Montreal-based Van Berkom Associates (VBA), with $1.5 billion in equity assets under management, concentrates 100% of its activities on U.S. and Canadian small-cap companies. Its $856 million VBA U.S. Pension Fund has generated 12.83% annualized returns since fund inception in 2000, as compared to 6.0% for the benchmark Russell 2000 Index. The fund holds a concentrated portfolio of 42 positions, and its average holding period is three years. The portfolio is over-weight services (27%), healthcare (19%) and financials (20%), and it is under-weight energy (2%) and technology (10%).
Three attractive buys from its portfolio include consumer electronics retailer Hhgregg Inc. (HGG), discount retailer Big Lots Inc. (BIG) and hospital operator Universal Health Services, Inc. (UHS). A conviction sell from its portfolio includes Fossil Inc. (FOSL), a provider of fashion accessories. The following summarizes its largest buys and sells and top holdings based on the most recent SEC 13-F filing for the June 2011 quarter:
Services sector: Buy HGG and BIG. VBA added $54 million from its $190 million prior quarter position in the sector. It added $11 million to its $16 million prior quarter position in BIG, a new $17 million position in satellite communications services company Iridium Communications (IRDM), and $5 million to its $21 million position in HGG.
HGG is a specialty retailer of consumer electronics, home appliances, and related services. The stock has been weak since the beginning of the year, along with other big-box retailers such as Best Buy Co. Inc. (BBY), due to continued macro-economic pressures on its appliance and consumer electronics categories. However, the company has continued to out-perform with earnings rising in four of the last five years, and has continued to beat analysts' estimates including in the most recent March 2011 quarter.
The company is in expansion mode, planning to add 35 to 40 more stores in 2011-12 to its current 173 stores, which is expected to further bolster its earnings from $1.22 in the 2011 to $1.53 in 2013. Meanwhile, the stock trades at a forward P/E of 10, at the bottom of its historic P/E range. Analysts are bullish on the stock giving it a mean target of $18, well above the current $13 price. Also, of the 19 analysts covering the stock: Four give it a strong buy, 15 a hold, and none rate it at underperform/sell. We believe that the bottom has been set in the stock in a $12-15 range, and we would be aggressive buyers here, expecting that the improving economy and the company’s expansion plan will lead to strong revenue and earnings growth in the coming years.
BIG operates 1,398 close-out stores in 48 states. It offers products under various merchandising categories including consumables, home furnishings, electronics, appliances, and home maintenance products. Besides VBA, high alpha funds that have a long-term track record of beating the markets also bought BIG aggressively during the quarter, adding a net $346 million to their $75 million holdings from the prior quarter. This included York Capital Management ($201 million), ESL Investments ($56 million), Eton Park Capital Management LP ($54 million), Perry Corp. ($41 million), Third Point LLC ($22 million) and SAC Capital Advisors LP ($15 million).
BIG trades at a forward P/E of 11 at the bottom of its historic P/E range and well below multiples for its peers. Of the 16 analysts covering the stock, six rate it a buy/strong buy, nine a hold, and one rates it at underperform. The most recent analyst actions have put price targets on BIG in the $38-46 range, well above the current $33 trading price. The stock has fallen off recently as speculation surrounding a buy-out of the company ended, and it has been consolidating recently in the $31-34 range. BIG is a compelling opportunity in the low-$30s, and we would be buyers into any dip back near $30.
Healthcare sector: Buy Universal Health Services, Inc. (UHS). UHS owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers in the U.S. and Puerto Rico. At $40 million, this is VBA’s largest position in the portfolio. The stock has been riding steadily upward recently, up over 30% in the last six months. We believe that the upside momentum will continue as the stock trades at a forward P/E of 12, at the bottom of its historic range, while earnings are projected to explode upward from $2.54 in 2010 to $3.97 in 2011 and $4.47 in 2012. Furthermore, analysts are bullish on the stock, as 15 give it a buy/strong buy, five a hold, and none rates it at underperform/sell. The hospital industry is recession-resistant, and UHS would be a good buy for those seeking to add a defensive play to their portfolios. We would start building a position here, buying shares in case negative headlines from Washington relating to the ongoing debt limit negotiations and its possible impact on Medicare lead to a temporary weakness in the share price to the $50 range.
Consumer cyclical sector: Sell Fossil Inc. (FOSL). FOSL designs, develops, markets and distributes fashion accessories worldwide. It offers a line of fashion watches, and provides various fashion accessories for men and women, including handbags, belts, small leather goods, jewelry, and sunglasses. The products are sold through company-owned retail stores, department stores, and specialty retail stores, as well as over the Internet and through catalogs. VBA sold its entire position in the $100+ range in the June quarter.
FOSL has reported increasing revenues and earnings every year since 2006, with earnings rising at a very impressive 31% compounded rate. Furthermore, it continues to beat analysts' earnings estimates every quarter by wide margins. The stock price has responded well, up over 1,100% from the $11 lows in early 2009, while revenues and earnings are up in comparison only a relatively modest 30% and 100% over the same period. At current prices, we believe that the stock has run ahead of itself and is priced for perfection. It trades at a forward P/E ratio of 25 based on estimated earnings over the next 12 months, at the top of its historic P/E range. It also trades above analysts’ mean price target of $120. Furthermore, high alpha funds that have a long-term track record of beating the markets sold FOSL aggressively during the prior March quarter, selling $195 million of their $536 million holding in the stock. The selling guru funds included SAC Capital Advisors LP ($95 million), Royce & Associates LLC ($87 million), Capital Growth Management LP ($8 million), Balyasny Asset Management LLC ($4 million) and Driehaus Capital Management ($2 million); none of the funds added to their FOSL positions during the quarter. We would be sellers into the rally as we believe that the downside execution risk exceeds the potential upside opportunity at these levels.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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