Carret, who turned 101 last December, founded the Pioneer Fund in 1928; in 1996, he cut back to part-time as a money manager at Carret & Co. in New York City. During the 1970s, Mowell was the firm's Tallahassee-based vice president for southeastern operations. "From Phil, I learned the importance of investing only in businesses you thoroughly understand," Mowell says.
Other lessons from Carret:
Don't be misled by growth of earnings per share. Instead, focus on owner earnings, a number obtained by adding net profits to depreciation and subtracting annual capital needed to run the business. Mowell says that's the clearest way to find core earnings.
Look for management that is committed to the company's long-term prospects. "Mr. Carret paid special attention to what management does with free cash flow," Mowell says. "Are they buying other companies, buying their own shares, paying dividends? If they are in a growth phase, they need to deploy excess cash into the business, but if they cannot get the same returns they need alternatives."
Mowell has followed his mentor's principles since starting his own firm in 1980. He and fellow managers Carl Monson and Don Reinhard focus on primary research, such as SEC filings and contact with management. "We like to meet with them and learn their focus," Mowell says. "We like to see management invest at least two years' salary in their stock. It shows their interest will be coupled with ours." Mowell and company also like to see debt-to-equity ratios lower than 40%, consistent earnings growth, conservative accounting practices and minimal exposure to regulatory and environmental problems.
Mowell Financial designs and manages portfolios for six Florida foundations and about 100 individuals, who usually must place at least $200,000 under management. About 80% of total assets are in stocks, which the firm generally holds for at least three years. Winners include St. Joe Corp., which has risen from $20 to the mid $30s since Mowell bought shares in 1995. He finds value in CEO Peter Rummell, St. Joe's lack of debt and its huge Florida land holdings. In 1996, Mowell noticed re-insurer Mid Ocean Limited trading at $45 - six times earnings. He bought the stock after talks with management and study of SEC filings pointed to a strong, growing franchise. Mid Ocean traded at $76 in early May.
Mowell's growth stock portfolios posted an average annualized return of 21.6% for the 1988-1997 period, easily beating the 16.4% average for growth mutual funds tracked by Lipper Analytical Services. In 1997, Mowell's return was 28.3%, against Lipper's 25.1%. For this year's first quarter, Mowell's portfolios trailed the Lipper average, 11.6% to 12.8%.
Mowell received an economics degree from the University of Pennsylvania's Wharton School in 1956. He moved to Tallahassee and started turn-around firm Mowell Associates in 1963. "We groomed the companies up and sold them," Mowell says. In the 1980s, management at troubled Reflectone in Tampa called on Mowell. He helped the flight-simulator company clean up its balance sheet and engineered a 1989 sale to British Aerospace.
Among Mowell's favorites: Florida Rock Industries trades at 13 times earnings and has strong growth potential. He sees Ford Motor Co. expanding its global market share. Leucadia International owns insurance firms and has stakes in plastics and movie theater companies. "It's a poor man's Berkshire Hathaway," Mowell says, likening it to Warren Buffett's holding company. Satellite-maker Loral Space Communications is the leader "in a wide-open growth area that has very few players." Pioneer Hi-Bred is the world's leading producer of corn seed and soybeans. He looks for it to benefit from growing worldwide demand for food.
COMPANY PROFILE
Wireless Vision
Four years ago, when ParkerVision engineers couldn't find a low-cost, reliable radio-frequency technology, company executives figured they'd spotted a business opportunity. After spending more than $5 million on research and development, executives at ParkerVision, a maker of automated video conferencing equipment, say the company has produced a wireless technology that is cheap, market-ready and brimming with potential. They say ParkerVision's chip design can be used in products such as cordless and cellular telephones, pagers, toys and garage-door openers, at a fraction of existing costs.
"We clearly understand the value of what we have here," says Jeffrey Parker, founder and CEO of ParkerVision. Recent tests conducted by Boeing show the technology is appropriate for commercial grade wireless communications. If true, the new product comes along none too soon for ParkerVision. Founded in 1989, the Jacksonville company has yet to post a profit. That trend continues in 1998 with a first quarter loss of $1.4 million, or 13 cents per share, on $2 million in sales. In recent years, income from its video conferencing systems has been wiped out by the costs of developing new products and wireless technology.
To profit from its wireless research, ParkerVision is looking for partnerships or licensing agreements with semiconductor manufacturers. It also plans to license the technology to makers of wireless products.
Meanwhile, ParkerVision has rolled out a new video production system for TV and cable studios that allows, for example, one technician, instead of 10, to manage the complete production of a newscast. The studio camera system costs $150,000 to $300,000. Company officials say some 6,000 production studios buy video equipment each year.
