Interview: Permanent Portfolio---Cuggino, Michael---Fund Manager
>> shares of hewlett-packard soared by 52% in the past year as long as the company’s c.e.o. has been at the helm. tomorrow is mark hurd’s one-year anniversary on the job. michael cuggino, president and portfolio manager of the permanent portfolio fund joins us to talk about the job hurd’s doing. michael has 80,000 shares of hewlett-packard in two of his funds. michael joins us from san francisco. welcome.
>> good afternoon, lori.
>> tell me, first, why do you think mark hurd’s been a more effective c.e.o. than his predecessor, carly fiorina?
>> i think under carly fiorina there was a lot of marketing buzz, a lot of excitement, a lot of pizazz but not a lot of operating execution. i think mark hurd, on the other hand, is more of an operator and i think you see that in the operating results over the past year for h.p. there’s more focus on operations, streamlining businesses, execution of the operating model and i think that’s reflected in the stock pricism there’s much made of hurd bringing in outside talent to help him run h.p.
>> that’s correct.
>> what are the chances this one-year milestone turns out to be the end of the honeymoon?
>> there’s always a risk. a lot of times in these situations, where h.p., from an operating standpoint, really had a lot of issues. the sort of easy stuff has been done. and i think that’s why you’ve seen the real dramatic improvement over the last year. in addition, you’ve had sort of a restructuring effort with about 15,000 people they’ve announced they’re going to lay off. they’re only about 1/3 to half of the way through that so there’s more efficiencies to be gained with that. but i think overall from a business standpoint, there really is, with h.p., the risk that they need to find out who they want to be. they have formidable competitors on the computer market , with the high-end hardware sector, the consumer issues with p.c.’s as well as some of the consumer products they’re talking about and the printing division. so anywhere you look, they’ve got exposure in all those areas. they’re not the market leader in any of them and they have some formidable competition in the likes of dell, i.b.m., sun microsystems and things like that so they have real challenges ahead to keep improving.
>> i want to narrow in on the cost cutting. mark hurd says that he plans to do additional cost cuts. he’s cut 15,300 jobs that he says will save $1.9 billion this year. i think you said, to be clear, he’s not finished with the job cuts. would you think he would look to do more cost cuts and what would those look like?
>> i believe he announced a roughly 15,000-person layoff a few months ago, several months ago. and they’re not all the way through that. they’ve realized some savings on that so far in this year but they still have more people to trim on that. it was around 1.7, 1.9 billion. so they’re not all the way through that so there’s operating leverage and gains to be made from finishing off that layoff. having said that, i think there is still more fat to be trimmed from their operations and as they refine their business model going forward, i expect them to continue to sort of fine-tune additional layoffs or increases in other aspects of their businesses. but i don’t think he’s done. i think there’s more operating efficiencies to be gained. and i expect him, as an expert in operations, to continue that.
>> you mentioned the competition, especially with dell. raymond james’ analyst saying more price cuts will be needed but maintaining margins, which hurd has been successful at almost doubling in the last year, maintaining them will be tough given the fact that in the p.c. industry this is a mature market . will this be a problem, in your view, for hewlett-packard?
>> i think it’s a significant risk. wherever you look at h.p.’s business, they’re in somewhat of a commodity business, whether it’s printers, whether it’s personal computers, whether it’s hardware. and to some degree, you’re subject to pricing pressures with competitors on all fronts and that has the effect of reducing margins. so, no question there’s pricing issues out there. and, you know, dell, i.b.m. these people are formidable competitors who have demonstrated an ability to price cut and remain profitable. so that’s h.p.’s challenge. on the margin front, reducing the top side in the revenue area, you’ll have margin pressure. while the last year has seen margin expansion, over the last several years, you’ve seen a decline in margins in h.p. from, let’s say, 26% to around 22%, 23%. and i think that’s more reflective of the more commoditization or more of the p.c. business impacted in h.p.’s overall business model. so it is a significant risk. on the other hand, i do think there is upside with the stock and i have faith with the management team mark hurd is running right now.
>> you have 80,000 shares. will you increase that position?
>> right now it’s a fairly priced stock. if they come in and continue to execute, i think it’s a very fairly attractive-priced stock going forward as a long-term investor so i being see us adding to it in the right situations. it’s run up a little bit recently so you might want to see the price stabilize. but long term, i think it’s a good investment in the computer hardware sector.
>> michael, thanks so much. michael cuggino, president and portfolio manager of the permanent portfolio. and hewlett-packard closed up 1% today. the ncaa grabbed top ratings for cbs on air and online. some internet sites are praying for similar exposure from the masters this year. we’ll talk to our sports reporter next.
