Pedal to the Metals

{Q} Is this theme reflected in your funds?

{A} Our single biggest position is in industrial metals stocks. We’ve been in these for three-and-a-half years, and we have huge gains in a lot of these, and we can’t see anything that’s going to change that. I can see this going on for another couple of years.

{Q} Name some of the top industrial metals stocks.

{A} Peru Copper [Amex: CUP]. BHP Billiton [NYSE: BHP] . . . . Phelps Dodge [NYSE: PD]. Inco Ltd. [International Nickel, NYSE: N]—they’re now the biggest nickel producer in the world. It was only about six years ago when Dow Jones thought that the prospects for International Nickel were so poor that they kicked it out of the Dow Jones Industrial Average, and the stock has gone from $5 up to $70 since they kicked it out!

{Q} What have you been selling?

{A} Until recently, one of our biggest positions was in independent power producers. We bought these companies because of our belief that there’s going to be more demand than the regular electricity system can provide. Our quantitative support work has been deteriorating there. We cut the positions in half a month ago and just got rid of the rest of them.

In the electrical area, there’s been a narrowing—something called the "spark spread," which is the difference between what it costs to produce the electricity and the price it can fetch from the consumer. The price of natural gas is up 40 to 50 percent from a year ago; coal prices are also up. But the price of electricity, because of the regulatory issues in so many states, is up only 6 percent.

{Q} What are you short right now?

{A} We look at about 1,500 stocks and grade every one of them on 13 different factors. We have limitations—for instance, no more than 35 percent of the portfolio can be short any one sector, like technology or health care. Right now, 32 percent of the portfolio is short financial stocks; consumer discretionary is 23 percent. The average holding period for a short is 16 weeks. We had Knight-Ridder [NYSE: KRI] for a short for 77 weeks, until recently.

{Q} On the long side, where are you finding some value, besides industrial metals?

{A} Pharmaceuticals have been very good for us. The highest sector exposure is health care, where we have 34 or 35 percent of the portfolio—in our Select Industries port- folio—invested. We have biotechs, we have generic pharmas, we have big pharmas, and we have something we call health care cost containment, which is kind of a conceptual theme.

A lot of the big pharmas are in a world of hurt right now.

They’re probably the outstanding values in the market because of all the negatives. You’re looking at buying Pfizer [NYSE: PFI] at 11 times earnings. Sure, their growth rate is going to slow. But nevertheless, it’s a very dynamic growth industry if you look at nothing else but the demographics and the aging population. We bought the whole package—all the big ones. It’s probably the biggest contrary play in the portfolio.

{Q} Are there any other relatively new sectors on your screens?

{A} Well, yes. We have a new one that has now been attractive for two months, and it’s home entertainment software. Video games and things like that. We have 4 percent of the equity portfolio in there. For instance, Activision [Nasdaq: ATVI] is one name we own. And locally, we also own [Bloomington-based cyber-education company] Plato Learning [Nasdaq: TUTR].