A broker raises his hand. One of about two hundred and fifty who have filled a ballroom at the Westin Galleria hotel, he has come to hear the Franklin Resources road show starring portfolio manager Michael Price. With the addition of Mr. Prices’ Mutual series funds to the Franklin stable, plus all of Templeton funds, Franklin Resources has transformed itself from a firm dominated by fixed income funds to an equity powerhouse. The transformation has moved Franklin from a mere 8 percent equities to 53 percent.
“How do you feel about technology stocks?”, the broker asks.
Mr. Price, whose face recently adorned the cover of Fortune Magazine with the headline, “The Scariest S.O.B. On Wall Street” because his large positions in major companies have forced mergers and put CEOs out of work, is quick and direct in his answer.
“How can you determine value in something that changes so rapidly? We’re value investors. We look for value today. We get nervous about something that may be completely different in a year or two.
“You won’t find much technology in our portfolios… but there is one exception. Phillips.There, we look at their record company and their other properties and we figure the technology is free. That’s what we like. Value.”
Later, in a private interview, I ask Mr. Price his view of the current market and its opportunities.
“You mean like what do I do now?
“You have to err on the side of caution. It’s time to prefer the value side of the market. It’s risky as hell to be out there with Coca-Cola, thinking they are going to continue growing forever.
“There are still value groups that have gotten hammered. The healthcare companies, for example. Or the tobacco companies. There has been a lot of progress on the litigation front.
“But this market is very picked over. You’ve got to look for value. That’s all we do. We look for stocks that are too cheap based on their asset value and we do that by benchmarking against prices for similar companies that have been acquired.”
Where is he finding value now?
“We’re buying smaller cap value stocks in Europe— companies that are poised for downsizing.You’ll never see our stocks on the new highs list. They will be on the new lows list. We wait for that. We look to fund companies that are over-leveraged. We look for distress. We set a price we will pay and buy equity. It’s all simple. It’s not rocket science.
“It’s Wall Street that makes it complicated. What Max Heine ( his mentor and the founder of Heine Securities, the firm purchased by Franklin Resources) and Warren Buffet did was to boil it all down to buying companies when their value was deeply discounted. I think the Street creates too much noise— options, derivatives, triple witching hours and all that.” ( Significantly, major Price funds like Mutual Beacon and Mutual Shares how have European stock holdings that account for as much as 21 percent of portfolio assets, an indication that the value he seeks is getting harder to find in the U.S. market.)
Then what should investors look for?
“First, a company selling at a discount from asset value. Second, a management that owns shares. The more, the better. Third, a clean balance sheet— little debt— so there is less financial risk. It doesn’t work to buy things that are highly leveraged. If you do those three things, you’ll do fine.”
Isn’t this what Warren Buffet does?
“No. The mind set is similar. But Buffet is different. He can identify businesses with very unique franchises. We’re not good at that. We’re not. We look for value.”
“All right. We own shares in BIC, the French razor company. It sells at one third the earnings multiple of Gillette. We feel comfortable with that. I don’t know how to value a Microsoft, a Disney, or an America Online. Microsoft and Disney may do well forever. But I don’t know.
“I can’t buy a Planet Hollywood. There, you got a lot of stars but it still came down to having 30 hamburger joints with a market value of $1 billion.”
And there you have it. It isn’t rocket science. When you look at a stock, just ask yourself if you’re paying an interplanetary price… for a hamburger joint.
The Dallas Morning News, “Michael Price Speaks His Mind,” December 15, 1996.