Investing in Value-Creating Opportunities

Wall Street Transcript

67 WALL STREET, New York - July 23, 2012 - The Wall Street Transcript has just published its Investing Strategies Report offering a timely review of the market to serious investors. This special feature contains expert industry commentary through in-depth interviews with expert Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investing in Canada - Value Investing - Downside Protection - Dividend Yields - Global Macroeconomic Trends

Companies include: Federated Investors, Inc. (FII), The TJX Companies, Inc. (TJX), Ross Stores Inc. (ROST), Altria Group Inc. (MO), Philip Morris International, I (PM), Annaly Capital Management, Inc (NLY) and many others.

In the following excerpt from the current Investing Strategies Report, a leading portfolio manager from Herndon Capital Management discusses the outlook for the market for investors.

TWST: What are some of your top holdings or top investment ideas right now? Please tell us a little bit about what you like about them.

Mr. Cain: One thing that I must say is that when you look at our top holdings in the portfolio, for some investors that would correlate to their favorite holdings, but we don't have any core holdings in the portfolio, and we try to steer away from having a lot of biases and subjectivity toward certain companies. Clearly for any investor to make an investment and the investment is working, they have an affinity for it. They want more of it. But in terms of making that something you would call a “favorite,” we shy away from that. Instead, our focus is on the total portfolio, and we are expecting that every company has an opportunity to outperform, it just may not be timely right now.

Of some of the more timely names which have worked their way into being some of our larger holdings, I will look at the top three, each coming from a different sector. Federated Investors (FII) is one of the larger publicly traded asset managers, and they have an overhang because they are one of the largest managers of money market fund assets right now. Clearly that part of the investment management industry has come under a great deal of pressure, and the bulk of their assets are in that area. Clearly, with interest rates being so low, it's hard to make a lot of money there. You're seeing some of the weaker or marginal players starting to sell off their funds and assets. Federated is a buyer of that, so in a business where margins are very thin — it’s almost negative; it’s next to nothing — they are building upon the scale that they already have such that when the interest rate environment does turn — and these things tend to run in cycles — they are going to be very well positioned and, we think, continue to garner share and generate solid returns on that asset class. What also is being neglected is that they are a diversified money manager. They also offer longer duration fixed income funds, as well as offering equity funds on a domestic as well as an international front. That doesn’t get talked about a great deal. This is still an extremely profitable company run by a family, the Donahue family, that tends to have an eye toward maximizing their returns as well as that of their coinvestors. So although the company has rebounded somewhat this year, we still think there is a good deal more upside to be generated there.

The next company is TJX Companies (TJX), the purveyor of T. J.Maxx, which has benefited from the trade-down effect of the middle-income and even upper-income consumer who wants to buy branded goods but wants to pay a discounted price for doing so. This company as well as another portfolio holding, Ross Stores (ROST), has done extremely well. They don't get lumped so much in the same category as the dollar stores, because they typically are selling goods at higher price points, but what they are is an alternative to mall-based retailers that are selling goods at closer to full price that may be of similar brands. They have benefited from the economic environment that we have been going through, and the amount of loyalty, even as the economy is gradually starting to do better, has not dissipated. The same-store sales have continued to meet and beat investor expectations. So we think that there is still a great deal more upside here. The good thing about them geographically is they have not maxed out their potential — no pun intended on that. They have a platform that's growing nationally, but they still have more growth opportunities. They have exposure to the Canadian market with their platform, and they also recently expanded to the U.K. The discounted branded retail platform is something that we are not sure if it's going to be worldwide, but it's something that clearly has a great deal more legs to it.

And then the next one to mention would be Altria (MO). As the market has had issue from time to time with what's taken place over in Europe, some of the consumer staples companies, which this company comes from as far as the sector representation, have done fairly well. And despite the issues regarding legislation, and even though there are well-documented, well-known and well-advertised ill health effects of the products that Altria makes, the company is still making a tremendous amount of money, paying a very healthy dividend and the stock price has responded.

One of the things to really like about a lot of the consumer staples companies is that their typical cash outlays to continue to manufacture their products is not that significant. A lot of the spending that they typically are doing is defending the brand. From a commodity standpoint, yes, the cost input levels do fluctuate with commodity prices, but those are pretty well managed. What they are really fighting for, in many cases, is additional market share. Some of the legislation that has taken place regarding marketing has allowed some of the major players to really form more so-entrenched positions, because the competitors can't necessarily out-market if they don't have the dollars. 

And then, two, they are not going to be allowed to continue to do that to the same degree from a legislative standpoint. So they have a pretty formidable market share in terms of the proverbial moat around the business. The challenge that they do have, unlike their international counterpart Philip Morris International (PM), which is also one of our top 10 holdings, is they are locked into the domestic market. So from a capacity standpoint, they are maxing that out, and clearly it's been shown that the number of smokers is gradually declining. But they have actually been able to continue to get price increases to go through, and they stick because people still have a demand for the product.

TWST: What prompts a decision to exit a holding for you? Is there a recent example that you would offer to illustrate?

For more from 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.

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