Joshua R. Schachter, CFA, is a Senior Portfolio Manager of the Snow Capital Small Cap Value and the All Cap Value portfolios. He joined Snow Capital at the firm’s inception in 2001. Mr. Schachter’s duties include security research, selection and portfolio management.
In this 2,165 word interview, Mr. Schachter details the stock picking process at Snow Capital and highlights many top stock recommendations for 2021.
“Our investment philosophy is extremely unique. We believe there’s a behavioral finance component to investing that most people either fail to recognize or fail to incorporate into their investment process.
When Wall Street likes something, they give it a high p/e — price-to-earnings ratio. When they dislike it, they give it a low p/e. And in practice, when they dislike it, there’s something wrong.
And what’s happening is the discount rate is going up from some fear or uncertainty. And when that discount rate goes up, it contracts the net present value of the future cash flows and earnings and that’s what’s contracting the p/e.
So we go into those situations with a contracted p/e and look for a catalyst to change the market’s opinion of those future cash flows and earnings.
To get what we call p/e expansion to some future normalized level, our competitive advantage is figuring out what that p/e should be in the future and figuring out the catalysts to make it get there.”
This unique Snow Capital method creates an interesting opportunity for their investors:
“CNO Financial is my favorite insurance company. It’s primarily a provider of annuities and life insurance serving the middle markets.
They do have some legacy long-term care insurance liabilities, in which they’ve done a very nice job of siloing the risk. They’ve done that through reinsurance contracts, price increases, and other mechanisms to minimize their liability to long-term care.
CNO, I believe, will be acquired in the future. But between now and then, they have a significant amount of free cash flow to be able to return to the shareholder in the form of buyback and dividend yield that is 2% currently.
Their buyback is a significant piece of the puzzle for investors; it could approach 10% a year for the company. So, this is a free cash flow machine.
They are growing their end markets through new distribution, direct to consumer, which has grown during the COVID pandemic. And it’s so cheap. It trades at 10 times earnings with that roughly 10% free cash flow yield because of the taints of the long-term care overhang, which I think is overblown.”
Another group of financial stocks are also top 2021 picks from Snow Capital:
“Thinking about the financial sector, you have two different categories in our portfolio. We have banks — and we have a number of banks that are in the midst of a transformation operationally that will really enhance earnings power.
Some of those banks that are noteworthy are First Horizon (NYSE:FHN), TCF Financial (NASDAQ:TCF), Umpqua (NASDAQ:UMPQ) and BankUnited (NYSE:BKU).
Those four banks are in the midst of redefining their leverage inside their income statement and really enhancing their efficiency and are very attractively priced based off of our normalized earnings power once they’re done with the changes.”
Get the complete picture on these and other top 2021 picks from Joshua Schachter at Snow Capital, exclusively in the Wall Street Transcript, by reading the entire 2,165 word interview.
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