Robert Stansky, manager of the world's largest mutual fund, Fidelity Magellan, has a modest definition of his job:
"I'm basically an analyst who gets to buy some stocks," said the 42-year-old investor, who took command of the stock fund in 1996 after the previous manager made an ill-timed move into bonds (the $73 billion Magellan is currently closed to new investors).
Stansky's self-effacement is overstated, given Magellan's enormous power to create self-fulfilling prophecies through its buy and sell decisions. Few traders dealing in large-capitalization growth stocks want to be on the other side of the trade when Stansky is in the market.
Nonetheless, in his few public appearances since assuming command, Stansky has emphasized the essence of his work: purchasing a share of the best in corporate earnings.
"The most important thing I can do for my shareholders is to be right on earnings," he told a conference of the Society of American Business Editors and Writers.
Stansky was dramatically wrong on earnings when he bought heavily into Cendant Corp., the corporate mutant of numerous consumer service firms that last spring disclosed widespread accounting fictions on its books. He doesn't blame Cendant's controversial management team.
"I plain old missed it in trying to figure out there was something wrong underneath," he said. "It's my fault if a security I own goes down and not up."
Despite the Cendant disaster, Stansky has focused and resuscitated Magellan this year to the point that it almost meets the benchmark return of the Standard & Poor's 500 index, returning 13.1 percent through October vs. 14.6 percent for the S&P; 500 index. In 1996, the year Stansky succeeded Jeffrey Vinik, Magellan's return was exactly half the S&P; return.
In recent months, corporate earnings seem to have faded in the minds of many investors in stocks and stock mutual funds.
Worry over global market liquidity has flipped 180 degrees into euphoria over Internet stocks with little or no earnings, at least according to financial news headlines.
Meanwhile, earnings from operations by the S&P; 500 companies declined by about 3 percent in the third quarter, which ended Sept. 30, from the 1997 third quarter. It was the first year-over-year decline in quarterly profit since the third quarter of 1991.
The consensus outlook for the fourth quarter and 1998 calls for weak profit growth.
Yet the major stock indexes are poised to revisit the record highs achieved in July.
The juncture of optimistic investor sentiment and mundane corporate profit outlooks creates what Stansky called "the P/E problem."
(The price/earnings ratio, or P/E, is calculated by dividing a company's price per share by the sum of the most recent four quarters of earnings per share.)
A high P/E -- typically a P/E over 30 -- means investors are willing to pay a great deal for an increment of reported earnings per share, usually in the hope that future earnings will grow into the price being paid for the stock.
L The P/E for the S&P; 500 blue-chip companies stands about 30.
So, an investor is paying $30 for $1 of earnings.
Some companies will attack the P/E problem by boosting unit sales of their products; others will do it by using their expensive stock as currency to buy growing businesses, Stansky said. But many companies with lofty P/Es will never generate profit to justify such optimistic valuations.
Commenting on the current corporate vogue, he said, "You can't cut costs all the way to prosperity."
The stock market, Stansky believes, is looking for those companies that will perform better than others in the quest to solve the P/E problem. "There is plenty of room for stock selection."
It's a long-term strategy.
As the Magellan portfolio stands today, Stansky has placed his chips on technology stocks, 22 percent of the portfolio, compared with 17 percent of the S&P; 500 index. Technology offers the best chance for unit growth, he believes.
His three largest technology holdings -- Microsoft Corp., Intel Corp. and Cisco Systems Inc. -- have an average P/E of 55, which is why Stansky says, "For our shareholders, I hope they're not expecting to get rich quick."
Pub Date: 12/06/98