David F. Swensen has been the Chief Investment Officer in Yale University since 1985. He is responsible for administering and investing the University's endowment assets and investment funds, all of which amount to $19.4 billion. Realizing an average annual return of 11.8% on his investments from 1999 to 2009, Swensen's solid track record has allured Wall Street portfolio managers.
The Yale Model, co-created by David Swensen and Dean Takahashi, is described in the book Swensen authored: Pioneering Portfolio Management. Generally speaking, it consists of dividing a portfolio into five or six roughly equal parts and investing each in a different asset class. What is most important in the Yale Model is extensive diversification and an equity orientation, eschewing asset classes with low expected returns like fixed income and commodities.
Especially revolutionary at the time was his acknowledgment that liquidity is something to be shunned rather than something to be searched for, inasmuch as it comes with a heavy price of lower returns. Thus, the Yale Model is typified by a comparatively large exposure to asset classes, including private equity in comparison to more conventional portfolios.
As such, this type of investment, i.e. apportioning only a small amount of traditional U.S. equities and bonds and a greater part to alternative investments, is pursued by many important endowments and foundations. Consequently, it is known as the "Endowment Model" (of investment).
Swensen's book, Unconventional Success: A Fundamental Approach to Personal Investment, recommends these allocations to single investors who seek a "well-diversified, equity-oriented portfolio":
30% Domestic stock funds
20% Real estate investment trusts
15% U.S. Treasury bonds
15% U.S. Treasury inflation-protected securities
15% Foreign developed-market stock funds
5% Emerging-market stock funds
I deem it essential to purchase companies with products or services that are needed or desired, have no close substitute and are unregulated. Analyzing Swensen's portfolio, I found that he also respects such business tenets. I will detail his holdings and the reason why he could have picked each stock.
Approach Resources Inc. (AREX)
Approach Resources Inc. is an autonomous energy company in the fields of exploration, development, exploitation, production and acquisition of non-traditional natural gas and oil properties onshore in Western Canada and the United States. Approach Resources Inc. concentrated its growth efforts most of all in locating as well as developing natural gas reserves in known tight gas sands and shale areas. Currently, this Company operates in New Mexico, Texas and Kentucky. It also owns a non-operating interest in Western Canada.
I think that Swensen invested in AREX because its total production rose 50% to 2.3 MMBoe (6.4 MBoe/d), which consists of 55% oil and NGLs and its Oil and NGL production was increased 152% to 1.3 MMBbls. A second reason could be that its revenues rose 88% to $108.4 million and its net income totaled $7.2 million ($0.25 per diluted share). Furthermore, I am sure that Swensen's analysis contemplated that the company's adjusted net income (non-GAAP) increased 125% to $19.5 million, or $0.67 per diluted share, and that its (non-GAAP) EBITDAX increased 85% to $79.4 million (or $2.72 per diluted share).
Swensen was attracted by the fact that production for 2011 totaled 2,338 MBoe (6.4 MBoe/d), in comparison to 1,556 MBoe (4.3 MBoe/d) in 2010, which represents a 50% rise, and that Oil and NGL production for 2011 jumped 152% to 1,280 MBbls, in comparison to 507 MBbls produced in 2010. I also believe Swensen invested in AREX because its production for 2011 was 55% oil and NGLs as well as 45% natural gas, in comparison to 33% oil and NGLs and 67% natural gas in 2010. Likewise, non-GAAP EBITDAX for 2011 reached $79.4 million ($2.72 per diluted share), in comparison to $43 million ($1.94 per diluted share) for 2010.
AREX's Current Net Profit Margin is 12.96, currently higher than its 2009 margin of -12.86. I like Companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Current Return on Equity for AREX is 2.70. It is lower than the 20% standard I look for in companies I invest in, and higher than its 2009 average return on equity of -2.35.
In terms of income and revenue growth, AREX has a 3-year average revenue growth of 13.76 and a 3-year net income average growth of 40.18. Its Current Revenue Year over Year growth is 41.66, higher than its 2009 revenue growth of -49.11. I like when current revenue growth is higher than the past year. It generally shows that business is performing better for some reason.
In terms of valuation ratios, AREX is trading at a Price/Book of 2.9x, a Price/Sales of 10.5x and a Price/Cash Flow of 11.7x in comparison to its industry averages of 1.9x Book, 3.0x Sales and 6.4x Cash Flow. It is essential to analyze the current valuation of AREX and check how it is trading in relation to its peer group.
Higher One Holdings Inc. (ONE)
Higher One Holdings Inc. provides technology and payment services to the industry of higher education, bringing solutions to higher education institutions and students with a view to handling financial disbursements, including on campus and community purchases, student refunds, payroll and employee expenses and payment collection from students, parents and sponsors. For its higher education institution customers, Higher One Holdings Inc. presents its OneDisburse Refund Management disbursement service. For students and other campus community members, it can offer its OneAccount service which encompasses an FDIC-insured deposit account facilitated by its bank partner, the OneCard (a debit MasterCard ATM card) as well as other retail banking services.
