The manager of the Aston/Veredus Select Growth Fund (AVSGX), B. Anthony Weber, knows that market conditions have been taking a toll on his investment strategy, but he insists that the validity of his approach remains solid.
The manager of the Aston/Veredus Select Growth Fund (AVSGX), B. Anthony Weber, knows that market conditions have been taking a toll on his investment strategy, but he insists that the validity of his approach remains solid.
"Right now, this environment is stupid," he said. "It's been like driving at night with your lights off, because you don't know what's next."
Mr. Weber is one of three portfolio managers sharing responsibility for three mutual funds and $1.2 billion in total assets under management at Louisville, Ky.-based Veredus Asset Management LLC.
The $55 million Select Growth Fund, which gained 24.3% in 2007, declined by 11% in the first month of 2008.
The average return of the large-cap-growth mutual fund category as tracked by Morningstar Inc. of Chicago was 13.3% last year.
For the month of January, however, the category average, with its 6% decline, outshined the five-star-rated Aston/Veredus fund.
The Standard & Poor's 500 stock index gained 5.5% in 2007 and also declined by 6% in January.
"This has been the toughest environment I can remember, and I've been in the business since 1981," Mr. Weber said. "But you just have to adapt."
Clearly, the strategy has yet to find its sea legs in the midst of extreme market volatility, but the fund's category-leading history, combined with a 250% annual turnover rate, does suggest a proven ability to adjust on the fly.
Despite the current market's illogical nature, which was brought forth by the spreading credit crisis, the strategy has seen the fund's assets grow to $55 million, from $2 million, since August 2005.
The basic strategy is grounded in a deliberate focus on company earnings reports, compared with Wall Street earnings estimates.
"Earnings estimates are always wrong," Mr. Weber said. "We're focused on inefficiencies in the marketplace, and that still exists, even with large-cap stocks."
Challenging the consensus estimates for corporate earnings is the linchpin of Mr. Weber's strategy for managing a relatively concentrated portfolio of 30 to 40 stocks, with 45% of the assets allocated to the top 10 positions.
"It's the nature of the Street to be always cynical and always skeptical," he said. "Fully two-thirds of companies do not live up to their estimated growth rates."
Mr. Weber is proud to boast examples of market inefficiency, particularly among some of the world's most liquid and widely followed public companies.
Consider, for example, Microsoft Corp. (MSFT), the Redmond, Wash.-based computer and software giant.
One would assume that just about every ounce of inefficiency could be squeezed out of a company such as that one. But the opportunity to take advantage of a gap in the market has been apparent during Microsoft's two most recent fiscal quarters. In October, when it reported the results of its fiscal-2008 first quarter, the 45-cents-per-share earnings came in 6 cents above analysts' consensus estimates. Two weeks ago, when the company reported its second-fiscal-quarter earnings, the 50-cents-per-share earnings were 4 four cents above the analysts' average estimates.
"Microsoft is one of the best brand names in the world, and it's one of the most followed stocks on the board, and the earnings estimates were too low," Mr. Weber said.
Meanwhile, there are signs that the Street's estimates are trying to catch up with reality. In July, the average full-year-earnings estimate for Microsoft was $1.70 per share. But as of last week, it had jumped to $1.87.
Meanwhile, the fiscal-2009 estimates went from $1.93 to $2.09.
"We like to see the analysts coming toward us," Mr. Weber said. "We'll know it's time to sell when the expectations have reached their highest point." Microsoft, which on Friday made an unsolicited $44.6 billion bid to acquire Sunnyvale, Calif.-based Yahoo Inc. (YHOO), closed Jan. 31 at $32.60 per share.
The stock price declined by 8.4% in January and gained 10.6% in 2007.
Earnings estimate inefficiencies are the starting point of Mr. Weber's research, which considers companies with market capitalizations of at least $4 billion.
It generally takes two consecutive quarters of better-than-expected earnings before a stock is seriously considered. "We have a simple adage here that good things tend to get better, and bad things get worse — until they don't," Mr. Weber said.
To identify the good things, he needs to understand the "magnitude of the earnings revisions to determine if they are repeatable."
Questions? Observations? Stock tips? E-mail Jeff Benjamin at -jbenjamin@crain.com.
