Buy and hold is back: Eric McKissack of Channing Capital Management waits for good companies to recover from bad times

Black Enterprise, March, 2005 by Nicole Lewis

For Eric McKissack, CEO and chief investment officer of Channing Capital Management L.L.C., when a company's stock price falls sharply, that can signal a buying opportunity not to be missed. "When a stock price falls, our analysis may suggest that the price will recover, and that's what makes the opportunity work," he says.

Channing Capital Management primarily manages small-cap value stocks with a market capitalization of less than $2 billion and mid-cap value stocks with a market capitalization of up to $15 billion. The firm manages money for institutions and individuals, and last year it entered into an agreement with the Calvert Group Ltd. to manage the company's small- and mid-cap value funds.

McKissack, a former vice chairman and co-chief investment officer at Ariel Capital Management, says that when looking for investments, he prefers to focus on issues specific to the company rather than follow trends in the macro economy. "We want to buy quality companies that have delivered good shareholder returns in the past, even though they may be going through a tougher time now. We are taking a buy-and-hold approach, and we are willing to hold [stocks] for a relatively long period compared to most Wall Street investors. This makes our method of buying and selling stocks relatively tax efficient over time."

When McKissack selected a portfolio of stocks for BLACK ENTERPRISE, he started with Interface Inc. (NASDAQ: IFSIA), a company that manufactures, markets, and installs carpets, floor coverings, and related products for the commercial and institutional interiors market. Channing picked interface for the Calvert Group, which specializes in socially responsible investing. "We think Interface will benefit from a pickup in commercial construction, which has started to see some signs of activity after a slowdown in recent years," says McKissack. "Interface has a solid reputation for its sensitivity to the environment. They recycle carpets and they produce environmentally friendly flooring products."

McKissack also recommends the Harkel Corp. (NYSF: HKL), which markets and underwrites specialty insurance products for well-defined niche markets, personal and commercial property. and liability coverage. He says Markel is an attractive buy because "they provide insurance in many small market segments that aren't as competitive. For example, they provide insurance to schools, animal shelters, day care centers, and horse farms."

McKissack also notes that treating its employees well is part of Markel's company policy: Employees have the opportunity to purchase company stock at a subsidized rate. "A program like this has helped Markel because it has a low employee turnover rate and that means the company is retaining its knowledge base while, at the same time, maintaining its competitive edge."

Turning his attention to healthcare, McKissack likes Sybron Dental Specialties Inc. (NYSE: SYD). The company manufactures and markets dental and orthodontic products. "The industry has attractive growth characteristics because we have a consistently growing aging population and an increasing interest among adults for cosmetic work," says McKissack. Another plus is that Sybron doesn't have a lot of competition.

McKissack believes his final selection, Sun Gard Data Systems Inc. (NYSE: SDS), will generate greater revenues moving forward. The company integrates software and processing solutions primarily for financial services institutions and serves three market segments: investment support systems, availability services and higher education, and public sector systems. "We expect demand for SunGard's back-office systems and software products to increase as financial service companies try to update and improve their capabilities," says McKissack.

                                    12- to 18        P/E on
Company                               Month         Projected
(Exchange: Symbol)     Price *     Price Target   2005 Earnings

Interface Inc.           $9.96        $14.00           22
(NASDAQ: IFSIA)

Markel Corp.           $310.50       $450.00           12
(NYSE: MKL)

Sybron Dental           $34.11        $40.00           19
Specialties Inc.
(NYSE: SYD)

SunGard Data            $26.23        $36.00           17
Systems Inc.
(NYSE: SDS)

                     Est. 5-Yr.
Company              Annual EPS
(Exchange: Symbol)   Growth Rate   Why Stock Will Outperform

Interface Inc.           15%       The commercial building sector
(NASDAQ: IFSIA)                    is expected to increase, and
                                   Interface should pick up business
                                   in this area.

Markel Corp.             14%       Markel is expanding its insurance
(NYSE: MKL)                        services in specific markets.

Sybron Dental            12%       Sybron should benefit from a
Specialties Inc.                   growing elderly population
(NYSE: SYD)                        and an increase in younger
                                   adults seeking cosmetic dental
                                   work.

SunGard Data             15%       SunGard should pick up business
Systems Inc.                       from the financial services
(NYSE: SDS)                        sector as it upgrades its
                                   business systems.

SOURCE: ERIC MCKISSACK, CHANNING CAPITAL MANAGEMENT

* AS OF NOV. 22, 2004