Do you like to go against the crowd with your investment choices? Then you might find value in the stock-picking strategies of Becker Value Equity Fund, which has had quite a run favoring underdogs and dismissing Wall Street recommendations. Fortunately, co-portfolio manager Marian Kessler was kind enough to share with Kapitall the details of Becker's bottom-up stock picking strategy.
A bit of background: The 4-star Becker Value Equity Fund (BVEFX) primarily invests in companies with market capitalizations greater than $10 billion, and uses the Russell 1000 Value as its benchmark. Their investment process is based on fundamental analysis to identify securities that are trading at attractive valuations.
Let's Talk Strategy - What Do You Look For?
"We focus on individual stock selection. We're not top sector rotators or macro driven. We pay attention to companies rather than headline news. We do our own in-house research instead of using Wall Street recommendations, figuring their interests are not necessarily aligned with our own."
When searching for an out-of-favor stock it must meet what Marian calls "relative" and "absolute" valuations. "Relative" meaning it is trading at a discount to historic norms, and "absolute" meaning it is trading at a discount to the market as a whole.
"It's not enough for a stock to be cheap," says Marian. "The company must be developing a roadmap of how they are going forward." For that roadmap the fund looks to the balance sheet for low debt to capital and improving operating margins and revenue growth. "If you have good capital management your earnings flow from there."
On avoiding value traps: "Stocks need to show a positive spread of return on capital relative to cost of capital through good times and bad - this has helped to avoid situations where stocks look cheap but are not earning their cost of capital."
These screens are done in addition to visiting companies, checking a firm's sourcing, supply pipeline, input providers, rating agencies, and analyzing how management benefits shareholders in the long run.
Let's Talk Stock Specifics - What Are Some Favorites?
Teck Resources Ltd (TCK) - Becker recently bought into this Canadian basic materials company that explores, develops and produces a high quality metallurgical coal (used for steelmaking, not heat). "When markets were improving dramatically from 2008, demand for steel making coal went through the roof. It started up in the $50s in 2009-10, and we bough it in the 20′s. Expectations have come down a lot over concerns surrounding European and China industrials but the company's fundamentals remain strong. It has low debt, and high cash flow generators and remains one of the world's largest producers of metallurgical coal. It's undervalued but the highest quality name in the space. It's also not well followed on Wall Street, which we love."
Corning (GLW) - This is a new addition to the Becker portfolio and represents an "absolute value" stock. The stock is very out of favor and has fallen, especially since 2000, from being a huge fiber optic company. It's now one of the world's largest glass companies. They are the developer, manufacturer, and distributors of display screens, TV monitors, and gorilla glass. According to Marian, the company is farthest along in developing gorilla glass that will eventually be sold into monitors. Furthermore, the stock has a high quality balance sheet, with net cash at $3 billion, exceeding long term debt. The stock is currently trading in single digit multiples and offers a 2.32% dividend yield.
"The stock suffers from concerns over demand for TVs and other display items and China's manufacturing capacity," she explains. "I think Corning could also benefit shareholders from a possible breakdown from the company. Their low margin slow growth fiber optics business, which was their big growth business a decade ago, could be separated from their much higher margin and faster growing glass business. If they were to pull apart I think we'd see the stock go much higher, although I don't know if management would ever do it."
Harris Corporation (HRS) - Harris, an international communications and information technology company, is an absolute value stock for Becker. It's a mid cap name, and not well followed. The firm provides a lot of local warning systems for natural disasters as well as services for defense programs and national intelligence programs in addition to private defense software. The company is selling just over book value, with single digit multiples, and well run in a niche space.
Time Warner Inc. (TWX) is a relative value stock Becker has owned for quite a while. Over the years the media company has been shedding itself of larger businesses like AOL and Time Warner cable, and at this point it is just a content company. About 50% of its revenue comes from channels like TBS, HBO, CNN, Turner Classic, Cartoon Network, and more. Warner Brother Films make up 35% of revenues, and the rest are from popular publications like Time Magazine.
It was out of favor in the low $30s over concern that Amazon (AMZN) and Netflix (NFLX) would take over control of content, but that is something their strong management has been successful in hanging onto. They found that people are willing to pay extra for HBO and quality entertainment, and with mobile devices they get more volume and revenue off their film library. "It's not a particularly cheap stock. It's trading 17 times earnings and has an enterprise value/EBITDA of 8.6. But from an asset value, it has enormously attractive assets and management has been a good long term grower. We think it's still reasonably valued, and are happy to add to our position." (click to enlarge)
Any Advice For New Investors?
"Buy what's understandable to you. Buy what you know. Don't buy into stocks or strategies or mutual funds if you don't know why they're doing what they do. And be careful about holding names you love. Don't fall in love with stocks."
Business Section: Investing Ideas
Are you looking to follow the investing advice of Marian Kessler and Becker Value Equity Fund? In addition to the insights and recent trades mentioned above, we list Becker's top 10 holdings below. The firm holds roughly 60 positions with fairly equal weighting.
Becker has done considerable research on each of these names, and feels confident in their ability to surprise and increase in value. What do you think? List Average 1-Year Return: 29%.
1. Microsoft Corporation (MSFT)
2. Intel Corporation (INTC)
3. JPMorgan Chase & Co. (JPM)
4. 3M Co. (MMM)
5. Verizon Communications Inc. (VZ)
6. Time Warner Inc.
7. Amgen Inc. (AMGN)
8. Dun & Bradstreet Corp. (DNB)
9. Merck & Co. Inc. (MRK)
10. PNC Financial Services Group Inc. (PNC)
Interactive chart: Compare the 1-year returns for these names using this tool. Click through to analyze these names using other metrics including average analyst ratings, market cap, dividend yield and more.
Written by Kapitall's Rebecca Lipman. For a complete list of hedge fund interviews by Kapitall, click here.