I have had the privilege of learning from some great stock pickers. Information advantage is a key component to stock selection, and in 2004 when I chose to create a new hybrid investment process, I choose data processing in a post Sarbox/Reg FD environment to gain information advantage rather than supply chain identification or some of the other generally accepted practices among top managers.
Our multifactor models work, and when reversing a stock scored highly by our models into investment themes that I have been taught over the past decades, I find the process has come full circle.
Case in point is Verizon Communications Inc. (VZ), one of the most loathed firms by this New Yorker. As a portfolio manager though, the firm is a gem for many of the reasons that I cannot stand the firm. Our investment process tosses out our emotion. Clear decisions are made on stock selection not biased by a focus group of one.
A few set up stories.
My firm’s headquarters is now 2 blocks away from having FiOS Internet, a great service that may take years to bring another two blocks.
My wife’s Blackberry Storm is a useless paper weight. She simply wants to exchange it for the incredible Curve. Currently, VZ is offering a buy one Blackberry get another one free. We are still struggling to exchange the inferior phone for a workhorse of a phone.
We finally got DSL at my second home. The trouble; DSL only works while we are on the phone at the same time. Our workaround is to call our cell phone from our land line and let them sit the entire time we are online. Verizon can’t figure out how to fix this so we can always be online.
So why not vote with our wallet and leave? I think you know the answer to this question because it is a big reason the firm is a good investment – they are almost a monopoly!
FiOS is great and not offered by a competition in that part of NJ, cell service other than Verizon sucks in much of the northeast and DSL is the only high speed internet offered in our area.
On top of being a monopoly, the firm has a unique policy of never allowing a customer to speak to the same person twice. This veils all potential responsibility.
The flip side is that FiOS rocks, VZ offers only low tech phones and slower mobile internet (not true 3G) but easily provides the best basic service for phone/text/email, and DSL (the only service available) is life changing to us in the boonies. So we accept the challenge of navigating the bureaucracy that is VZ.
In a contracting industry, Verizon reported year over year quarterly revenue growth of 3.40% and sports a trailing 12 month operating margin of 18.50% which is near the top of the industry. The firm has a strong trailing 12 month return on equity of 13.93%.
From a portfolio construction perspective it is a good fit for two of our strategies with a portfolio calming beta of 0.79 and the lure of 6.46% dividend yield. Street analysts are mixed on Verizon, providing another potential advantage for the stock.
Layup investment themes my mentors steered me towards are government mandated firms and pseudo-monopolies. This firm has characteristics of both and the data keeps my emotions at bay and my perspective well placed.
Disclosure: Mr. Corn is Chief Investment officer - Equities of Beacon Trust Company. Verizon is a holding in the Beacon Core portfolio. Mr. Corn directly owns shares of through his participation in that portfolio.