It has long been said that one man's trash is enough man's treasure. Sometimes, if you know where to look, value and riches can be sitting right beneath your nose.
That's roughly the mindset that fund manager Andrew Wellington of Lyrical Partners has these days, as he sorts through scores of trendy, pricey, and overcrowded stocks until he finds exactly what he's looking for. To be chosen is no small feat given that Wellington's U.S. Value Equity fund (LYRIX) holds only three dozen stocks and averages just six trades a year.
We recently sat down with Wellington to ask where he sees value in a market that is continually setting new record highs. We've outlined his three favorite picks - all of which he currently holds.
"Hertz is the big consolidator," Wellington says. "They recently acquired the Dollar Thrifty Group and because of that there's a lot of upside to their earnings."
To be sure, the largest car rental company has already had a huge run-up, gaining nearly 500% in the past five years, but Wellington says it is still "a very cheap stock."
You'd think a stock that was up so much might be off-putting, but this New York-based money manager says Hertz still trades at just 10-times Wall Street's projected earnings for 2014, and only 8-times the 2015 estimates.
He's not the only one who likes this stock. In fact, 9 of 10 analysts who follow it currently rate Hertz a buy --a bullish bias that hasn't budged, even though the stock is now 15% below its all-time high of $27.75 hit in mid-July, and about as much from a more recent peak after lowering its full year outlook in late September.
Wellington says that while the business is certainly exposed to the impacts of the economic cycle, it is still a "resilient business", explaining that when their rental business slows down, the company sells cars when it doesn't need as many. "If you're a business that generates cash in a downturn," he says, "that makes it very difficult for you to go bankrupt."
After plunging almost 90% in less than two years, Goodyear has been on a post-recession roll, and has gained 500% since dipping below $4 a share in March 2009. Put another way, had you bought 1,000 shares at the trough, your $3,500 investment would be worth about $21,000 today.
"If you go back about a decade, Goodyear wasn't that great a business," Wellington says, pointing out that their domestic tire business - which was half their business - is barely breaking even. Today, thanks to a massive global restructuring, he says Goodyear's international business is not only good and getting better as Europe improves, but the U.S. operations are refocused and improving too.
Having given up trying to compete against cheap imports, Goodyear's U.S. business, which was earning 1% margins, is now earning 6% margins.
"So you have a business that is at just 8-times earnings, even though it is up so much, and it still has great growth in front of it," he says.
Western Digital (WDC)
Wellington calls this Irvine, California-based computer data storage firm "another great example of a company that is up a lot but still very cheap." In this case, by "up a lot" he means about 500% since the 2009 lows. And similar to Hertz, Wellington also highlights the fact that Western Digital operates within a ''nice, consolidated industry", pointing out that it and rival Seagate (STX) "together control 90% of the market" for hard drives.
"People think the hard drive business has to be hurting since everyone is buying tablets (which don't have hard drives) and not PCs, (which do)." But the fact remains that Western Digital has beaten consensus EPS estimates for ten quarters in a row and 18 of the last 20.
"They keep beating earnings because there is less storage on a tablet, but that storage is moving off and into the cloud," he says of what's often called the Big Data trend. "So while we've seen a decrease in storage demand in the PC world, it's been offset by a big increase in the cloud world."
Is Western Digital a volatile stock? "Sure," says Wellington, "but at 8-times earnings, you can just get in and forget about it."