Berkowitz, Muhlenkamp, Tilson Search for Value

Scouring the investment landscape for thoughts, insights and stock picks from market gurus.

By John Reese Dec 5, 2009 9:29AM

When it comes to investing, reinventing the wheel can be a dangerous game. If you want to beat the market over the long haul, I think your best bet is to learn from those rare investors who have done just that. That's why I created my Guru Strategy computer models on Validea.com, which are based on the approaches of proven winners like Warren Buffett, Martin Zweig, and Peter Lynch, and it's why at the end of every week I examine what some top strategists have been saying about the market and the economy.

 

This past week, with stocks up some 60% off their lows, the gurus I follow have been trying to find areas of the market that still offer good values. And several are focused on a controversial area that's not getting much love these days: healthcare.

 

Among those seeing bargains in the sector is Bruce Berkowitz, whose Fairholme fund's returns rank in the top 1% of its category over the past three and five years, according to Morningstar.

 

Berkowitz told CNBC that, while many investors are fearful of potential healthcare reforms, he thinks that “the reality [is] that not that much is going to change” for health insurers after a final reform bill is passed. As investors realize that, these types of stocks should benefit. He's high on firms like Humana (HUM), Wellcare Health Plans (WCG), and Wellpoint (WLP).

 

Like Berkowitz, Whitney Tilson and John Heins -- who were among the few that saw the housing crash coming -- are high on healthcare. “Investors fear that health-care reform will hurt the entire industry, a key reason that the sector trades at just 12 times earnings, or 36% below the P/E of the S&P 500," Tilson and Heins write in their latest Kiplinger's column. “We think that the pessimism is overdone.” One firm the duo is very high on: Pfizer (PFE).

 

Ron Muhlenkamp, the value manager who has an excellent long-term track record, stumbled in the recent bear, and has bounced back strong in 2009, also likes healthcare. He's high on Pfizer and UnitedHealth Group (UNH), Kiplinger's reports. Despite fears of government intervention in the sector, Muhlenkamp says that the firms are key parts of the healthcare industry, and good buys. “The last time you had the chance to buy drug companies this cheap was during HillaryCare” in the early 1990s, he said.

 

Muhlenkamp also sees value in tech stocks, Kiplinger's reports.

 

Another manager with a great track record, Donald Yacktman, is finding value in a different area that not too long ago was unloved: media stocks. He said early this week (prior to Comcast's NBC deal being announced) that he's high on Viacom, Comcast, and News Corp. Overall, he says, the best values right now involve businesses that are “very high quality”, not the junk-type stocks that led the rally earlier this year.

 

MarketWatch's Mark Hulbert, meanwhile, isn't looking at a particular sector, but instead at a style-box category. Hulbert writes that large-cap stocks often outperform toward the end of the year, and he says they are primed to do particularly well in a year like 2009. Two big reasons: mutual fund manager compensation incentives, and tax-loss selling.

 

In terms of the broader market, a couple top managers offered very different thoughts. John Hussman, who was ahead of the curve on the '08 crash, said that he sees "close to an 80% probability … that a second market plunge and economic downturn will unfold during the coming year."

 

“This is not certainty," Hussman wrote in commentary on his web site, "but the evidence that we’ve observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle."

 

On the other hand, Laszlo Birinyi was sounding bullish. “There’s still an awful lot of liquidity,” he told CNBC. “That’s why you see these rallies after a piece of bad news: because too much money is sitting on the sidelines.” He thinks the markets have a long way to run, and says the Dow Jones Industrial Average will hit 11,000 by year-end.

 

Finally, money manager John Dorfman also offered a more positive outlook. Dorfman writes in his Bloomberg column that he thinks the economic recovery is for real. And, with that in mind, he's targeting stocks in three areas that he says typically outperform in the early phases of recoveries: energy, materials, and industrials. He's cool on consumer discretionary stocks, however -- another area that typically does well in such climates -- because he thinks the consumer will continue to struggle unwinding debt in this particular recovery.

 

Full disclosure: I'm long HUM and PFE.


 

John Reese is founder and CEO of Validea.com, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies."

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