The Case Against Financial Stocks

Fund manager Jerry Jordan is bearing on banks, bullish on oil, and says a market sell-off is near.

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Fund manager Jerry Jordan doesn't stick to any one strategy. Instead, he invests thematically. From the helm of the Jordan Opportunity Fund (symbol JORDX), Jordan plays three to five different themes—typically industries—at one time. For the most part, Jordan looks for fast-growing companies across all sectors and company sizes, and he's not afraid to invest a large percentage of his fund in one sector while owning nothing in another.

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Jordan says some themes run longer than others. He's been bullish on energy for "a very long time," and he's currently devoting a fair chunk of his portfolio to certain areas of healthcare. In February and March, he was into bank companies, but Jordan got out by the end of August because he believed the tremendous rally in the sector wasn't supported by significant structural changes.

The fund, which started in January 2005, lost 37 percent in 2008 but is gaining ground, with an impressive 42 percent return so far this year. The fund's 5 percent annualized return over the past three years places it in the top 1 percent of all large growth funds, according to Morningstar. U.S. News recently spoke with Jordan about the state of financials and the beat of the market. Excerpts:

You've been an outspoken critic of financials in the past. What about now?

I'm not a huge believer in the financials . . . but basically I'm a believer that we're beginning a five- to 10-year bear market in financials relative to the broader market. That doesn't necessarily mean they go down, that just means I expect them to underperform the broader market over time. . . . We owned them for five or six months. We bought them aggressively in February and March, cut back in June, bought some back in July, and we were out of them all by the end of August. Now, had they gone up slower, we might still own them, but when you buy a group of stocks and they go up 50 to 80 percent and you really don't think that the business has structurally changed, then we're going to sell them. We just thought people had gotten ridiculously bearish on financials in February and March. As it turned out, we were right.

Generally, what kinds of companies catch your eye?

What I want to own are companies that either have a patent, a monopoly, or sell a commodity product.... that's secularly tight looking out over time. For instance, "have a patent" companies like Celgene [which has] a cancer drug and Amgen with some of their new drugs coming out. [There are] companies that have a virtual monopoly. . . . Google and Apple are names we've pretty much owned consistently for four or five years. . . . Then on the other side, the oil companies sell a product that we believe is secularly in short supply. Is it secular today? No, but do we think it's going to be in short supply looking out? Yes. Do we think prices for oil are high enough to get enough reinvestment to produce more oil? No. So, we think prices are going to go much higher and profitability is going to come back quickly to these companies, and more importantly, it's going to come back at the expense of a whole bunch of other parts of the market.

You've also said you're fairly bullish on healthcare. What about pending legislation?

I'm bullish on parts of healthcare. My belief is there will be some sort of legislation, and they will continue to craft it over time. I think it's one of those things where it's sort of a Trojan horse. They want to get it in there, and they want to try to open it more as they go. But what I think is going to be true is that we're going to get more coverage for everybody, which will increase utilization. That's good for diagnostic companies, that's good for some device companies, and that's certainly good for some pharmaceutical and biotech companies.

Looking forward, what companies look appealing?

I like companies like an Abbot (ABT). They're big, they're broad, they have a wide product line, and they have a couple of dominant products. . . . Valuations are still reasonable, and [healthcare is] a sector that people aren't all that excited about or they're nervous about. . . . So it helps to generally add a counterbalance to an aggressive energy weighting.

I think oil services, and I continue to believe that most mining companies will be. There are a number of smaller-cap Chinese companies that we've been buying. . . . There are a number of companies that I would literally consider are the classic growth stories where they're companies based in China, selling products to the Chinese people with tacit approval by the Chinese government to do what they're doing because whatever it is that they're doing is better for the Chinese.

One company, Zhongpin (HOGS), takes pork products and packages them in a way they can be shipped across the country. So the shelf life goes from two days to 12 or 13 days. It's like Oscar Meyer bacon. They don't have a lot of companies that do that, and if you're the Chinese government, you want to improve the shelf life of products because it's better for the health of the people.

There's a small one called China Biotics (CHBT). It's a biotics company where the Chinese government is pushing these guys to push ahead because they think if they can increase the bacteria that people are absorbing through the food—good bacteria—it will help balance their bodies and help offset their use of antibiotics when they get sick. It's another classic growth company.

Where do you believe the market is headed?

Near-term, we need a correction in the stock market. . . . I think we're more likely to correct in price, but it could be violent, vicious, and quick, so I have been raising cash over the last month in anticipation of a sell-off, whether it's a sell-off in my names or the overall market or both—probably both—so I can step in and start adding back to some of these names and/or add to names that I've got on a watch list. Right now, the sentiment appears to be pathologically bullish. I'm actually pretty positive, but I think we need to unwind some of the sentiment first.