David Williams, skipper of Columbia Value and Restructuring, is arguably the mutual fund world's top value investor according to his 15 year track record. A humble investment pro with a tremendous knack for finding value, Williams is not afraid to invest in companies that are undergoing significant restructuring operations as his strategy takes advantage of investor skepticism and market mispricings of good busines ses undergoing short term headwinds. More than anything else, Williams is a keen value investor with a market crushing long term investment track record. His strategy is tax efficient and has historically entailed extremely low portfolio turnover. Williams has quietly crushed the overall markets, and most people have never heard of him.
Williams has achieved annual returns of 10.48 % over the past fifteen years, besting the S & P 500 by 3.7 % per year over that period of time. In fact, UMBIX is the number one ranked Large Value mutual fund over the past 15 year period. The fund will likely be managed skillfully for the next fifteen years by Guy Pope and J. Nicholas Smith, who both have very strong risk adjusted track records on their own. Although Williams is likely departing the fund for retirement at some point in the near future (he was supposed to retire in 2008). I believe that this supporting team of managers has learned an incredible amount from this understated value investment master and can continue the fund's long term record of out-performance.
I had the extreme pleasure of meeting Williams in person back in 2004 in a very brief chance encounter. The experience was an eye opener, and I learned a great deal from my short mid-day visit. A good friend of mine who grew up near the value guru's New Jersey residence had explained to me before the meeting that Williams was an incredibly humble guy and that he drove a Ford Taurus back in the late 1990's when most Wall Street gurus were driving Bentleys and Ferraris. Upon asking him about his penchant for the earlier model mid-size Ford sedan, Williams quickly corrected me by saying, with a smile, that he now drives a "Ford Focus," and that "you are either born value or you're not."
To be sure, UMBIX is one of the only actively managed large cap value mutual funds to outperform the S&P 500 over the past fifteen plus years net of fees, and is the only fund to accomplish this feat without garnering celebrity status for the fund's manager. David Williams also gets great gas mileage when driving to and from work and does not have to worry about the depreciation that comes from owning a fancy car -- a true value investor indeed.
Here are David Williams' top 10 stock picks in UMBIX and a quick synopsis of their valuations and how I am investing in some of them using options.
UNP -- Union Pacific is one of the strongest independent railroad businesses on a publicly traded exchange after Warren Buffett purchased all of Burlington Northern a couple years ago. UNP sells for 17X earnings and benefits from rising commodity prices. Risk averse investors can consider selling the January 2012 $ 100 put options, instead of purchasing shares directly, to buy this name at a lower price. With a forward PE of 13.44, an EV / EBITDA of less than 9 times, and a fairly low dividend yield; selling the leap put option for a roughly 1 % per month yield seems like a smart and conservative way to play this stock.
AMX -- America Movil is a majority held investment vehicle of Mexican Billionaire Carlos Slim. The stock trades for 12.4X forward earnings with an EV / EBITDA of around 6 times. ROE is 38 % which qualifies this as a good company at a reasonable pricetag in my view. YOY quarterly revenue growth of 26 % as well as profit growth of over 40% is also a plus. I am very bullish on this name over the longer term as Slim has proven to be one of -- if not the very best -- business manager s and investors in the entire world. Investing wisely is about staying with the best management teams in the world over the long term and buying shares when they trade for a reasonable price. I feel AMX meets this strict criteria for investment.
ANR -- Alpha Natural Resources is trading for 9.3X forward earnings and for an EV / EBITDA multiple of 8.6X. The stock has a PEG ratio of .43 and should benefit from rising coal prices. The stock is a bit too expensive for my taste currently based on trailing earnings, although the assets in the ground may be worth well more than the market price of the stock net of the company's debt given the company's large mining asset base. If I were to buy this name, I would look to buy long dated in the money calls instead of purchasing directly, as this strategy gives investors a built in stop loss order. Furthermore, I would sell front month at the money calls against the name to gain income and hedge downside risk.
LO -- Lorillard sold off heavily back when the U.S. Government was trying to ban Menthol cigarettes, but now it appears that this roadblock is permanently behind the company. LO trades for 15.5X trailing earnings and 12.78X forward earnings. The stock has a dividend yield of 5 %. Insiders at Lorillard purchased around $ 1MM of stock at $ 79 or so per share before the decision against the ban was rendered, however given the run to $ 106 per share, I am not as interested in the stock at this time as I was when shares traded for a much better price. Smoking is not going away anytime soon, but buying low and selling high is what wise long term investing is all about.
