INVESTMENT INSIDER
Thyra Zerhusen on finding sleeper stocks

This fund manager searches for controversial stocks that could be poised for a big rebound.

In a business dominated by men, Thyra Zerhusen is making a name for herself. Her mutual fund, ABN AMRO Mid Cap Fund, posted positive returns in 2000 and 2001, years in which returns for the S&P 500 were dreadful. In fact, the fund's three-year average annualized return of 10.6 percent is almost 18 percentage points better than the S&P 500's over the same period. This has earned Zerhusen the praise of her colleagues as well as respected financial journalist Louis Rukeyser, who calls her record "extraordinary."

Not bad for someone who's running her first mutual fund. Zerhusen, who has more than 25 years' experience in investments, took over the Chicago-based fund four years ago. She's proven adept at picking midsized companies that she perceives to be both undiscovered and undervalued—many of them from the technology sector. "I like companies that have a distinguishing feature," she says. "It may be proprietary products or research, outstanding service, or low production costs—something that permits them to gain and grow their share of the market."

Zerhusen, who pronounces her first name "Tour-a," was born in Germany and educated in Switzerland. In 1969, she received a master's degree from the Swiss Federal Institute of Technology, the same school that Albert Einstein graduated from. Shortly afterward, she began her successful career as a financial analyst and money manager. Senior Editor Dennis Murray caught up with her during a recent trip to New York.

What's the most likely scenario for the US economy?

I expect that we'll have a relatively slow recovery, with modest growth. Interest rates will probably rise, but not dramatically. I think consumer spending will remain steady.

Will President Bush's tax initiatives help?

Not with the huge deficits we already have. I think President Bush should have extended tax incentives for capital expenditures, so companies would be motivated to spend now. That in turn would help create new jobs.

What worries you most about the chances of an economic recovery?

Another terrorist strike on the scale of Sept. 11, or a serious, terrorist-initiated blackout.

You've had a knack for buying technology companies at the right time. Do you see a rebound?

Not yet, but spending will pick up. There will be a recovery in technology stocks, because for the last three years companies haven't been making big expenditures on tech products. I think that has created some pent-up demand.

It's going to take investors a while to believe that a tech rebound is for real. Many still feel the sting from the Nasdaq's collapse.

Yes, but that's because people bought stocks based on hype and not on fundamentals. Many of these companies didn't have any earnings and were selling for many times their revenues. It was totally insane.

What do you look for in a company when deciding whether to invest?

It has to have good revenue growth and something that distinguishes it from the competition, but I also like it to be somewhat out of favor or undiscovered by investors. It might even be a company involved in a controversy that requires me to sort through the facts, to figure out whether it's something that can be fixed over the next quarter or two or whether it's permanently damaging.

Often I'll visit the company myself, talk to current and former employees, or both, to get the answers. That's why I hold only about 35 stocks in my fund. I want to have enough time to understand each company's people, products, and services.

What other criteria have you established to help you find sleepers?

I usually look at the price-revenue ratio, which I feel is a more accurate reflection of an undervalued stock than price-earnings. If a stock's price-revenue is significantly lower than the average of its industry peers, the company is worth examining more closely. If you can find a company that trades at one times revenues or less—Reader's Digest Association and Unisys are two good examples—and you're patient, you can make money.

Tell us about a few stocks that meet your requirements.

I like a company called Harris, which has both government and commercial businesses that include communications equipment for the military and high-definition television technology. I attended a meeting at the company earlier this year and listened to some amazing stories about how their telephones helped soldiers who were under heavy fire in Afghanistan. About one-fourth of Harris' sales come from foreign countries, so it's not entirely dependent on its contracts within the US. The company also has a new CEO, who I think will make it more productive and efficient.

Another company I like is FMC Technologies, which provides services to a wide range of industries, from air transportation to food processing. An exciting part of its business is related to underwater drilling. It supplies technology to big oil companies like BP and Shell, to allow them to minimize the risks of drilling at great depths. FMC is gaining market share because its technology is reliable and cutting-edge. Over the past couple of years, I've met several of the company's high-level managers, including the chairman and CFO, and I've been quite impressed with how talented and focused they are.

What's the biggest lesson you've learned over the years that would be helpful to individual investors?

Avoid the hype. By the time you read about a company in a magazine, under a title like "Six Stocks to Buy Now," it's usually too late.

And what advice can you offer to help people better weather the inevitable market downturns?

Unless you know a great deal about investing, stick to mutual funds. A fund manager will have the experience, relationships, and resources to help him or her make better choices about when to buy and sell stocks. The manager is more likely not to sell in a panic, as many individual investors did during the recent downturn.

Look, too, at a fund's after-tax returns. Funds that have low turnover tend not to generate as much in taxable capital gains as those that trade frequently. And, finally, purchase no-load mutual funds, to reduce your costs in the first place.

 

Dennis Murray. Investment Insider: Thyra Zerhusen on finding sleeper stocks. Medical Economics Dec. 19, 2003;80:29.