For Subscribers

Get the complete article now!

Six money managers examine portfolio management strategies in the latest issue of The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info562.htm

TWST: Could you give us a brief overview of A.R. Schmeidler & Co. and its investment philosophy?

Mr. Schmeidler: Our firm has been in business since 1971. We have a very stable client base and many sophisticated clients. Half of our business is institutional, half of it is individual accounts and families. Our whole thrust is to buy companies using the stock market as a medium of exchange, not as something we are trying to predict — a very important distinction. We don’t know what the market is going to do. We don’t try to guess what the market is going to do; we use it as a medium of exchange in order to buy the most earning power, the most cash flow, the most assets for the dollar among companies that stand to benefit from the major themes, and this has been our strategy since the firm began. For example, when there was an energy problem in the 1970s, we owned energy producers. During the past few years, we’ve had a significant commitment to defense companies because the businesses were selling quite cheaply, at big discounts to revenue and backlogs, and lots of clarity in terms of their business outlooks. Our philosophy has always been to avoid difficult areas such as tobacco. So our fundamental strategy is to buy the most earning power for the fewest dollars. We are often led to recommending companies that are not necessarily institutional favorites — sometimes unpopular companies, even unrecognized companies, and yet major players in their markets. The investment environment today is really much more performance-oriented and momentum-based; and that’s not an environment that is predictable. So if we are right about the themes where capital has to flow, then eventually people are going to see those opportunities, because capital will always be drawn to the highest rate of return. And that’s our fundamental philosophy. We have frequent client communication, so clients are fully aware of this. We write outlooks regularly. We speak to our clients often. We don’t have limits on size of a business. If a company has a capital structure of 100 million, nothing prevents us from getting involved with it; likewise, if a company has billions of dollars in capital structure, that wouldn’t keep us away.

TWST: Let’s discuss some of the areas of the market that are exhibiting growth potential. You mentioned defense, for example.

Mr. Schmeidler: Defense is a very important area. We’ve been involved with that sector for several years, particularly in the last two years. Most of our defense holdings were purchased prior to 9/11, but we’ve liked defense since the Defense budget was slated to increase annually. That began in the Clinton Administration. The Bush Administration has further enhanced that. The defense area was very interesting because it was undervalued. You had companies selling for half or less of their annual revenues. Northrop Grumman (NYSE:NOC) is an interesting example because the annual revenues can grow to 20 billion or 21 billion. When we were investing in it, the company was selling for 11 billion. So we were buying growing revenues at almost a 50% discount with rising cash flow and earnings and a growing backlog. You could conclude that the company was not an institutional favorite. Now, bear in mind that if the defense component of the S&P 500 is 1.7% and you think defense is going to be very strong, then obviously you’re going to see a lot of institutions wanting to overweight defense in their portfolios. Consequently you could anticipate demand coming into the group.

This special Investing Strategies Report includes:

1) Sarat Sethi, Principal and Portfolio Manager/Equity Analyst of Douglas C. Lane & Associates, Inc., examines portfolio management strategies in this timely and deeply informative 3,600-word interview from The Wall Street Transcript.

2) Frederic G. Burke, President of Johnson Lemon Asset Management, examines portfolio management strategies in this timely and deeply informative 2,600-word interview from The Wall Street Transcript.

3)Arnold R. Schmeidler, President of A.R. Schmeidler & Co., examines portfolio management strategies in this timely and deeply informative 6,500-word interview from The Wall Street Transcript.

4) Jerome H. Walther, Chief Operating Officer of Church Capital Management, examines portfolio management strategies in this timely and deeply informative 3,000-word interview from The Wall Street Transcript.

5) Donevan E. Kukul, Portfolio Manager with Cohen Klingenstein & Marks, Inc., examines portfolio management strategies in this timely and deeply informative 4,000-word interview from The Wall Street Transcript.

6) Paul C. Hogan, Investment Research Analyst at Fenimore Asset Management, examines portfolio management strategies in this timely and deeply informative 3,900-word interview from The Wall Street Transcript.