By Michael Brush, MarketWatch
If you ever bump into fund manager Mark Finn, chances are it will be in the scratch ’n’ dent aisle. Not that he needs the savings. As a manager overseeing more than $40 billion at T. Rowe Price /zigman2/quotes/203200152/composite TROW -1.38% , he pulls down a big enough income.
Instead, he has a penchant for buying things that go for a discount because they’ve gotten dinged. After all, that’s how he beats his Morningstar category at the T. Rowe Price Value Fund /zigman2/quotes/209574122/realtime TRVLX -0.20% . His fund outperforms competing funds by almost two percentage points annualized over the past three years, and 1.6 percentage points over the past 10 years.
That’s a great record, considering that most managed funds lag the markets. And it largely comes down to shopping in the stock market’s scratch ’n’ dent aisle.
“I’m a relative value manager. I am not looking for junk that bleeds cash or is way overlevered,” says Finn. “I’m looking for high-quality companies experiencing some controversy that can get back on their feet over the next few years.”
By “high quality,” Finn means companies that have traits like good brands, great management, a strong-market position or duopoly status. I’ll also point out that — like many outperforming managers I have interviewed — Finn beats competitors in part because he takes outsized positions, running up to 5% of his portfolio.
Here are a few examples of what the stock market is offering right now in the scratch ’n’ dent aisle.
Tragically, Boeing’s /zigman2/quotes/208579720/composite BA -1.59% 737 Max crashes have killed hundreds of people. Investors have fled the stock as a result, driving it down to around $330 from $446 earlier this year. And media outlets continue to pile on with scary headlines about how the plane’s issues will ground plans for new aircraft, too.
“We are hitting the apex of the controversy with Boeing. We are at the point where there is capitulation,” says Finn. That’s what makes this a good time to buy the stock. The 737 Max cloud won’t hang over the company forever. “We believe it is a software issue, and they are getting it fixed.”
He notes that Boeing has a history of pulling through crises — like the 787 Dreamliner production delays several years ago. He expects a repeat.
Meanwhile, there’s a bullish backdrop for this troubled company. There’s “insatiable demand” for narrow-body 737s to satisfy emerging middle-class travelers around the globe. There have been very few order cancellations, so Boeing’s backlog is holding up. Boeing is part of a duopoly, alongside Airbus. This limits supply and supports pricing. And the stock looks cheap relative to its cash-flow potential.
This one is in the scratch ’n’ dent aisle because investors see Tyson /zigman2/quotes/201117502/composite TSN +0.73% as a commodity supplier of chicken, unlike competitor Hormel Foods /zigman2/quotes/209170265/composite HRL +0.91% . Hormel has developed a brand status that brings a higher valuation among consumer companies. High-profile consumer-brand companies like Hormel, PepsiCo /zigman2/quotes/208744353/composite PEP +0.55% and Procter & Gamble /zigman2/quotes/202894679/composite PG +0.41% have forward P/E ratios in the 22-24 range, compared with 13 at Tyson.
Tyson is working to close the gap. It is developing and marketing specialized products , which should boost its multiple. “It is a journey, but they are executing well. Tyson is moving in that direction,” says Finn. “Tyson will never completely become a brand-oriented staple, but it can get there 70%.”
The company’s stock should journey up to $100 or $110 in a few years from recent levels of around $87 because of the transformation, he says.