By Serkan Unal
Boasting 40 years of experience in the financial industry and overseeing more than $60 billion, Jean-Marie Eveillard is a French-born value investor who currently serves as the senior adviser and Board Trustee to First Eagle Funds. First Eagle Funds include Global Fund, Overseas Fund, U.S. Value Fund, Gold Fund, Global Income Builder Fund, First Eagle Fund of America, and High Yield Fund, representing a "fully complementary range of value-oriented investment options across the capital structure." Eveillard had been one of Wall Street's best value investors, earlier having served as a manager of the noted Funds. Over his 26 years at the helm, he managed to produce average annual returns of 15.8% in his First Eagle Global Fund, outperforming the average annual return of 13.7% for the S&P 500.
Jean Marie has won many prestigious awards in his career. In 2001, Morningstar, Inc. co-honored him as "Stock Manager of the Year." Two years later, the group gave him a "Fund Manager Lifetime Achievement" award for one of the most successful investment records. In 2009, Eveillard was a finalist for Morningstar's "Fund Manager of the Decade Award for Non-U.S. Stocks."
Currently, Eveillard is bullish about equities, Japan and gold. He was recently quoted as saying that "gold is a substitute currency, and … as long as (the Fed and ECB) keep printing enormous amounts of paper, … gold cannot be overvalued." His portfolio reflects his attraction toward large-cap value plays and strong gold miners.
Gold Fields Limited (GFI) is the 7th-biggest position in First Eagle Investment Management's portfolio, valued at more than $600 million at the end of the third quarter. The company is one of the largest unhedged gold producers in the world. It operates eight mines in South Africa, Peru, Ghana, and Australia, with total attributable precious metal and gold equivalent mineral resources of 217.0 million ounces and mineral reserves of 80.6 million ounces. This gold stock pays an attractive dividend yield of 3.4% with a relatively robust dividend growth of 14% per year over the past five years and a low payout ratio of 32.5%. Over the past five years, Gold Fields' EPS expanded on average by 37.8% annually. Analysts forecast that the company's EPS will expand by more than 50% next year. The gold miner's financial performance this year has been hurt by lower production amid labor strikes in South Africa. The company is currently unbundling its 100%-owned subsidiary, GFI Mining South Africa Proprietary Limited, to create a new miner, Sibanye Gold, which will manage two gold mines in South Africa as well as various service companies. As of February 2013, Sibanye Gold will be listed on the Johannesburg and New York exchanges as a separate independent company. Sibanye Gold shares will then be distributed to existing Gold Fields shareholders. After the spin-off, Gold Fields will continue to manage its remaining gold mining assets. Gold Field's stock has an ROE of 15.3%. The shares are down 31.5% over the past year. Billionaire Jim Simons boosted his stake in the stock in the previous quarter, while a long-term gold bull, billionaire John Paulson, scaled down his position in Gold Fields, while maintaining his position in SPDR Gold Trust (GLD).
FirstEnergy Corp. (FE) was the 9th-largest holding in First Eagle's portfolio in the third quarter. The position was worth some $574 million at the end of the quarter. The company engages in the generation, transmission, and distribution of electric power. It pays an especially appealing dividend yield of 5.3%, which partly may be a reason for Eveillaird's interest. The company's payout ratio is exceptionally high at 91%. Its competitors American Electric Power Co., Inc. (AEP) and Dominion Resources (D) pay dividend yields of 4.3% and 4.1%, respectively. Over the past five years, FirstEnergy Corp.'s EPS shrank at an average annual rate of 10.5%, while dividends expanded, on average, by 1.9% per year. In the previous quarter, FirstEnergy Corp.'s EPS plunged by nearly 20% over the previous year's quarter, although the EPS beat analyst estimates. The company is under pressure due to growing competition and low electricity prices. It is managing expenses so as to ensure cost-effectiveness. The dividend could be at risk if the company's free cash flow position deteriorates further. In terms of valuation, the stock is trading at 13.3 times forward earnings, below the industry average of 15.0 times. AEP trades at a forward P/E of 13.6 and Dominion Resources trades at a higher ratio of 15.7 (justified by a higher projected 5-year EPS growth). Among fund managers, Michael Messner (Seminole Capital-check out its top picks) and Charles Clough (Clough Capital Partners-see its major holdings) also hold positions in the stock.
