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Personal Finance > Investing
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The Maverick: Ken Heebner
CGM Capital Development Fund, portfolio manager
September 9, 2002: 6:20 PM EDT
By Pablo Galarza, MONEY Magazine

NEW YORK (MONEY Magazine) - When Capital Growth Management's Ken Heebner first joined the ranks of the Ultimate Investment Club in 1998, he couldn't pound the table hard enough for real estate investment trusts (REITs).

That was at the beginning of the dotcom era, which morphed into tech mania, when brick-and-mortar stocks were despised. From his 45th-floor office overlooking the sailboats in Boston Harbor, Heebner recounts how a TV anchor on a stock-market-focused cable channel even asked him to apologize to viewers for sticking with his recommendation of REITs as they continued to lag the market. A Boston Globe profile wondered if Heebner had lost his touch.

The Ultimate Investment Club
Click on any name to go straight to profile from MONEY Magazine
NameFirm
Bill D'AlonzoBrandywine Fund
Steve GalbraithMorgan Stanley
Bill GrossPIMCO
Ken HeebnerCGM Funds
Sallie KrawcheckSanford C. Bernstein
Bill MillerLegg Mason
Bill NygrenOakmark
Hilda Ochoa-BrillembourgStrategic Investment Group
Dick WeissStrong Funds
Paul WickSeligman Funds

Then, "just as the crowd was ready to lynch me, REITs started to take off," he recalls. In fact, REITs have been some of the best-performing stocks in the market in recent years. The National Association of Real Estate Investment Trusts' index has racked up a 14 percent annual return since 1999, while the Dow, the S&P 500 and the Nasdaq have made nauseating round trips.

And now that REITs have become popular, Heebner, who's always on the hunt for new opportunities, has cooled on them.

A diamond in the rough

The little-celebrated Heebner is one of the great investors of all time. Now 61, he is rivaled by few for his longevity in the investing world -- 31 years and counting -- and for his stock-picking acumen.

Heebner's record over the past 25 years of running CGM's Capital Development Fund easily trounces the S&P 500's total return -- 5,197 percent, or 17 percent annualized, vs. 2,169 percent, or 13.3 percent annualized.

What makes Heebner's success so intriguing is that he flouts conventional theories of successful investing. Instead of diversifying, he makes big bets and rarely owns more than 30 stocks at one time. ("Diversification doesn't allow you the protection winners offer you in the overall result. If I'm right, my winners will carry the fund," he says.)

Rather than buying and holding, Heebner is an aggressive trader who moves out of positions as quickly as he builds them. He's a growth investor who scours unloved sectors and rarely pays more than a low-double-digit multiple on earnings per share.

The returns of his funds -- in addition to CGM Capital Development, Heebner runs CGM Focus (even more concentration plus the ability to short stocks) and CGM Realty -- mirror his shoot-for-the-stars mentality and suffer wild boom-and-bust swings. Yet given his record, it's tough to find fault with his modus operandi.

Today, Heebner is feeling quite bullish, particularly about stocks that depend on consumer spending. "I have great confidence in the growth of the economy, and there's no chance of a double-dip recession," he proclaims.

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So he's loaded up on the stocks of home builders (25 percent of assets), recreational-vehicle manufacturers (15 percent), retailers (12 percent) and auto dealerships (11 percent).

You mean companies that rely on the debt-laden, undersaved, scared-about-losing-his-job consumer?

"In 30 years in this business, most of the time consumers have looked overextended, and that's never held them back," he counters. "Sure, unemployment has crept up, but it's still less than 6 percent. What really counts is the behavior of the 94 percent that are employed."

The silver lining: The economy won't necessarily heat up, he says, and so the business cycle will last longer, which is far more important to investors than a booming yet short-lived cycle. Heebner loves home builders for many reasons, but chief among them is this: Wall Street hates them.

"They said the recession would swallow them up. Then, when orders were strong, they said it's a bubble," he chortles. The industry, he explains, benefits from low interest rates, and a lack of land in major metropolitan areas limits competition for existing players.

  graphic  Stocks to watch: Heebner  
  
Hovnanian Enterprises
Thor Industries
Winnebago Coach
Monaco Coach
Sonic Automotive
Group 1 Automotive
United Auto Group
Stage Stores
Rent-a-Center
  

Other positives are how the publicly traded home builders are consolidating the industry, gaining market share and buying back stock. At any one time, Heebner will own stock in half of the home builders that trade on the stock market.

Heebner's favorite is Hovnanian Enterprises. The firm, which has historically focused on New Jersey and the Baltimore/Washington D.C. metro area, has expanded to California, placing it in three of the hottest markets in the country. Should all those homeowners get hit with wanderlust, Heebner hopes that they will venture off in recreational vehicles made by Thor Industries, Winnebago Industries and Monaco Coach.

Heebner thinks that innovation and the weakening prospects of competitors Fleetwood Enterprises, Coachmen Industries and National R.V. will cause profits to rebound in his picks. He's also betting that consolidation will drive auto dealerships Sonic Automotive, Group 1 Automotive and United Auto Group higher.

Another way Heebner is playing consumer spending is via two retailers: Stage Stores, which sells branded apparel in small towns in Oklahoma and Texas, and Rent-a-Center, which runs a nationwide chain of stores that offer rental-purchase agreements for items like TVs, refrigerators and sofas.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.