Portfolio Manager Eric Hewitt of OppenheimerFunds says that when looking at Potlatch Corporation (NASDAQ:PCH), a REIT that operates through the resource, wood product and real estate segments, the opportunity lies around the company’s net asset value.
Our philosophy is built around changes in return on invested capital. We are excited about the capital structure changes at Potlatch. Housing in the U.S. is very strong. Housing starts are picking up and have been on a steady trend higher over the past several years. The same goes for multifamily building. And so we like the fundamentals of the timber business.
That said, the real opportunity within Potlatch is looking at the net asset value, the NAV, of the company. It’s pretty easy to figure the NAV out by looking at the timber assets that they own and assigning value to those assets based on a per-acre trading value that you can see in the marketplace.
The net asset value of Potlatch right now, as we calculate it, is between $45 and $50. The stock is trading at $34 today. The management has been selling the timber assets — raw land — and using that cash to buy back their stock and thereby closing the gap between the current $34 stock price and the $45 to $50 NAV, and we think that will continue. They just sold some land in Idaho recently and have been using the proceeds of that sale to buy back stock, and we think that’s a story that can play out at least until the stock trades closer to NAV.
Andrew Boord discusses Fenimore Asset Management and the FAM Small Cap Fund. While Fenimore is a value shop, Mr. Boord is more focused on finding quality stocks than on finding cheap stocks. He spends a lot of time identifying high-quality companies in the small-cap space and then waits to buy until shares are available at a discount to his estimate of intrinsic value. Sometimes Mr. Boord finds these discounts when there has been a temporary setback or investors are fearful. The FAM Small Cap Fund is having a good year of performance so far. According to Mr. Boord, this is because the current environment, where there is fear about the economy, is one in which quality shines and outperforms.’
Full interview available here.
David Weinstein discusses Dana Investment Advisors and its large-cap strategies. Mr. Weinstein uses a relative value philosophy with a unique risk-controls design. The strategies are sector-neutral and equal-weighted, with about 50 to 55 holdings in each strategy. Mr. Weinstein doesn’t try to time the market and is focused on bottom-up security selection. He aims to find best-of-breed companies within industries. He looks for the best combinations of valuation, growth, balance sheets and quality of earnings. In addition to a large-cap core strategy, two other large-cap strategies are the Dana Catholic Equity and Dana SRI Equity. These follow the same investment philosophy but add a comprehensive environmental, social and governance integration process.
Full interview available here.
Sean M. Thorpe discusses Aristotle Capital Management, LLC and the International Equity Strategy. Mr. Thorpe’s investment philosophy is made up of four components. First, he only invests in high-quality businesses. Second, he looks for opportunities globally, and analysts are charged with covering a sector rather than a specific region. Third, he invests with a long-term view. Fourth, he runs a concentrated portfolio of 30 to 40 holdings. In addition to these four components, Mr. Thorpe thinks of himself as an investor in a business, not a trader of stocks. He uses a methodical, patient approach and his turnover in the portfolio is low. Rather than try to predict economical or political outcomes, Mr. Thorpe sticks to what he knows and what he can control. He aims to generate solid returns by focusing on great companies that are trading at a discount.
Full interview available here.
Eric Hewitt discusses OppenheimerFunds and the Oppenheimer Small Cap Value Fund. Mr. Hewitt is a bottom-up stock-specific manager. His underlying philosophy is to find an unanticipated acceleration in return on invested capital. When identifying a potential investment, Mr. Hewitt looks for one of three things: the company’s ability to improve sales, to improve margins or to make capital structure changes with a positive impact on return on invested capital. In addition, he examines a company’s income statements and talks with its management team to get a view into the company’s dividend policy. Mr. Hewitt believes this gives him a more accurate insight into the fundamentals of a business.
Full interview available here.
Biotechnology and pharmaceuticals companies are going through a period of some uncertainty due to political changes in the United States. Health care payment has changed in recent years, and this year during the presidential campaigns, there has reportedly been rhetoric that suggests drug pricing could come under more government scrutiny than in previous years, making this especially difficult for pharmaceuticals in the United States, which is considered by some analysts as the most important market for medical products in the world, even for companies that are based overseas.
The United States’ markup in prices versus Europe and other places is expected to diminish. Drug pricing in the United States has driven stocks down, and the consolidation strategy that has taken place has been negative for these companies, according to some analysts, who say the acquisition model isn’t as attractive to investors anymore, as some investors now think these companies have been built around easy access to credit and not necessarily around synergies in their products. Others say there is incremental innovation of older drugs, and that the market is still rewarding those companies. Analysts are looking for companies that are disruptive and will change clinical practice, and they say there have been some exciting emerging areas, although as a whole innovation seems to be lacking, according to some analysts, though there seems to be disagreement among analysts.
