Identifying the Key Metrics to Watch to Build an "Alpha Engine": an Expert Portfolio Manager Shares His Portfolio-Construction Strategy, Along with Some of His Favorite Dividend-Paying Names

Wall Street Transcript

67 WALL STREET, New York - March 13, 2013 - The Wall Street Transcript has just published its Investing Strategies Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Long-Term Investing - Value Investing - Longer-Term Investing - Bottom-up Investing - Global Investing - High Quality Companies - Investment Strategies -

Companies include: Norfolk Southern Corp. (NSC), Cisco Systems, Inc. (CSCO), Intel Corporation (INTC), Becton, Dickinson and Company (BDX), Eli Lilly & Co. (LLY) and many more.

In the following excerpt from the Investing Strategies Report, an expert portfolio manager discusses his portfolio-construction strategy and his investment philosophy:

TWST: What types of companies do you like to include in a portfolio? What are you specifically looking for?

Mr. Altman: Our first goal is to build a solid portfolio that we are happy with, and that is compelling as a standalone equity portfolio. In fact, by being "happy with it," I mean the portfolio of underlying stocks is the "alpha engine" of the strategy. The way we look at things, I want to buy companies that are historically cheap based on cash flow, based upon enterprise value to EBITDA and based on current yield.

I find those are better value metrics than p/e ratios since "e" can disappear. I like a more broadly defined measure of valuation and for the most part, when a company sets a dividend, they don't like to cut it so I look very carefully at free cash flow yield as well. If the free cash flow yield is high, then that would tend to mitigate the future risk of a dividend reduction and might, in fact, enhance the probability of a dividend increase. That's the valuation side.

From a fundamental point of view, I like to find companies that I think have a secularly positive outlook with maybe a cyclical concern out there for the next three, six, nine or 12 months by the analytical community, one that I think is transitory, which gives me the buying opportunity. A perfect example of that was recently we added Norfolk Southern Corp. (NSC) to the portfolio when the stock was under $60 because everybody was worried about coal volume, and they haul coal.

After some deep fundamental and industry research, and talking in detail with company management, I concluded that coal is basically in an inventory adjustment more than it is in a secular decline. Inventories are coming down, export coal is slowing, and China's demand is slowing and what have you. So to me, coal volume is a cyclical thing, and it will continue to come and go. However, secularly, the railroads are taking market share from the trucks in terms of carrying "stuff," so there is a secular growth aspect to them.

When I can buy a company like NSC at the bottom-end of its valuation band, and I think there is a compelling secular story, a cyclical concern and a 3%-plus yield at the time, I'm very happy to buy the stock and be paid to wait. That's basically how ...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Rates

View Comments (0)