- NEW YORK (Fortune) -- John Neff feels your pain. The legendary money manager, 77, beat the S&P 500 by an average of more than three percentage points a year during his 31-year run at Vanguard's Windsor fund. He has been investing his own money since retiring in 1995. Ever a contrarian, he has continued to thrive by going against the crowd - such as shorting Nasdaq 100 futures during the tech bubble to pick up 40% returns after the bust.
But even Neff couldn't find safe havens in last year's tumultuous market.
"I've taken a kick in the chops along with everybody else," he says, estimating that his stock portfolio lost nearly 30% in 2008. Worst hit was his stake in Citigroup, a top holding early in the year that withered as shares plunged more than 70%.
As you'd expect from a great value investor, Neff isn't cowed. In three decades leading Windsor, he saw plenty of devastated markets and more savaged stocks. He built his stellar record and the fortunes of Windsor investors by sticking to a simple investing strategy: Buying out-of-favor stocks that he believed had good growth prospects, then cashing in when the rest of the market caught up. He's even bet on Citi (C, Fortune 500) during a free fall before: In 1991, as the bank reeled from soured loans, Neff doubled down while other investors fled.
Neff isn't buying Citi now. But he has been hunting for other bargains through the final, grim months of 2008, even tapping his bond portfolio in December for extra cash. On the eve of the New Year he shared four stock picks - and his optimism about the market. "I think it's time to go in, and I have," he says. "And I think retail investors should be availing themselves of the bargains out there."
For one, Neff believes that both stock and housing prices were scraping the bottom late last year. He also thinks that the economy will start to recover in 2009, helped by the Fed's drastic interest rate cuts, low gas prices, and massive discounts by retailers and Detroit.
In the meantime he expects his down-and-out stocks to benefit from the rebound. First on his list is Seagate Technology (STX), a top hard-disk-drive manufacturer that supplies Dell, Hewlett-Packard and others. It's been a rough ride: Neff thought the stock was cheap at around $20 last January, then watched the shares slide nearly 80% through 2008. He added to his position at $4 in the fall, when the yield had crept up to 12%.
In early December the company lowered its earnings estimates for the current quarter. But Neff thinks revenues will recover in the next fiscal year, which for Seagate begins in June. "It's going to have a pretty testy quarter, but I don't think the dividend is in question, and that provides some support," he says. "It's not going to be a normal year, but I still think next year's EPS could be a buck or better."
He's also bullish on another technology stalwart, Hewlett-Packard (HPQ, Fortune 500). "I wouldn't usually own two technology stocks, but at the right price even I can be convinced," he says. And he couldn't pass up HP, a blue chip that now trades in the mid-30s.
"I think for this challenging year, HP will earn $4 a share," he says. "They're leading the pack on PCs, and I think they'll get some economies from the EDS acquisition. If I'm right on $4 for 2009, next year it will be $4.60. That's friendly growth."
“I think retail investors should be availing themselves of the bargains out there.”
He's also looking for growth in energy stocks, since he expects oil prices to rebound from late-2008 lows. "Obviously the price of oil came down sharply, but even at this level refiners and producers are making pretty good money," he says. "If I'm right and oil's coming back up a bit, they'll continue to have good bottom lines."
Neff did get pummeled on one of his energy picks last year: He started buying ConocoPhillips (COP, Fortune 500) when the stock first dipped last January. "I thought I was getting quite a bargain at $70 a share," he says. But after climbing to $96 in July, the stock started sliding. It ended the year in the low 50s - a steal, in Neff's opinion.
"They have great cash flow, and they'll raise the dividend in a couple of months," says Neff. "I think they'll have $12 in earnings per share for 2008, maybe $11.50. So at a little over $50 a share, I think that's a very low multiple."
His other favorite is Swift Energy (SFY), which operates oil and natural gas wells in Louisiana and Texas. In 2008 Swift's shares dropped more than 50%. Even so, it has a high P/E because analysts expect earnings to fall sharply this year. But Neff, in true contrarian style, thinks those estimates are too pessimistic. "It's cheap, it's profitable, and it could be a purchase candidate," he says.
Back in October 2008, I posted the following: John Neff Is Buying Again And Shares What He Buys!
The following passage on Citigroup is interesting when compared to the article on Fortune.
- His current portfolio contains about seven stocks. His on-again, off-again love affair with banking giant Citigroup Inc. is on again. He famously bought a big stake in that company for Windsor in the early 1990s when bad loans in real estate and in developing countries pummeled its shares.
He has been buying Citigroup again, believing that its stellar network of offices around the world will help it thrive when the global economy recovers. Citigroup now accounts for about 13 percent of his portfolio.
...
"Citigroup is up 18 percent today," he said after yesterday's market close. He still has a long way to go. Citigroup shares closed at $18.62 yesterday. He paid about $45 a share for previous Citigroup purchases.
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