PBR -- Petrobras has been under pressure due to the capital raising deal with the Brazilian Government, but this has increased the company's reserves tremendously. The stock trades for 8.2X trailing earnings and an EV / EBITDA ratio of 6.8X with a return on equity of around 15%. Petrobras is a little too confusing for me after the deal with Brazil was made, however, I do believe that this company could be a good investment for investors looking to take a position in the bull market in oil prices ( which in my view is about central bank easing and supply and demand, and not just speculation ) and might make a wise 1 - 3 % position for an individual investor's portfolio. A good way to scale into this stock would be to sell the January 2012 $ 35 put options for $ 3 per contract, or a nearly 10% return on your risk between now and January.
DVN -- Devon trades for less than 9X earnings and at a PEG ratio of .84 which is quite reasonable in my view. DVN's EV / EBITDA ratio of 6.8X and commands operating margins of 43 % and a return on equity of 13%. Devon is a cheap stock with a strong record of earnings growth, but is obviously at risk i f another crash in oil prices takes place. G iven the tendency of central banks to print money if and when deflationary pressures rise, I feel the risk of commodities going down seems lower than the risk that commodity prices will rise over time. A rising tide in the commodity complex makes DVN a good long term investment compared to the S & P 500 in my view.
IBM -- International Business Machines has had a great run, moving from $ 130 per share or so last summer to $170 or so today. IBM's revenue growth stands at around 7 % YOY and has a forward PE ratio of under 12X earnings. Although I am personally not as bullish on IBM at 14 times earnings as I was at 12 times earnings, I do think that this stock could outperform the S & P over the coming years if the business can grow at a 7 % or so rate on both earnings and revenues. The January 2012 $150 call options can be purchased for just $23 or so per contract, which is just a $3 premium versus paying full price for the stock. Investors could buy this longer dated in the money call and sell June $170 calls for $3.70 per contract, limiting your total risk to less than $20 per share and giving investors a covered-call like return structure with a much lower cash outlay.
CNX -- Consol Energy trades at a 12X forward PE multiple and has exhibited a strong historical growth rate, making this a solid longer term investment for UMBIX. CNX is a little too expensive for my tastes, however, as I am looking almost exclusively to buy dollars for fifty cents. Consol is a good business at a premium valuation, and this premium valuation (12X EV / EBITDA) which excludes it from my list of potential investment ideas at this time. However, over a longer time horizon, this investment could make a lot of sense given the long term growth in Consol's balance sheet, which has grown from around $ 1 Billion in shareholder equity in 2006 to nearly $3 Billion today. This is a high growth name which has merits for many investors, but falls out of my area of expertise at current valuations. I don't put as much credence in forward PE multiples as trailing PE multiples, and CNX trades for 33X last year's earnings, which makes it too expensive for me personally.
COP -- Conoco Phillips trades for 10 times trailing earnings and just over 8 times forward earnings. Conoco seems to have righted its ship after some major troubles in 2008 when Buffett called investing in the company one of his biggest mistakes. Conoco is the polar opposite of CNX as an investment idea, because the company's balance sheet has essentially stayed flat over the past five years, while the valuation of the stock on earnings seems downright cheap at current prices. Because of the large losses in 2008, I am hesitant to invest in the stock unless the valuation is dirt cheap. At 8X forward earnings the stock is nearing my interest level , however, I am not invested in the name at this time. Selling a n at the money January 2012 put option on COP seems like a better way to " get long " the stock than buying shares directly. Likewise, a covered call approach to investing in COP seems like a good way to reduce risk in this cheap name which has seen relatively flat growth in balance sheet assets over the past five years.
ACE -- ACE Ltd. is trading for 7.8X earnings and 9.5X forward earnings. The company makes the Magic Formula screen, and insurance shares have been depressed for some time. Investors looking to play options on this stock could consider buying a deep in the money January 2012 $ 47.50 call option and selling front month at the money call options on the stock. Ace's tangible book value per share has doubled over the past two years, which makes this a dirt cheap growth stock with a deep value price tag, and that is why I am long the name via the January 2012 in the money call options.