Fund Seeks Stocks With Unique Ways
BY JESSE EMSPAK
INVESTOR'S BUSINESS DAILY
For Roger Sit, a unique product or service is the key to finding a company that can grow earnings at a high level.
Sit is president of Sit Investment Associates and runs Sit Large Cap Growth with father Eugene Sit and brother Ronald Sit and Michael Stellmacher.
Its investment horizon is three to five years. That's reflected in its portfolio turnover rate of 30%-50% a year.
Monsanto (MON) was one of the biggest holdings in the $260 million fund, at about 2% of assets as of March 31.
The fund picked up the stock in late 2007 when it traded at about 110. It's now trading at about 119.
Demand for its food-crop seeds should drive company growth, Sit says. There is a global shortage of arable land, and farmers need bigger yields.
On top of that, Monsanto is at the forefront of developing new varieties of crops, and many people in emerging markets are boosting the meat content of their diets. That requires more feed grains.
Sit says he trimmed the position in March, but has since added to it each time the stock dipped, only to have it push up again.
He plans to trim again if it reaches 150 or it hits 5% of fund assets.
Microsoft (MSFT) is another company whose margins per unit sales are rising, with both pricing power and economies of scale.
The global demand for personal computers is rising, Sit says, and there is no widespread competition for Microsoft's operating system and other software. Sit expects sales of PCs to go up later in the year, pushing up the stock.
The stock was 2.2% of the fund as of March 31. It has been in the fund for several years. Since mid-2006 it has risen from about 22 to a high of 37.50 in November, before coming down to 28.
Sell Targets
The fund sets sell target prices, but they aren't hard and fast. For example, if Sit feels the industry's earnings estimates are conservative when Monsanto hits the 150 mark, then he may hold on to it. But generally 5% of assets is the limit.
Sit doesn't limit stocks to certain sectors, nor does he make much use of quantitative measures. Among factors he watches for is sales growth coupled with rising unit margins. The ability to raise prices for its products and/or services is also a plus.
Visa (V) has both pricing power and increasing sales. The fund picked up the stock when it went public in March.
It has pricing power because it controls so much of the transaction market. Also, Visa only charges for processing payments. It doesn't issue credit and debit cards, so there is no debt risk.
"People see it as a financial play, but really it's a tech company," Sit said.
The fund started with a small position — about 0.5% — and has built on it a little each time the stock pulled back. It is now about 1% of the fund.
The stock went public at 44. It's now trading around 78.
Sit usually starts with positions that are 0.5% of fund assets, but sometimes he jumps in as high as 2%.
Though the fund doesn't have sector limits, Sit says he tries to be conscious of risk.
He uses the S&P 500 and Russell 1000 as guides. Most of the time the fund's asset allocation will be close to the Russell 1000. But it can vary by a few percentage points.
Sit says his risk controls are one reason the fund would underperform in a speculative market, such as the tech boom of the late 1990s.
"We hopefully will get the sector calls right and then get the company right," Sit said.
The toughest part is finding the sectors before the rest of the market does. "If you wait for the bell to ring, you miss 20% to 30% of the return," he said.
Among stocks that haven't worked well for the fund recently is Citigroup. (C) It has lagged the market and is 60% off its 52-week high. Sit says he is trying to gauge the market's mood before deciding whether to sell.