ParkerVision shares fell from $30.63 last October to $14.13 in January, after IBM canceled an agreement to test Parker Vision's wireless technology, but shares rebounded this spring to trade in the low $20s. ParkerVision is well capitalized. Thanks to a recent private placement, the company has roughly $30 million in short-term investments and cash. It's too early to tell whether ParkerVision's wireless technology represents a major breakthroughm but one New York City money manager is betting on it. "It's nascent technology, but I think that it can do what they say it can do," says Jack Ferraro, with Neuberger & Berman. "The potential should be extraordinary."
COMPANY PROFILE
Dressed to Work
Last year's results gave Superior Uniform Group's CEO, Gerald M. Benstock, reason for both celebration and concern. The company's stock price rose by a healthy 18.5% in 1997, ending the year at $16. But the company's sales, though hitting a record $144 million, only grew by 2%. Benstock thinks Superior, which manufactures and sells uniforms and career apparel wear to clients like Walt Disney World, Darden Restaurants, Auto Zone and Carnival Cruise Lines, will do better in 1998. Indeed, for 1998's first quarter, sales were $37.4 million, up 12% from the first quarter of 1997.
Benstock is also bullish on the company's new name, which shareholders voted in May to change from Superior Surgical Manufacturing Co. And he's counting on an expansion into the embroidered sportswear market to keep Superior's sales growth rates in double digits. Last year, Superior bought Sope Creek, formerly the J&L Group of Marietta, Ga., which makes a line of embroidered sportswear. "The marketplace for the products supplied by Sope Creek is substantial and growing," says Benstock. And Superior is shopping for more companies. "We are actively looking at several acquisitions within a year, possibly sooner," says Benstock.
Superior's healthcare-uniform sales are about 40% of revenues, with corporate I.D. wear making up almost all the rest. The company's 1997 sales produced a net income of $9.2 million or $1.15 per share. Benstock expects Superior's stock price to continue to rise as sales increase. Shares of Seminole-based Superior sell at a lower price-to-earnings ratio than shares of most of its competitors, he says.
Market analyst Alexander Paris Jr., with Barrington Research Associates in Chicago, sees a dynamic spirit in Superior's management which he believes bodes well for the stock. "It's a nice small-cap company, good for the long-term, patient small-cap investor," Paris says. He also sees advantages in how Benstock, his son and son-in-law run the company. "There's a high level of insider ownership, so it's run like a private company."
FIXED INCOME INVESTMENTS
Inflation Indexed Bonds
The April sale of $8 billion of 30-year inflation-adjusted bonds by the U.S. Treasury refocused attention on this new securities concept, just introduced last year. These bonds pay a cash interest rate of return of about 3.75%. Each year, they also accrue a value equal to the inflation rate and then pay 3.75% on the new accrued value. So, if you buy a $1,000 bond and total-year inflation is 2%, the bond pays $37.50 in interest that year and is then restated as a $1,020 bond, paying $38.25 in year two. Taxable income in year one would be $57.50 (cash interest plus accreted value).
Many financial writers have focused on the current inflation rate and concluded that such bonds are a bad deal. I would agree that inflation-indexed bonds are not ideal for a 35-year-old, but as investors age, they should focus more on preserving investment capital than growing it. Many retirees pursued capital preservation by investing in municipal bonds, which currently provide about a 4.25% tax-free rate of return, but with higher risk and no inflation protection. Inflation-adjusted Treasuries pay about a 3.75% taxable rate of return, with no risk plus inflation protection. Which is better?
Well, we calculated the returns of a $1,000 muni bond versus an inflation-adjusted Treasury bond over a five-year period of 2% inflation. After five years, the muni investor received total interest payments of $212.50 and still held a bond worth $1,000. The Treasury investor took in $112.47 in interest (after a 28% tax rate) and held a bond worth $1,104.08. In short, the muni investor had a total return of $212.50 versus $216.55 for the Treasury bond buyer. This is about a wash, but if inflation is more than 2% or if the investor is taxed at less than 28%, the Treasury bond investor comes out ahead. If inflation rises to its historical average of 3% or more, the Treasury bond investor will come out well ahead since the Treasuries will trade at a premium while munis will sink in price. Also after five years, the advantage gets progressively greater because of the continuous growth in the Treasuries' interest payments.
Many investors like the tax-free convenience of munis and willingly give up some return for this feature. Such investors should consider exchanging the tax-free feature of munis for the inflation-protection feature of inflation-adjusted Treasuries. The best way to buy these bonds is directly from the Federal Reserve through the Treasury Direct program (call 202/874-4000 or go to www.publicdebt.treas.gov).