This week we have put together a special 63 page report on Large Cap Value Investing. As part of the report we spoke with Marian L. Kessler and Robert N. Schaeffer of Becker Capital Management, Inc. They gave us their investment strategy and what opportunities might be available in this economy;:
Ms. Kessler: We are large cap investors. At least 60% of both our separate accounts and our mutual fund are invested in large cap stocks. However, we do have some flexibility to find stocks, particularly in the mid-cap range. In the past year we have had an opportunity to look at many companies that have fallen into this territory, but the average market capitalization of our portfolio is still clearly large cap at $38.8 billion. Philosophically, we buy stocks that meet four characteristics; 1) They must be out of favor, 2) They must be average or better quality, 3)Business trends must be stable to improving and4) They must be trading at a valuation discount to their historic norms, or the market. We don’t buy turnarounds. Instead we prefer healthy balance sheets. We prefer very low debt-to-capital and we’re really focused on cash flow and other attractive balance sheet characteristics. We spend our time researching diligently our companies to discern the direction and the magnitude of the change in business fundamentals, whether that is operating margins, market share, top line growth, bottom line growth. This approach, especially last year, kept us away from a lot of value traps that many large cap value managers fell into.
On finding opportunities in this economy
Mr. Schaeffer: It is becoming more difficult. The market’s second quarter performance was the result of very strong performance from companies that had been most negatively impacted by the credit crunch. We have maintained our emphasis on larger, higher-quality companies that are financially strong, have superior balance sheets and the wherewithal to operate in a variety of economic conditions. That’s one of the things that we do think will matter significantly going forward as this is a very challenging economy still. Our belief is that this economic rebound may well be substandard by historic comparisons. In a challenging environment, the economy will likely divide companies into winners and losers more than ever before. However, given our emphasis on research at the company level, we believe that superior stock selection will drive returns over the next several years. Becker Capital’s value add over the years has typically come from superior stock selection; approximately 70% to 75% of our performance as opposed to sector bets
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