Manager Review #1 - Barrow Hanley
This is the first of about 15-20 investment manager reviews I will work on. Looking at what other value managers own is a great source of new investment ideas.
The first review is of Barrow Hanley Global Investors. Jimmy Barrow was a legendary value manager. Barrow took over part of the Windsor Fund when John Neff was near retirement. “John Neff on Investing” is a good read for new value investors. Barrow was famous for taking a punch at a Wall Street analyst who had a Sell rating on Union Carbide at $10, and then changed to a Buy when the stock was $40. Mr. Barrow was intense.
I have monitored this portfolio for nearly 40 years. I had a friend that worked at Barrow Hanley, and I had the chance to speak with Mr. Barrow for a few hours in the late 1980’s. Barrow retired in 2006, but the firm’s culture is so strong that is still my favorite value portfolio. I monitor the portfolio using Guru Focus, but the top 10 ideas are disclosed on the firm’s website. The portfolio is now a collection of multi-cap strategies, but the “flavor” of Barrow is still discernible.
Barrow was always willing to own the “tough” names. He owned controversial stocks that required plenty of extra work. Recently Barrow Hanley has owned the oil stock, Hess - HES. HES was highly leveraged to a controversial field in offshore Guyana. The stock has been a “home run”. They bought John Deere - DE - at just the right time. Barrow Hanley’s top holding is Merck, which is Wall Street’s least favorite big drug stock.
The current portfolio of Barrow Hanley makes me think about the following stocks they own:
Phillips 66 - PSX - $109 - the refiner has been doing a great job in a volatile environment, the stock sells for 8x mid-cycle earnings
International Flavors - IFF - $112 - a very complex situation, but with a high quality business underneath, the balance sheet is a little scary
Advance Auto Parts - AAP - $147 - I have never owned an auto parts retailer, but the simplicity and consistency is attractive, again a controversial name
Philip Morris International - PM - $104 - I dread having to understand the regulatory complexities, I have putting off this project for many years
Perrigo - PRGO - $37 - another complex restructuring with plenty of moving parts, I love the basic business (OTC generic drugs)
Vertiv - VRT - $14 - born of a SPAC, this is another controversial name, equipping data centers is the main business
Pioneer Natural Resources - PSX - $234 - maybe with natural gas hitting new lows, this is the energy stock I should own? - the variable dividend adds complexity
Pinnacle West Capital - PNW - $74 - maybe this is the utility I should own? - Arizona regulators have been tough to figure
Aramark - ARMK - $45 - the company is doing a great job running very boring cafeterias
M&T Bank - MTB - $155 - a Buffalo, NY regional bank at 9x earnings with a solid non-wholesale funding base
You could do much worse than owning these 10 stocks, finding 10 more yourself, and then spending the rest of your time marketing and doing client service. That would be a great business plan for your new investment firm.
So many other value manager have given up and bought Google or Apple. Barrow Hanley has stuck with their contrarian value strategy through “thick and thin”.
I feel stupid not owning at least one one these stocks. That is why my old boss called me “an arrogant son of a bitch”. The choice between using stocks you “discovered” yourself, or “borrowing” ideas from other managers is a constant issue with any investment professional. Try to find that sentence is any other investment book.
Of my top 20 ideas right now only Masco - MAS - was borrowed from another manager.
Let’s call this:
Learning Experience #2
Should I replace Masco - MAS - $51, currently my weakest idea, with any of the 10 stocks from Barrow Hanley?
I guess I should also compare Merck - MRK - $105, with my Roche - RHHBY - $39
As I have discussed before, my current Model Portfolio is just a “sketch”. I will do a lot more work before coming up with a final version. I plan to do at least 15 more of these manager reviews, and 20+ more industry reviews, before choosing an actual portfolio.