Low valuations
Interview: Federated Investors---McCloskey, Kevin---Fund Manager
>> well, comments from policymakers on both sides of the atlantic were moving markets today. fixed income markets , that is. the 10-year note fell after the president of the federal reserve bank in atlanta voiced concerns over leaving interest rates too low for too long. take a look at that time bond market here today. see the yield back up above 3.7% on the 10-year note and those declines also fell to end the shorter end of the curve. although look at that. no change now. unchanged and only 1/32 move for the three year note. if you take a look also at the same time, speculation about a possible cut in european interest rates took a toll on the euro today. its worst day in three weeks. e.c.b. president jean clauds trichet was quoted by a german newspaper saying they may lower their growth forecast if consumer demand doesn’t pick up soon. the currency gained almost 15% against the dollar in the past year. well, while the final verdict hasn’t yet been reached about larceny and fraud charges against former tyco chief executive officer and chief financial officer, our next guest says he’s bullish on tyco. he is a large-cap value investor and he says he looks for companies that are down and out, victims i think is what i might call them. kevin mccloskey, portfolio manager at federated investors joins us now from the nirm pittsburgh. kevin, thank you for joining us. let me ask you, you say you told our producers you look for turnarounds and restructuring plays or company where is the market has afforded them low valuations. i just called them victims. but the market gives low valuations typically for a reason. why would you want to get involved with somebody else’s bad news?
>> well, our view is that good companies aren’t always good stocks and we want to find good stocks in the marketplace. so we’re looking for situations where is the valuation keeps us in the story and over time, as the story plays itself out and the stock price will eventually catch up and then the market will bid too much for these shares and then we want to sell them to other investors out there.
>> so, you are recently got yourself involved in shares of tyco. the stock has gone from, you know, as low as $10 a share in 2002. it’s up now approaching trying to push to $30 again. i’m not sure where you bought it or what size. but what’s the tyco story? why do you feel good about tyco, while the headlines on that company are what their former executives allegedly did?
>> this is a name we’ve owned for a while. we did own it in 2002. but we added to the position when the stock was down and out and it certainly was a good performer for us last year. we think that the fundamental businesses that the company has are themselves good cash generators and we’ve seen the liquidity fears in the stock go away over the past 12 months as the company has moved to right the ship and get rid of some underperforming businesses and then do some things to raise assets and improve the quality of the earnings that have been reported.
>> let me ask you this. you said the companies moved to right the ship. should the company also move corporate headquarters out of bermuda? there will be a vote on that at the annual shareholders meeting tomorrow.
>> that one we’re sort of torn with right now. i think in general investors would like to see the company move back. but they will take a big hit on the tax base and i think the math for the company is that they don’t do a substantial amount of business with federal or state governments to make the move worthwhile. so right now the jury is still out and our view on the stock there, we’re still trying to make up our minds as to which side of the argument we come out on. you can make a compelling case both ways.
>> as people have recently revisited the stock, i say “recently” as opposed to prekozlowski and schwartz, if indeed they are convicted at their trials going on right now, jury deliberations are going, as an investor, would you be vindicated?
>> i think as an investor in the shares, you would be somewhat vindicated from the stand point if there were criminal convictions amongst the former executives. but the market has already moved beyond that and is looking to the operating performance of the businesses. so i think that weigh on the shares in the past, but now investors can feel more confident that these type of issues won’t arise again in the future.
>> well, the shares have almost tripled since edward breen took over as c.e.o. in july 2002. why don’t you play schoolteacher here and give him a grade. a, b, c, d, e, or f? what do you give him?
>> i’d say right now he is probably a b-plusms i think the market appreciates the openness that he’s done and given investors and they really moved in the fall of last year to explain the operating businesses in great deal with wall street and with investors. i think we’ll see more of that from them and also see asset divestitures in 2004 and 2005 as they move to streamline a lot of the business lines they’re in.
>> where has he not met your expectations?
>> i would say in general as far as what people are concerned about it’s not going fast enough with the restructuring, but to his credit he has been quite thorough in trying to root out all the old evil, if you will, and to give investors a base, at least to where they can believe in the numbers.
>> you’re a tough gradeser. i’m glad i’m not your student, just your host. thank you for joining us. folks, he is a portfolio manager at federated investors join uses from cleveland tonight. the jury in that tyco trial, as we said s ened five days of deliberations today. no verdict. fit was, certainly would have been our top story. that, of course, as they continue to ask for more documents as they try to make a decision on the fate of dennis kozlowski and mark schwartz. we’ll have the latest coming up next.
