market folly

Ken Heebner is the founder of Capital Growth Management and he manages the CGM Focus Fund, among other actively managed mutual funds.  He has put up big numbers some years, but he also was hit big during the financial crisis.  However, his long-term numbers beat the market (10 year and 15 year performance) and put him in the top 1% of his peers.

He sat down with Consuelo Mack on WealthTrack and talked about the themes he's seeing these days and how he's playing them:


Resurgence In Housing = Big Theme

Heebner's big theme in the US is housing.  He says, "I think it's the single most important factor causing economic activity and the stock market to surprise on the upside."

He notes that after a large drawdown in prices during the financial crisis, housing starts declined as homebuilders cut back.  As such, demand has grown while supply was largely stagnant.  As such, supply needs to catch up with demand and home prices can head higher until supply catches up.

As a result of this, Heebner also sees consumer confidence rising due to improved personal balance sheets which can obviously translate into increased consumer spending.

However, he doesn't necessarily think homebuilder stocks offer the best value as they're well off their lows and the general perception is more favorable for the industry nowadays.  The time to really load up on shares was when the majority of people were pessimistic.


His Outlook For Banks

Other themes he's tracking include industry consolidation and corporate profit margins.

He points out that 5 major banks have almost 50% of deposits and this consolidation hasn't been seen in quite some time.  Additionally, Heebner highlights the low P/E ratios many banks trade it.  He also feels that business opportunities for banks are presenting themselves and they should have some solid pricing power.

In particular, he highlights Morgan Stanley (MS) and Goldman Sachs (GS), noting that they can see P/E multiple expansion and that half of the earnings from MS come from wealth management.  He also points out the negative sentiment surrounding MS in particular.  We've highlighted Dan Loeb and Third Point's pitch on Morgan Stanley as well.

Of the industry, Heebner says, ""I look for situations where I think the fundamentals are a lot better than everyone else thinks they are.  I wish there were more of them.  I'd say the big investment banks are in that category today."


On Running a Concentrated Portfolio & Cutting Losses Quickly

Heebner likes to focus on companies where the risk/reward is very skewed in his favor.  While there's a lot of companies he looks at possibly owning, he says he wants to place the most capital on the companies he feels best about.  He asks, "Why hold the ones that aren't as good?  The side effect is volatility that exceeds everyone else's portfolio."

A lot has been made of Heebner's high turnover.  This, he says, is partly due to the fact that he likes to cut losses quickly.  Many great investors over time have highlighted the importance of managing losses.


Embedded below is the video of Ken Heebner's interview with Consuelo Mack on WealthTrack: