Telecom Supplier is Contrarian Pick from Value Portfolio: A Wall Street Transcript Interview with Lesa A. Sroufe, President and Chief Investment Officer of Lesa Sroufe & Co.

Wall Street Transcript

67 WALL STREET, New York - November 8, 2012 - The Wall Street Transcript has just published its Investing Strategies Report offering a timely review for serious investors and industry executives. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Small Cap Investing - ESG Investing - SRI Investing - Long Term Investing - Focus on Fundamentals

Companies include: Google Inc. (GOOG), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Cisco Systems, Inc. (CSCO), Dell Inc. (DELL), Flextronics International Ltd. (FLEX), Southwest Airlines Co. (LUV), Total SA (TOT)

In the following excerpt from the Investing Strategies Report, an experienced contrarian portfolio manager discusses her investment philosophy and top picks:

TWST: Are there any other broad themes or trends you are finding compelling in today's market environment?

Ms. Sroufe: One of the areas that, I would say, is also inexpensive are some of the old-line, large-cap technology stocks. There is a have and have-not in the technology industry. Whereas social networking is still working, and stocks like Google (GOOG), which is more broad-based, Apple (AAPL) and Amazon (AMZN) have done very well in terms of their stock price and in earnings - the old-line, commodity-technology stocks have really lagged the general market and declined even as the general stock market rose.

The companies I am talking about are Cisco (CSCO), Dell (DELL), which arguably trades at eight times earnings, and other companies such as Flextronics (FLEX), which is an original equipment manufacturer to the telecom industry which trades at less than eight times earnings. Flextronics has been strongly free cash flow positive and has used that extra cash flow, rather than paying a dividend, to buy back stock. We think over time that will benefit Flextronics' common stock very well. Flextronics trades at less than $6, and, as I said, less than eight times earnings.

TWST: What are some of your top stock picks are right now. Is that one?

Ms. Sroufe: We tend to like companies that are out of favor and have declined in price. Unlike other investment managers, that's something that actually gets us pretty excited, because we believe that investor attitudes are really part of the investment equation, and that investors naturally like stocks that are appreciating in price, that make them feel more confident, and they lose confidence as stocks decline in price.

There are times when a stock is declining in price that it's just overdone relative to the fundamentals of the company. We think that's the case with Flextronics. Flextronics counts among its many customers some of the large-name telecom companies. You don't see Flextronics' name on products, but they are the manufacturer of the equipment, as is often the case.

Flextronics had its heyday back in the 1990s, when the stock was bid up to over $40 a share when the manufacturing capacity for telecom equipment was very tight, and what happened was it became an overcapacity situation starting with the dot-com crash, and a lot of companies went out of business. Flextronics used its muscle to acquire other companies. It had a strong balance sheet and continued to acquire companies, and as the supply and demand in OEM manufacturing came into balance, which started, I would say, about 2009, the company has actually been able to grow its earnings.

And so here it is today, less than $6 a share, and earnings estimates for the year ending March of 2013 are for the company to earn about $0.80 a share. And next year, we expect the company to grow its earnings by another 10%, to $0.88 a share. The more important story there is the company, over the last four years, has been able to retire about 20% of its shares outstanding. And we think, over the next four years, the company will be able to retire at least another 20% of its shares outstanding.

TWST: Is there another favorite name you want to share?

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