Stocks Trading at Discount to Intrinsic Value with Growth Prospects: Paul Hogan, Co-Manager of the FAM Equity-Income Fund at Fenimore Asset Management

Wall Street Transcript

67 WALL STREET, New York - September 10, 2012 - The Wall Street Transcript has just published its Large-Cap Value and Other Investing Strategies Report offering a timely review to serious investors and industry executives. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Large Cap Investing - Downside Protection - Value Investing - Risk Mitigation

Companies include: Mattel Inc. (MAT), McCormick & Co. Inc. (MKC), Aqua America Inc. (WTR), Meredith Corp. (MDP) and many others.

In the following excerpt from the Large-Cap Value Investing Strategies Report, an highly experienced portfolio manager discusses his investment criteria:

TWST: Would you give us three examples of holdings you believe are representative of the firm's investment approach, and tell us what you like about each of those three stocks?

Mr. Hogan: We are looking for companies that have a long runway for growth ahead of them. This growth may come from new product innovation, geographic expansion or even acquisitions. Furthermore, we like businesses that have strong competitive positions and are able to fend off competitors.

One sign that a company has a strong position in the market is their ability to raise prices. This becomes very important as input costs rise. Another indicator of competitive strength is the return on invested capital that a business is able to earn. Stronger companies earn significantly higher returns than weaker ones. We want them to be highly profitable so they can pay an ample dividend and grow that dividend over time. The holdings in the fund have grown their dividends by 11% annualized over the last five years. We are pleased with this number considering the dividends in the S&P 500 Index have actually declined by 2% over the same five-year period.

TWST: Would you give us three examples of holdings you believe are representative of the firm's investment approach, and tell us what you like about each of those three stocks?

Mr. Hogan: Sure. Mattel (MAT), the toy maker, has terrifically strong brands, such as Barbie and American Girl, and they recently bought the Thomas the Tank Engine brand. This company has a 3.8% dividend yield.

Interestingly, when you think about the "graying of America," and then carry that onto the younger generation, it means that there are more grandparents. With more grandparents, that's more people to buy toys for the grandchildren and Mattel should benefit. This isn't just a U.S. company - they're growing all over the world. We think this is a great story. They are well managed and have the potential for much growth.

Another story is McCormick (MKC), the spice company. It conducts business internationally and has a 2% dividend yield. McCormick is able to grow through worldwide acquisitions and is also doing a lot of innovative things in the supermarket. In fact, spices are one of the most profitable grocery store categories.

McCormick is not just producing the bottled spices. They're actually packaging recipes with little packets containing the right amount of spices necessary per the instructions. This way if somebody wants to cook a chicken dish, they don't have to go out and buy three or four large containers of each of the spices that would be included in that recipe. They just get the premeasured amount, which makes it very easy.

The third is Aqua America (WTR). This is a water utility, which operates in 13 states. This year the one headline that seems to be dominating the press is the drought in the U.S. The drought has benefited Aqua America because water utilities tend to do very well when we have hot, dry summers. So Aqua results have been very good, and management continues to make acquisitions, and this grows its customer base.

TWST: What is Fenimore's sell discipline? Would you give us an example of a stock you recently sold and tell us why?

Mr. Hogan: There are a few reasons why we would sell a stock. First, the stock appreciates and is fully valued. We may decide the potential return from the current valuation is not large enough, so we start trimming back the position. Normally, we just trim and don't sell whole positions.

The second reason is that the investment no longer meets our criteria. We want to recognize this as soon as possible so that we can sell completely and invest the proceeds in better prospects. Finally, we may lose faith in a company's management team or the results are not tracking to our expectations, in which case we would sell the entire position.

An example that we sold recently is Meredith Corporation (MDP). Meredith publishes magazines, and it also owns TV stations. The business was able to grow for a number of years, but then it hit a wall in terms of expansion. Management tried a number of different initiatives to grow again, but nothing really panned out. Meredith declared a much larger dividend, which we were happy to see, but we just saw better opportunities elsewhere.

TWST: What do you see as the most significant risk on the horizon for investors?

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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