Jordan Opportunity Fund Expects a Lull

Despite the downturn, Jerry Jordan sees good buys in energy, healthcare, and U.S.-based steel companies

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Since launching the Jordan Opportunity fund three years ago, manager Jerry Jordan has trounced the market by making bold bets on a few dozen fast-growing companies. In each of those three years, the $35 million fund beat the S&P 500 stock index by an average of 9 percentage points. What's more, Jordan Opportunity's annualized 16 percent return over that time period beat that of 98 percent of funds that invest in large, growing companies.

Jordan focuses on themes and trades frenetically (the fund's annual turnover is 304 percent, which implies that the entire portfolio is replaced every four months). More than half of Jordan Opportunity's assets are currently invested in the energy and healthcare sectors.

Where do you think the market is headed?

We're probably in a recession, so the market is trying to price that in. I think last week was a major, traumatic, capitulation bottom, and that means we're going higher. But here's the rub: Looking at 80 years of history, the likelihood that we're going much higher anytime soon is zero. That's because, historically, bear markets or recession-induced wipeouts take time to work themselves out. As the saying goes, there is a difference between a low and a bottom: A low is a point in time; a bottom is a process. We're in a bottoming process right now, and it will take time—I assume until April, when companies will say that the first quarter stunk, but things are starting to look better for the second quarter. That doesn't mean we can't tack on another 200 to 400 points to the Dow's upside. It just means we're probably going to have to go back down below 12,000 between now and April.

We're not really going anywhere for the next three months, but I don't think there is any real risk left in the stock market. There always will be individual names and sectors, of course, but you've got to be fully invested by mid-April for a rally that lasts another 12 to 24 months.

You're known for playing a handful of themes. What are they currently?

I continue to love energy—predominantly oil service and drilling companies because it will continually get harder to find oil. It's a treadmill, because companies have to spend more money just to continue to produce what they've been producing. If you look at the budgets most companies and countries have announced for 2008, most spending is projected up 15 to 20 percent versus 2007. I own Schlumberger and Transocean, which have both had good pullbacks. Another good name is a company called Weatherford, which is sort of a junior service company—not as big as Schlumberger but cheaper, executing extraordinarily well, diversified geographically, and is probably a takeover target. These stocks all look cheap. I also own a fair amount of healthcare for a lot of obvious reasons: If the economy is decelerating, I want to own companies with good, solid, double-digit earnings growth, good visibility, and that are trading at a reasonable multiple. Right now, healthcare has that in spades. So I own Genzyme, a multi-product biotech company; Merck, which has had a big wipeout in the last few weeks; and Aetna, the HMO. I also own Medtronic, which I think is a value and a growth idea. It's not a wild grower, but it can do 12 to 15 percent earnings growth looking out six to 12 months. This is a cheap stock.

One name I've added to that I think is a terrific idea is MEMC Electronic Materials [now trading around $75 a share]. They provide silicon to the semiconductor industry and polysilicon to the solar industry. It's not a real sexy business, but kind of like oil, it's a commodities business where demand is strong, but it's hard to grow supply. Every company that's said it will increase polysilicon production is, a year later, still trying to get production up and going. Solar orders are so strong that MEMC is going to be fully booked for the next two years. I think this is a cheap stock that can definitely trade at 25 times earnings given scarcity value. I think this is a $100 stock.

Let's talk about what you don't own much of: technology.