NEW YORK (MONEY Magazine) -
When Bill Nygren was 10, his father decided to teach him a lesson about the evils of gambling. So en route from the family home in St. Paul to Disneyland for a family vacation, Nygren's father stopped in Las Vegas and sat down at the slot machines for a demonstration of the futility of gambling.
There was just one problem: He kept winning. Far from souring Nygren on speculation, the experience instilled a lifelong fascination with the balance between risk and reward.
It has proved a profitable obsession. Oakmark Select, the concentrated midcap value fund that Nygren has managed since 1996, has returned an annual 16.2 percent to fundholders since inception, easily outpacing the S&P 500's 8.3 percent return over the same period.
And in 2001, Nygren's first full year managing Oakmark, his firm's large-cap value fund, the portfolio gained 18 percent, solidly trouncing the index's 11.8 percent return. With that kind of record, it's no surprise that Nygren is hailed as one of the new superstars of value investing.
The 43-year-old fund manager has worked for Harris Associates since 1983, first as an analyst, then as director of research and finally as a portfolio manager in 1996. Like fellow UIC member Bill Miller, Nygren stretches the criteria and definition of what makes a stock a value play. And like Miller, he invests in areas traditional value investors avoid, including tech and biotech.
The process
Nygren starts his stock search by doing a bottom-up analysis of a company to figure out how much a potential acquirer would fork over to buy it. After crunching the numbers, he makes sure that management is smart and closely aligned with outside shareholders.
When a stock he likes falls to 60 percent of what he thinks it is worth to an acquirer, Nygren pounces. Then he waits patiently for the market to recognize the stock's full value.
Indeed, Nygren is patient enough to invest with a five-year time horizon. He and his crew of analysts carefully monitor a company's fulfillment of their investing premise, of course, but as long as the company stays on track, they will stick with it.
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Investing Tools
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Oakmark's value manager sees lots of opportunity today. Nygren rarely focuses on whether the broad stock market is over- or undervalued, but he notes that at 929, the S&P 500 index is about 20 percent undervalued.
"At these levels, we are really excited," he gushes. His advice to investors feeling gun-shy as a result of the market carnage? "Don't let newspaper headlines scare you out of equities at the bottom."
Nygren's favorite hunting ground is disparaged large-caps, which he calls "fallen angels." He cites Home Depot (HD: up $0.01 to $33.26, Research, Estimates) as the poster child for this type of investment. "Two years ago, it sold for two times the market multiple," he explains. Now it's roughly in line, despite continuing to grow at an above-average rate.
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Stocks to watch: Nygren
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Other stocks that have fallen further than the market and that Nygren views as above-average companies undergoing short-term problems include Boeing, Duke Energy and just about every beleaguered pharmaceutical company around. That includes Abbott Labs, Bristol-Myers Squibb, Merck and Schering-Plough.
"The industry will continue to have above-average growth and stability," says Nygren. "And look at the dividend yields." Abbott yields 2.5 percent; Bristol-Myers, 4.5 percent; Merck, 3 percent; and Schering-Plough, 2.9 percent.
Nygren also likes media stocks. He's stocking up on CNN/Money parent AOL Time Warner, and AT&T as a way into Comcast, Hughes Electronics for its DirecTV operation and Liberty Media. Buying a basket of stocks lets him hedge his bets. "You can spend endless hours debating which is more attractive," he says. "But as a group they are selling at a large discount to where they were historically priced."
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