My Heinz Catch-Up Lesson

 | May 03, 2013 | 7:18 PM EDT
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Do we need to "play" this rotation? Or can we be more like Warren Buffett and be long-term oriented and just own Heinz (HNZ) right through it?

I picked Heinz for a reason. I picked it because at the beginning of 1987 we had a very similar spurt in industrial activity and employment, not unlike we had this week.

I had just started my hedge fund and I told people I was going to do it differently from other hedge funds. I was going to think long term. I had liked the stock of Heinz for ages because it was a great domestic-going-international play. People forget that at one point companies like Heinz were largely domestic and they had such fabulous brands that they decided they could take the world by storm. Heinz had one of those brands and the company was beginning to deliver consistent, smooth growth as it picked up share in country after country after country.

I want to own it through thin and, yes, thick. I gave it as an example of the kind of company that I thought I could operate.

Within the first two months of the fund I had lost 9% and the market was only down about half of that. I had gotten hit by a massive rotation out of the Heinz and into companies like Phelps Dodge (now Freeport (FCX) ) and Reynolds Metals, Alcan and the Bethlehem Steel. All storied names, names that I thought had little value because they had nothing proprietary and blew with the cyclical winds.

When I told the same people who had put money with me that I was down because of my long-term strategy of emphasizing best-of-breed stocks, the vast majority of people who had agreed with that philosophy told me they were going to exercise their right to pull their money out at year end if I were still down like that. Others wanted me to open the fund and send the money back at that very moment.

My Heinz strategy didn't work. I had to scramble like hell and play the game with the chemicals and the papers. I quickly recouped the losses and ended up finishing in the black for the year and the rest was history; 14 real good years.

I never forgot the Heinz gambit though.

I think this could be a very big rotation that's about to happen. The employment number is the single most important number we get. It called the tune in the downturn and it called the tune in the upturn. Now it appears that we may have some sustained employment growth, which means that interest rates could head higher and the bigger-yielding stocks like Heinz aren't going to be able to keep up with the modern day Phelps Dodges and Bethlehem Steels, which is this case might be Freeport or Timken (TKR), even as the former is involved in a difficult merger and the latter might have some angry and potentially selling shareholders if the company doesn't resolve to split itself up at next week's shareholder meeting.

The pressure to perform will not lead to a wholesale selloff in the dividend-paying slow growers if the Fed stands pat, but new money's going into the cyclicals for certain and unless you are Warren Buffett, I think you are going to have a real hard time if you are managing anyone else's money but your own. The pressure to perform isn't changed. The anger of the investors will not have changed. The need to dump the Heinz and buy Cummins (CMI) and National Oilwell Varco (NOV) hasn't changed.

So remember, while you are watching Doug Kass duke it out with Warren Buffett, don't just ask "what would Warren do?" Ask "what would your limited partners or investors do?"

Because unless you have Warren's long-term track record, guess what? You aren't buying Heinz. You are selling it.

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