Thyra Zerhusen, manager of the $375 million ABN Amro Mid Cap Fund, likes to invest in companies when they're reporting disappointing earnings.
"I ask myself: 'If I buy this today, where could this be' " in a year? said Zerhusen, who has worked in the investment business for 27 years and has run the fund for the past five. "If I'm pretty confident that things will straighten themselves out, I use the opportunity."
She added to her mutual fund's holdings of Unisys Corp., a marketer of computers and consulting services, and toymaker Mattel Inc. last month, betting that their profits will rebound.
Chicago-based ABN Amro Mid Cap ranks second of 71 similarly managed funds during the past five years, rising at an average annual rate of 13.2 percent, according to data compiled by Bloomberg. A $10,000 investment in 1999 would have grown to $18,500 today. Strong Mid Cap Disciplined Fund ranked first with a 15 percent annual return. ABN Amro Mid Cap is up 0.2 percent this year.
The fund invests in 35 to 40 stocks with market values of $1 billion to $10 billion. Zerhusen wants companies that are gaining market share and ones that she expects will generate earnings growth at rates that aren't reflected in share prices.
Zerhusen bought shares of Unisys, which installs and manages computer systems, after the company said on July 9 that second-quarter sales and profit missed analysts' estimates. Earnings dropped 63 percent in the quarter. Shares of the Blue Bell, Pa.-based company dropped 15 percent that day.
The money manager paid $10 to $11 a share for her most recent purchases. The stock closed Friday at $9.67.
She has bought on declines before. Zerhusen, who has owned the stock for more than four years, added to her holdings at $6.25 in October 2002. She sold some when the price surpassed $16 last December.
She paid between $16.50 and $17 for shares of Mattel in April and May after the company said first-quarter earnings unexpectedly slumped 73 percent because of lower Barbie sales and higher transportation costs. By mid-July, shares of the El Segundo, Calif.-based company had fallen 13 percent.
The company said July 19 that second-quarter earnings rose, helped by lower expenses and higher American Girl and Hot Wheels sales. The stock has since gained 2.5 percent, closing Friday at $17.19 a share. "Sometimes you look at the quarter and it's not that bad, but there's one item that's not working out, or one business segment, and in this case it was Barbie," Zerhusen said. Barbie accounted for about 30 percent of the company's sales in 2003, according to analyst Sean P. McGowan of Harris Nesbitt Corp.
Chicago-based Optimum Investment Advisors LP, where Zerhusen is a managing director, manages the fund for ABN Amro Holding NV, the biggest Dutch bank. She has about 18 percent of the fund's assets in media companies, which she likes to measure by comparing their price to sales.
On that basis, Pearson PLC, publisher of the Financial Times newspaper, sells for 1.2 times sales, cheaper than McGraw-Hill Cos. at 2.8 times, Dow Jones & Co. at 2.1 times and New York Times Co. at 1.9 times revenue. Pearson also is the world's largest book publisher with units such as Penguin Books.
"It's a great company with great properties, and I think the valuation should be closer to similar types of companies," Zerhusen said. The stock is down 5 percent this year.
About 3.5 percent of the fund is invested in Cincinnati Financial Corp., which is the cheapest property insurer in the Standard & Poor's 500-stock index relative to book value. The company sells for 1.1 times book value, meaning corporate assets minus liabilities. Cincinnati Financial owns shares of companies such as Fifth Third Bancorp and Alliance Capital Holding LP, which represent 59 percent of assets.
"If you have interest rates going up, it might hurt them less than other insurance companies" that have more invested in the bond market, Zerhusen said. The stock is trading at about $40, up 7 percent from when Zerhusen started buying it last August.
About 6 percent of the fund is invested in oil- and gas-service stocks. FMC Technologies Inc., a Houston-based maker of offshore oil equipment, is the best performer among her biggest holdings. The shares have risen 26 percent this year.
ABN Amro Mid Cap Fund charges management fees of $13.40 per $1,000 invested. The average for mid-cap funds is $17, according to data compiled by Bloomberg. The minimum initial investment is $2,500.