Tips from a professional money manager: there's nothing Lou Holland likes more than a good bargain

Black Enterprise, May, 1997 by James A. Anderson

This month, BLACK ENTERPRISE launches a new column, Private Screening. In it, we'll pick the minds of African American money managers to f nd out what's happening in the financial markets and to get the scoop on good, long-term investments. To lead things off, we turned to Louis A. Holland, managing partner and chief investment officer of Holland Capital Management, and portfolio manager of the Lou Holland Growth Fund, which was up 14.62% in its first eight months.

As a portfolio manager, there's nothing Lou Holland likes more than a company with good earnings growth prospects. The problem is, there's nothing he hates more than overpaying for a company, no matter what the future may hold. In fact, Holland uses the throaty acronym GARP--growth at a reasonable price--to refer to his investment approach.

In the investment world according to GARP, bargain hunting is fundamental. So when Lou Holland tells you he expects the S&P 500 to increase earnings 10% at Louis A. Ho the most this year, he's really saying he's looking for companies that will post growth more in the 15% range. Likewise, when he tells you the S&Ps are selling at an average 15-20 times their earnings per share, he's throwing a hint that he's looking for stocks with an equal or lower price-to-earnings ratio.

"We truly don't like to overpay," says Holland, who's been in the stock-picking business since 1968, and who now manages $450 million in assets. Case in point: Coca-Cola. "The company is growing at a rate of maybe 18% and selling at greater than twice its growth rate," notes Holland, who would be intrigued--until digging further in the numbers. "The minute I see that they're selling at 40 times next year's estimated earnings, I turn away. We tend to look for stocks where the price-to-earnings ratio is at a discount or a slight premium to their growth."

When he's screening the market, Holland looks for medium- and large-cap stocks with niche products, high returns on equity and expanding earnings and profit margins. Another important sign is insider ownership. "We like companies with significant insider ownership because they tend to be more shareholder-oriented," he says. All of which leads him to pharmaceutical stocks. "For the first time in recent years, earnings growth is accelerating from the 8%-9% range to the midteens," says Holland. "We believe these companies are part of the solution to the health care problem--and not the problem. Drugs are only 6%-7% of total health care costs, and pharmaceuticals help keep patients out of the hospital." There are other favorable trends as well, he says. For one, the FDA is approving new products faster. And, the industry has undergone restructuring and consolidation, actions he believes should help keep margins and profits expanding.

Holland's favorites in the sector include Pfizer (NYSE: PFE), which is growing earnings at a rate of about 15% and selling at about 22 times 1997 earnings, and Eli Lilly (NYSE: LLY), growing at a nearly 15% clip; its stock is selling at a P/E of 23.

Holland also favors companies who have fallen out of favor in the stock market, yet nonetheless are well run and have great prospects ahead. Electronic Data Systems (NYSE: EDS), a computer services company, fits that bill. Even though every facet of the computer business seems to be booming, EDS has lagged after being spun off from GM. The company's debt is low, he says, its margins high and with a projected growth rate of about 15%, the stock is selling at only 16 times its estimated earnings.

Pepsico (NYSE: PEP) is another example. Holland says the company should grow its earnings at around 15%, owing in part to its dominance in snack foods and its solid soft-drink business. Fast-food restaurant operations, however, have hurt Pepsi, going so far as to damage fourth-quarter 1996 earnings. With Pepsi looking to spin its fast-food business off, he thinks the stock will soon prosper.

Finally, Holland likes finance stocks and thinks American International Group (NYSE: AIG) is a good bet in the group. The company is growing its earnings 13%-15%, and shares are selling at 17 times 1997 earnings. Management is well respected, he says, and after two years of back-to-back 20%-plus stock market gains, AIG has all the makings of a good core holding.

So what about a market where profit increases will pale in comparison with 1995 and 1996? "It's an environment that separates the great money managers from also-rans," says Holland: "Our philosophy is that money is made in bear markets and not bull markets. We hope to participate in bull markets and outperform in bear markets, so that over a complete market cycle, we aim to be in the first quartile of all managers."

   Growth at a Reasonable Price

                                             Est. 1997  Est. 5-year
Company                       Stock price(*)    EPS     EPS growth
Pfizer (NYSE:PFE)                 $94.75        $3.49    15.5%
Lilly (NYSE:LLY)                  $92.75        $3.17    13.7%
Electronic Data Systems
(NYSE:EDS)                        $45.50        $2.39    15.6%
Pepsico (NYSE:PEP)                $34.50        $1.4     14.4%
American International
Group (NYSE:AIG)                 $125.50        $6.72    14.1%

(*) As of 2/21/97; EPS = earnings per share
Source; Zacks Investment Research, Chicago