Specialty pharmaceuticals has been trading at levels below broader market multiples. Some of the more exciting areas, according to analysts, are gene therapy, stem cells and regenerative medicines that are less mature but have potential to replace damaged tissues. Oncology is evolving to be more tailored to the specific patient based on the disease. Analysts say that even though there are fewer approvals within a class, the approvals that are getting through are more differentiated, meaning they are more innovative rather than incremental improvements. They also mention an uptick in INDs.
Analysts are looking for innovation in the form of drug approvals, moving them through clinical development quickly or entering clinical trials. The need for innovation in pharmaceuticals is driven by many factors, such as demographics and the decrease in funds in health care. The FDA is beginning to look at smaller trials as acceptable and other study designs and information if there is no other reasonable way of doing things, as in the case of unmet needs, analysts say. They also say investors need to be more discriminating in terms of evaluating health care investments, saying it’s not only about what other investors are doing, but there have to be theses behind different drugs and different programs.
Full report available here.
Education at for-profit colleges in the United States has been under pressure as of late, but analysts remind investors there are companies in education beyond for-profit schools. One of the problems with for-profit colleges was the funds received from the federal government, and analysts say there are segments of the industry that don’t depend as heavily on government funds. Child care and premium K-12 has been doing better, as well as companies that help traditional universities get their materials online. In for-profit colleges, analysts say it’s like investing in a bad neighborhood, but there are homes that are better than others.
In China, the government has been encouraging investments in education, which includes international schools, forgoing taxes on tuition. Rising wages for the middle class means more spending in education, which is considered an investment in the future, and the expected growth in children following a change in the one-child policy is expected to grow the school-age population.
Full report available here.
Portfolio Manager Sean Thorpe of Aristotle Capital Management says Mondelez International Inc (NASDAQ:MDLZ), one of the world’s best snack food and beverage companies, has the ability to beat its 18% operating margin target through its cost-cutting strategies.
Many people know this company through its brands, but many people don’t know it by name. It’s a larger company, $70 billion in market cap…It houses the global brands from what used to be Kraft Foods. This company makes cookies, crackers, gum, chocolates, things like that.
Thorpe continues:
The company is also very strategic in their thinking. They realized that it made more sense to sell their coffee business and keep a 49% interest, which they recently did. Here, the real story is margin improvement. The company is targeting 17% to 18% operating margins by 2018. We think they can actually do quite a bit better than that over the long run, and this will drive a lot of free cash flow and profits, and that excites us.
They’re doing some pretty interesting things. They’re modernizing factories; they’re moving to lower-cost locations and making some pretty big efficiency gains. I’ll leave you with two examples. One is Tang, the instant drink that we all know and grew up with. There used to be 400 formulations of Tang and 20 different suppliers to make that drink. They’ve cut that down to three to four flavors and a single supplier, saving them a lot of money.
The other example is LU biscuits. They used to have 4,000 SKUs in Europe. They’ve cut that down by 1,500 SKUs, and there’s more to go, but that saves them $100 million in costs and helps drive margins. These are just a couple of examples of lots of different ways that they can really drive margins going forward by just focusing and getting rid of unnecessary complexity that’s been built over many, many years.
Jim Wright and John Fattibene discuss Harvest Financial Partners. Their investment philosophy is based on the three tenets of dividends, quality and valuation. When selecting investments, Mr. Wright and Mr. Fattibene look for companies that pay sustainable dividends and are high quality. To them, quality is defined by attractive returns on investment, profitability, free cash flow, low debt and trustworthy management. Once they identify companies that meet these criteria, Mr. Wright and Mr. Fattibene wait patiently for the valuations to become attractive or cheap. Their sell discipline is then a mirror of their buy discipline. Dividends being cut, a slip in quality or a stock being overvalued are all reasons that Mr. Wright and Mr. Fattibene would sell a position.
Full interview HERE.
Martin H. Bergin discusses DUNN Capital Management, LLC. DUNN Capital is a commodity trading adviser. Mr. Bergin thinks managed futures strategies are a great benefit to an investor’s overall portfolio because of their noncorrelation. This noncorrelated characteristic lowers the overall volatility of a portfolio, increasing the overall risk-adjusted return. In addition, according to Mr. Bergin, managed futures provide insurance against bad events in the equity markets. Compared to a traditional long-only equity portfolio, Mr. Bergin’s strategy trades across different markets and commodities, which makes it very diversified. The managed futures strategy can also make money whether the economy is doing well or not. When it comes to risk management, Mr. Bergin uses a systematic program to adjust risk each day depending on market conditions. This approach has allowed DUNN Capital to decrease risk while still making outsized returns.
Full interview HERE.
