CHICAGO, IL — Recently, I represented Midwest Investment Management at the Morningstar Investment Conference, held here annually for investment analysts and portfolio managers.

Those of us in attendance shared ideas in the aftermath of the worst bear market since the 1970s. We also discussed the current investment environment and how it had changed in the previous 12 months. I also met with investment managers from other parts of the country. The Morningstar Conference is very beneficial because it provides a forum for new ideas, different perspectives, and “best practices” that we occasionally can integrate into the management of client portfolios at Midwest Investment Management.

Interesting findings

Conference attendees received the results of a comprehensive study that measured the bestperforming stocks from 1980 to 1998. Interestingly, 230 of the original companies in the S&P 500 Index had been merged, acquired, or deleted. The remaining 270 stocks were divided into quartiles, with the 54 best producing a compound return of 23.4%. By comparison, the S&P 500 Index returned 16.9% and the 54 worst stocks returned only 2.86% during that 18-year period. It’s important to note that the 54 “winners” had three identical characteristics: 1). A lower P/E ratio — 62% of those stocks sold below the S&P median; 2). Above average earnings growth of 11.1% and sales growth of 8%; 3). High profitability with a return on equity (ROE) average of 20.5%. These are precisely the characteristics of client portfolios at Midwest Investment Management! The losing quartile had the opposite characteristics: a P/E well above the S&P 500 Index; no growth in earnings; and belowaverage profitability (ROE) of 15.8%.

Challenging tasks

During one discussion group, Larry Puglia, a growth fund manager, noted that the market typically overpays for earnings acceleration, and underpays for consistent growth. We agree and attempt to find stocks that grow consistently with quality business models — these are companies we think of as “compounding machines.” Attempting to predict whether the favorable characteristics of profitability and growth can continue is one of our most challenging tasks. Some managers, including ourselves, like “Fallen Angels” — companies experiencing temporary problems, allowing us to purchase their stock at a good price. Of course, it’s our job to ascertain whether a company’s problem is temporary or long-term.

While here, I also met with senior managements of three Chicago-area companies whose stock we presently do not hold in client portfolios. Two companies made our quality cut, and we will buy their stock when the price is right. Personal visits continue to be an indispensable part of our decision-making process.

Editor’s note: The market vigilance exemplified by Al Meszaros has proven very beneficial to clients with managed portfolios at Midwest Investment Management. If you don’t have an account with our firm, and seek longterm growth of your portfolio based on solid and proven principles, contact Al Meszaros at (216) 830-1133 or e-mail: elm@mimllc.com