We are very pleased and proud to pass along more analysis and strategy from Keith Davis. Two weeks ago we passed along Keith’s thoughts with the sub-title “You Should Listen to Him.” It seems that the Wall Street Journal agrees.
MAY 26, 2009
Farr, Miller Leaning to Cash
By MARY ELLEN LLOYD
The stock market’s gains over the past couple of months have money managers at Farr, Miller & Washington LLC taking a more cautious stance these days.
“The recent run-up is probably more than reflecting the current economic conditions,” said analyst and portfolio manager Keith Davis.
Farr, Miller & Washington, with some $500 million in separately managed accounts, is expressing that uncertainty via its cash position. Generally representing between 5% and 10% of assets, cash has topped 10% lately as the firm trimmed some stakes to lock in recent gains.
Mr. Davis said investment managers are searching for large-cap growth companies with “rock-solid balance sheets,” but they look hard at valuations to avoid overpaying.
“While I think the [market] lows we saw in March could ultimately be the lows for the cycle, it wouldn’t surprise me if we got another round of economic data that scares the heck out of people,” said Mr. Davis, one of five members of the firm’s investment committee.
Second-quarter results from banks, another leg down in housing prices, additional issues in consumer credit — all are possible triggers for a selloff, he said.
As a result, the firm continues to like the sectors it has bet on in recent quarters for its model portfolio.
It is overweight stocks in the consumer staples, technology and health-care sectors, relative to S&P 500 sector weightings, and it remains underweight on financials and energy. “We’re not expecting a breakout market,” he said.
Even so, Mr. Davis continues to like for the long term many of the stocks the firm added or boosted in recent months when stock markets embodied a more pessimistic outlook.
Google, for example, is a recent addition to the model portfolio. “The secular trend of advertising going from print to the Internet is a very powerful one,” Mr. Davis said. “Google is kind of a dominant market-share owner, and we think they will continue to be so. Their technology is superior to their competitors.
“I’m not sure we’d add to it today, but we usually buy with expectations of owning a stock three to five years,” he said.
Farr, Miller & Washington also boosted its stake in J.P. Morgan Chase earlier this year despite staying underweight on financials overall.
It has since trimmed the position slightly to take some profits but nevertheless considers J.P. Morgan and Goldman Sachs Group, another holding, to be the two financial stocks with “the strongest balance sheets and the strongest management teams out there.”
Net of fees, the composite for Farr, Miller & Washington’s fully discretionary accounts is up 4.85% this year through Tuesday, compared with a 1.65% gain in the S&P 500. The Washington firm outperformed the index in 2008, too, falling 31.25% compared with a 37% decrease in the S&P 500.
Write to Mary Ellen Lloyd at firstname.lastname@example.org
Printed in The Wall Street Journal, page C6