In terms of ONE's quarterly results, it reached its best sales year ever, with Signed School Enrollment increase of 888,000. Furthermore, it was its best ever fourth quarter for new sales with a nearly 200,000 increase in SSE, not to mention that the company totaled 2 million OneAccounts upon completion of the fourth quarter, up 23% from a year ago.
"I am very pleased with our performance throughout 2011 and particularly pleased that we exited the year in such a strong position," stated Dean Hatton, President and CEO of Higher One. "We had an excellent year for sales and delivered earnings at the top end of our guidance range. We also laid the groundwork to implement a multi-bank strategy and took other steps that greatly improve the company's flexibility going forward. 2012 should be another year of strong growth for Higher One."
ONE's Current Net Profit Margin is 18.09, currently higher than its 2012 margin of 17.29. I prefer companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Current Return on Equity for ONE is 30.82. It is higher than the 20% standard I look for in companies I invest in, but lower than its 2010 average return on equity of 55.38.
In terms of income and revenue growth, ONE has a 3-year average revenue growth of 58.83 and a 3-year net income average growth of 71.00. Its Current Revenue Year over Year growth is 21.63, lower than its 2010 revenue growth of 86.80. It is essential to analyze why that happened. The current net income year over year growth is 27.27, lower than its 2010 average of 76.24. I do not like when current net income growth is less than the past year. I look for companies that increase both profits and revenues.
In terms of valuation ratios, ONE is trading at a Price/Book of 7.2x, a Price/Sales of 5.3x and a Price/Cash Flow of 21.1x in comparison to its industry averages of 2.7x Book, 1.5x Sales and 10.5x Cash Flow. In terms of valuation there is not a clear undervaluation multiple thesis here.
Wolverine World Wide (WWW)
Wolverine World Wide, Inc. is engaged in the design, manufacturing, distribution and marketing of several brands and styles of footwear. Its great footwear variety spans slippers, casual shoes, dress shoes, boots, moccasins, uniform shoes as well as work boots and shoes. It is also a domestic pigskin tanner.
Regarding WWW's quarterly results, revenue rose 12.9% to a record $1,409.1 million, propelled by double-digit growth from the Company's branded operating groups, namely the Outdoor Group, Heritage Group and Lifestyle Group. Foreign exchange contributed also with $17.3 million (1.4%, to reported revenue growth). This year's revenue amounts to the second consecutive year of double-digit growth, reflecting a strong momentum for the Company's brand portfolio in almost all major geographic regions. Also, gross margin of 39.5% equaled the prior year's gross margin, which evidences an outstanding performance in a difficult sourcing and product cost context.
With regards to its operating margin, it expanded to a record 12.1%, in comparison to the reported operating margin of 11.4% in the prior year. Diluted earnings per share rose 14.3% to $2.48 in comparison to prior year adjusted earnings per share of $2.17. Reported full-year earnings per share in 2010 amounted to $2.11. The admirable free cash flow generated in 2011 was invested into future growth, employee fund benefit plans and shareholder return value by means of the payout of $22.7 million in dividends and the repurchasing of 1.8 million shares for $65.3 million.
"Our portfolio of strong, global lifestyle brands combined to deliver another year of record performance," stated WWW's Chairman and Chief Executive Officer Blake W. Krueger. "Each of our three branded operating groups and our direct-to-consumer business contributed to the year's outstanding results. Additionally, all major international regions reported double-digit revenue growth, as our newly created International Group focused on the significant opportunities outside of North America. Our distributor and licensee business, which markets our brands in nearly 190 countries, also had an exceptional year, with revenue up nearly 40%. We are very proud of the record performance in 2011 and are excited about the global momentum of our brands, our continued geographic expansion and the impressive product innovations we have planned for 2012." (source)
WWW's Current Net Profit Margin is 8.75, currently higher than its 2010 margin of 8.37. I like companies that increase margins. Current Return on Equity for WWW is 21.97, higher than the 20% standard I look for in companies I invest in, and also higher than its 2010 average return on equity of 20.37.
In terms of income and revenue growth, WWW has a 3-year average revenue growth of 4.90 and a 3-year net income average growth of 18.01. Its Current Revenue Year over Year growth is 12.86, lower than its 2010 revenue growth of 13.39. I do not like when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. The current net income year over year growth is 18.01, lower than its 2010 average of 68.74. I do not like when current net income growth is less than the past year, and prefer to I look for companies that increase both profits and revenues.
In terms of valuation ratios, WWW is trading at a Price/Book of 3,.2x, a Price/Sales of 1.3x and a Price/Cash Flow of 23.8x in comparison to its industry averages of 4.1x Book, 1.9x Sales and 23.6x Cash Flow. It is essential to analyze the current valuation of WWW and check how it is trading in relation to its peer group.