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Listen Market briefing --- Lori (slow)
Mortgage --- Suzanne (slow)
Chart of the day --- Tom (slow)
rothman. recapping the day on wall street. losses for the three major averages, as we close out the first quarter. a lot of concern the fed will continue raising rates to curb inflation. mortgage originations may drop 19% this year, according to the mortgage bankers association. and the slowdown in the real estate market will likely take a toll on earnings growth at mortgage bankers. so why are big investors boosting their stakes in u.s. mortgage lenders? here’s suzanne o’halloran to tell us the answer.
>> veryk you very much. even as the mortgage business shrinks, some investors say you should buy these stocks now. n.w.q. investments is bullish on countrywide, wells fargo and indymac. they say the upbeat outlook depend on home sales and mortgage lending remaining fairly robusts and assumes the current flat yield curve will steepen again soon. n.w.q., value manager with $45 billion in assets, lifted their stake in all three companies during the fourth quarter, saying the shrinking mortgage market will benefit the biggest players.
>> perversely, this is a good thing for companies like countrywide, wells fargo and indymac in that as we have a shake-out in the mortgage market , which we anticipate in 2006 and 2007, really, the strong players that survive become even stronger and that’s what we expect will happen here.
>> as competitors shrink or disappear, the bulls say the difficult mortgage pricing hurting profit now will ease. fattening earnings for companies that are grabbing market share. >> as 2006 progresses, you’ll see some of the capacity come on in the industry and therefore there will be some pricing relief that’s going to help these companies’ bottom line.
>> analysts forecast slowing earnings growth this year for countrywide and indymac. they’re predicting a rebound in 2007. bullish investors say that makes the companies inexpensive. all three trade at price-to-earnings multiples below that of the s&p 500. within the group, countrywide’s stock is the best performer this year, up 7%, followed by indymac and wells fargo. following up on countrywide, the company met with analysts thursday. here are a couple of takeaways from that meeting. management said they will boost market share by significantly growing their sales force and management is not opposed to making an acquisition if it can be accretive in a short period of time. lori, back to you.
>> thank you, suzanne. fidelity investments will close the contra fund to new investors. it is the ultimate signal of success for a portfolio manager. in this case, will danoff. time for our regular look at the “chart of the day” with tom keene.
>> it’s not about ng rag wa. • nicaragua. contra means the opposite of. in 1990, when fidelity brought the fund out, they found one of their young guys, danoff now is 45 years old. and this is one of the giant success stories of active management. we could go all day on this. but to make a long story short, he’s trying to go opposite the tack and the way you see that mathematically is the r-squared statistic. if it’s near one, that means it’s just like the s&p 500, the portfolio. a lot of managers are 88, 92, near that 100 mark, usings 100 as a benchmark. will danoff’s r-square side 69, which is a very, very low number, low, low. he’s taken that opposite tack. it’s a simple chart, it’s friday. we went up, we hit 2000, we rolled over, got to the iraq war, 2003. and up, up and away. but it’s deceptive. i went back on the bloomberg and looked at mr. danoff’s statistics compared to the s&p 500, 16 years, and it’s extraordinary performance. he’s averaged over 16 years something on the order of 15.5% per year with the s&p and all the dividends reinvested, was up 11%. that difference is 4.5%, 450, 440 basis points. that’s extraordinary. anything over 200 basis points is considered a big success for an equity manager. in this case, will danoff did twice as good as a great job.
>> how do most active managers do over the long term?
>> it’s a heated debate. it depends on the cycle you’re in in the investment. as a generalization, most of them don’t get it right. it’s better to buy the index because most active managers aren’t going to perform at the index level. the reason why there’s so many active managers is everybody is sure their guy is going to win. their portfolio is the one that gets it right. a lot like hedge funds. my hedge fund is going to do grit and―great and yet 70% of them don’t work out.
>> that’s the magic, here, you really don’t know. i’m not so sure in september of 1990 people said, oh, will danoff, contrafund, let’s pile in. you don’t know that. it’s about the manager, it’s about the kind of portfolio, about the fund group. but what it’s really about is sticking with the fund to get those few moments where they really overachieve but the retirement today, it’s a great fund and it will still grow with all the 401-k contributions that will come into it.
>> bloomberg news editor-at-large tom keene, thank you very much. there is news after the bell today that boston properties will be added to the s&p 500 index. checking shares at the close, down $3.06, $93.25 a share. and it’s been a year since hewlett-packard said goodbye to carly fiorina and hello to c.e.o. mark hurd. michael cuggino of the permanent portfolio fund will join us next to gev us―give us hurd’s scorecard. stay with us.
