Co-CIO Interview: Whitney George on the Current Market

Whitney George

How alarmed are you about the market's recent difficulties?

It's not surprising to see increased volatility. In fact, the only surprise is how resilient the market has been through all that's gone on in the world through the year's first six months: political events in North Africa and the Mid East, the catastrophes in Japan, the series of tornadoes and floods that hit the U.S. and the recent brinksmanship in Washington over the debt ceiling. Any one of these events could have sparked a correction in the market we've had since the March 2009 lows.

Small-cap bull-market corrections are also very common. Furey Research, for example, recently showed that every post-recessionary bull market since 1982 has seen small-cap corrections in the 13-14% range. So we expect these downdrafts and think they're very normal. The key for us is to take advantage of lower prices, using the bear moments to refresh our portfolios for the long run.

What do you think of the idea that commodity prices have recently hit peaks and are likely to keep declining?

I think that commodities—and commodity stocks—are part of the same bull market correction. For a lot of people, the idea of commodities as a longer-term investment still seems somewhat new. And any sharp correction during a bull market is going to knock some investors off balance. As a contrarian, I find it interesting that so many people are proclaiming that the game is over in the middle of a correction that lasted less than two months. It took a nearly 10-year bear market to undermine investors' confidence in technology stocks, and it will take more than a brief correction to convince me that the forces driving commodity demand are dissipating. It seems to me that the two primary forces that have been pushing commodity prices higher, increasing demand in the developing world and currency debasement in the developed world, are still very much in play.

Has the recent correction made any sectors or industries look more interesting?

Certainly those sectors that have corrected the hardest are the most intriguing, which would include commodity stocks in both the energy and materials areas. We are also finding a lot of attractive opportunities in technology. Tech stocks have seen an interesting bifurcation recently. On one hand, social media and other new technology companies have enjoyed very explosive IPOs that look a lot like what we saw in the late '90s dot.com frenzy. On the other hand, there are a lot of mature technology companies such as Microsoft that have been languishing and experiencing multiple compression.

What other factors currently make technology so compelling?

We've been looking at the metrics at smaller tech businesses, and they appear as attractive to us now as they have at any time over the last 10 years because so many investors are now ignoring them. People have been flocking to a very narrow segment of the tech market in the hopes of rapid high growth, while they've been shunning the kinds of established businesses that are generating free cash flow. It's hard to get investors interested in the kinds of tech businesses that we currently like, such as analog semiconductor companies that have great balance sheets and are trading at less than 10x earnings. A new social media idea that's trading at many times revenues with the prospect of net profits still far off in the future attracts far more notice—and cash—than the fundamental factors that draw our interest.

There are also growing opportunities for technology in the developing world as well as a generally poor understanding here in the U.S. of new technology applications, specifically those that save energy such as LED lighting and computer-driven variable speed motors that are used in home appliances. The U.S. is behind in the adoption, and in recognizing the value, of these applications. However, oil at $100 per barrel and possible meltdowns in nuclear power plants are focusing more attention on the critical need for greater energy efficiency. We have had an ongoing interest over the last few years in tech companies that promote energy savings.