Q: The stock has come down to around 532, from its 52-week high of nearly 750. Is this a relatively new position? A: It was a position that we bought and then took gains in the rally when it went up toward 700. Now that the stock has pulled back, we've continued to increase our exposure. We estimate a longer-term growth rate of 30% for the company. Right now, there is a lot of skepticism about Google [whose results disappointed investors last week]. We think that earnings growth is going to be higher than what general expectations are, and that this will be true longer-term. Even with very conservative assumptionsl, we have Google trading at about a 40%-to-50% discount to its fair value.

Q: The stock has come down to around 532, from its 52-week high of nearly 750. Is this a relatively new position? A: It was a position that we bought and then took gains in the rally when it went up toward 700. Now that the stock has pulled back, we've continued to increase our exposure. We estimate a longer-term growth rate of 30% for the company. Right now, there is a lot of skepticism about Google [whose results disappointed investors last week]. We think that earnings growth is going to be higher than what general expectations are, and that this will be true longer-term. Even with very conservative assumptionsl, we have Google trading at about a 40%-to-50% discount to its fair value.

Q: The stock has come down quite a bit. The consensus earnings forecast for April '09 is $3 a share. For 2010, it's $3.40. A: We have it trading at about 17 times next year's earnings, and we see organic sales growth in the double digits and earnings growth in the 15%, 16%, 17% range. So you are not paying too much for the growth. Recently, Medtronic decided to raise its dividend, and management has been talking about returning about 40% of the free cash flow they generate over the next five years through dividends and buybacks. So we see this as generating a lot of free cash flow, along with having a wonderful pipeline of products.

Q: You hold Continental Airlines [CAL] and Southwest Airlines [LUV]. Why go near such a difficult sector? A: We look at a cyclical industry like this partly on its fundamentals. We are always investing when there is a great deal of pain and a great deal of front-page bad news. Clearly, we have that list of woes here, with high jet-fuel prices causing billions of dollars of losses in this industry. What we want to do is focus on companies that we believe are well down the line in terms of bankruptcy risk. In our view, other airlines are much closer to bankruptcy than Southwest or Continental if fuel prices stay where they are. So we focus on companies that -- if they can survive the downturn -- are going to come out much, much stronger. Southwest Airlines is clearly that way. It still has a very low debt-to-capital ratio, and has some strength because it has been able to hedge some of its jet-fuel costs. Also, it can gain pretty much as much market share as it wants, and it continues to be a low-cost carrier. When the industry comes out of this downturn, it will be smaller, and Southwest will emerge with more market share.

Q: What about Continental? A: Continental Airlines is a little bit closer to the difficulty in the industry. You can tell that by the stock price, which is at 9 and change. The key for Continental is making sure that it continues to take the steps to solidify its position and its profitability, so that it can get through this downturn. But we look at them as being in much better shape than some of its other competitors. And if they get a little bit of pressure taken away from jet fuel prices, it doesn't take much profitability to give you a very good return when a company is trading at a fraction of sales, as Continental is.

Q: Let's move on. A: The home-improvement retailers Lowe's [LOW] and Home Depot [HD] are facing a big cyclical downturn, with a low return on investment. You have a lot of stress in the end market, with housing being front-page bad news for these companies. But these companies also have wonderful characteristics, and they've generally been able to gain market share. More local home-improvement retailers are going to be under a lot more stress then they are. Home Depot and Lowes are financially stronger than the others. We think that they will be able to gain market share through this downturn. These are companies that, over the long term, have returns on equities in the high teens or low 20s, and they are trading at 1.5 times to two times book value. That's a pretty good potential return if you have the patience to live through some of the volatility we are seeing now.

Q: These companies fetch similar valuations, roughly 12 times forward profit estimates. A: We really look at this as almost a basket of stocks. These companies do have competitive strengths and weaknesses, but you are talking about stocks that are trading around 12 times forward earnings, and those are reasonably low expectations.