Tuesday, May 8, 2012

Value Investing and Research With No Value

Dodge and Cox Growth Fund's portfolio managers Diana Strandberg and Charles Pohl recently gave an interview to Morningstar in which they made a brief, clear case for their thinking in adding the much maligned Nokia to the portfolio.  It's the value investor's case in a nutshell, and one very much in tune with my analyst practice on both the buy and sell sides.  Strandberg and Pohl appear on the featured video for 5/8/2012 on the Morningstar subscription site.

On research with no value, we have the comment from a Wedbush Morgan analyst that Select Comfort is a "Buy" at $30 with a $39 target price.  The company, to its credit, has branded the air mattress.  Remember the one that many of us purchased at the army & navy store for $10?  A marketing person came up with a dial on an electric pump, branded it your "Sleep Number" and sold a story of restful nights counting sheep for a premium mattress investment. Sales took off and profits followed. However, when the shares hit $1 during the financial crisis, with the same business, same pricing and same marketing strategy, analysts were in their bunkers, reducing any positive ratings to "Hold."  This is exactly when savvy analysts and investors do their work and Buy.  Today, hedge fund mogul Steven Cohen has been accumulating shares at average prices of $29.  Tomorrow, we might expect "Strong Buys." 

I don't know if Dodge & Cox are right on Nokia.  I went the wrong way on it early in its evolution, but certainly their risk/reward proposition makes more sense than taking a flyer on air mattresses.

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