The Bank of New York Mellon Corporation (BK) is the 12th-largest stake in First Eagle's portfolio. In the third quarter, that stake was valued at $547 million. The company is a financial services firm, providing various products and services, including asset management. The bank is the 9th-largest U.S. financial institution by asset size. It is paying a dividend yield of 2.2% on a low payout ratio of 27%. Its competitors JPMorgan Chase & Co. (JPM) and State Street Corporation (SST) pay dividend yields of 2.9% and 2.3%, respectively. The company has an ROE of 6.6% and trades on a price-to-book of 0.8, at a discount compared with its respective industry (with the ratio of 1.4). The bank is also attractive relative to industry based on price-to-sales and price-to-cash ratios. Over the past five years, the bank's EPS was mostly flat, while analysts expect the company's EPS growth to average nearly 13% per year for the next five years. However, the operating environment in the near term remains challenging, with weak macro environment, Europe woes, and fiscal cliff concerns weighing on the bank's performance. Still, the bank sees large savings totaling nearly $1.3 billion in the period between 2012 and 2014. The Bank of New York Mellon Corporation's dividend was slashed significantly in 2009. It has been recovering since. The bank says it is committed to returning capital to shareholders. This stock has a high free cash flow yield of 10.7%. With a forward P/E of 10.2, it is trading at a discount to its peer group (with a forward P/E of 10.8, on average). The stock is up nearly 26% over the past year. Investment legend Warren Buffett's Berkshire Hathaway (check out its top picks) is a big fan of the stock.
Linear Technology Corporation (LLTC) was the 16th position in First Eagle's portfolio at the end of the third quarter, valued at $492 million. Linear Technology makes analog integrated circuits that are used in manufactured products such as cell phones, computer tablets and cars. The company pays a dividend yield of 3.0% on a payout ratio of about 60% of trailing earnings and 44% of free cash flow. Its competitors Analog Devices, Inc. (ADI) and Maxim Integrated Products, Inc. (MXIM) pay dividend yields of 2.9% and 3.2%, respectively. Over the past five years, Linear Technology's EPS and dividends grew at average annual rates of 4.1% and 6.8%, respectively. The company's EPS growth rate is forecast to average a faster 7% annually for the next half decade. Linear Technology is a solid company with a large, diversified customer base. Its high-quality business model is oriented toward the fast-growing power management chip market, which will drive growth in the future. In fact, the company is shifting its exposure away from the consumer and cell-phone markets due to their reducing reliance on analog-based technology and toward more rapidly-growing industries such as industrial, automotive, communication infrastructure and military. The stock has a free cash flow yield of 4.3% and a superb ROE of 59%. With a forward P/E of 18.8, the stock is priced slightly above its peer group and its own 5-year average ratio. Linear Technology's stock is also popular with RenTech's Jim Simon, who upped his stake by 23% last quarter.
Weyerhaeuser Co. (WY) was the 18th position in First Eagle's portfolio at the end of the third quarter. That stake was valued at more than $486 million. This forest products REIT that grows and harvests trees and builds houses pays a dividend yield of 2.5% on a payout ratio that, this year, is expected to exceed the company's target of 75% of cash flow before debt repayment and dividends. Competitors Plum Creek Timber Co. Inc. (PCL) pays a dividend yield of 3.9%, while rival Louisiana-Pacific Corp. (LPX) does not pay any dividends. Weyerhaeuser Co.'s EPS shrank more than 15% per year over the past five years; however, analysts forecast that the company's EPS will rebound dramatically by nearly 92% next year. The company has a significant leverage to a U.S. housing recovery, which is under way. Furthermore, the reconstruction efforts after the vast destruction of the Hurricane Sandy will boost the demand for Weyerhaeuser products in the near future. The stock boasts an ROE of 6.7%. Its price-to-book and price-to-sales ratios are below industry averages. With a forward P/E of 30.4, the stock is more favorably priced than competitor Plum Creek Timber Co. (with a forward P/E of 33). The stock is popular with another value investor, Third Avenue Management's Martin Whitman.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.