan Coleman, who manages the $1.8 billion fund JAENX, says he wants growth without the volatility that can go with high-risk stocks. He is proud that the fund's 11.16% return in the five years ended Monday came with 18.86% less volatility than the Russell Midcap Growth Index.
The key is steady earnings and a predictable business. Coleman says Ball Corp. BLL is a good example. It's been on a steady upward slope for several years.
Coleman bought the stock five years ago at about 18, and it made up 2.73% of fund assets as of Jan. 31. It's now trading near 45.
Ball, which makes aluminum soft-drink cans, has shown double-digit earnings in 13 of 17 quarters.
At the end of the first quarter of last year, earnings dropped 37%. But it wasn't because there was a drop in sales or a misstep by management. "They had a fire in a European plant, so that quarter looked a little weird," Coleman said.
It's also unlikely that demand for Ball's main product will drop. "It isn't like Coke is suddenly going to sell 15% less in cans," Coleman said. On top of that, there are few competitors that make anything like Ball's volume.
With fixed costs, even small revenue increases mean larger earnings growth than other industries offer. Technology is also a factor because small increases in operating efficiency bring big profits. A lot of free cash flow has also meant Ball could buy back some of its stock.
More recently, the fund bought NII Holdings NIHD, the new name of Nextel International, which went through bankruptcy reorganization in 2002. Coleman added it to the portfolio about six months ago, and since then it has risen from about 50 to 71.
Churn Rate
NII has many of its customers in Mexico. Serving individuals tends to boost costly churn rates. But NII's corporate customers keep a lid on the figure, Coleman says.
Its earnings rose 107% in the last quarter of 2006 and have shown growth in every quarter but two for the past three years.
An oligopoly in an industry also doesn't hurt. Potash Corp. of Saskatchewan POT is one example. Potash Corp. is one of three providers of a vital component to fertilizer -- potash -- and it has cut back production to support the price. The company can do that, Coleman says, because it has a dominant position in the market.
The stock went from about 83 when he bought it a year ago to 154. A good sign is the U.S. and other governments' efforts to encourage corn crops in order to produce ethanol. New crops will need more fertilizer, which means more profit for Potash.
Another example of a dominant player -- and the kind Coleman likes to invest in -- is the Chicago Mercantile Exchange CME. He says CME benefits from a "network effect" similar to what drove eBay's EBAY stock for years. "It has the most liquidity because it has the most investors," Coleman said. "There really is no reason to go anywhere else." The fund has had the stock for about four years.
CME has done well in part because options are countercyclical to the stock market. Coleman says the company had its best three days ever in terms of trading volume on its exchange when the market sank at the end of February.
CME's stock opened at 35 when it was issued four years ago and has marched to 550.
Another common trait of the companies Coleman looks at is return on invested capital. That's the return after spending on the business, less the cost of capital.
If that number is positive, the company is creating value, Coleman says. If it isn't, revenue and even earnings growth might look good but are probably not sustainable.
One growth story Coleman was sorry he missed was Whole Foods Market WFMI. Between 2002 and 2005, the stock quadrupled to about 80 before falling to earth at about 45. Its P-E ranged from 25 to 65.
"I was too valuation-focused," Coleman said.
Copyright 2007 Investor's Business Daily, Inc.
