Transportation and Technology Stocks Are Top Picks in this Wall Street Transcript Interview: Finding Value and Dividend Yield in Large Caps

Wall Street Transcript

67 WALL STREET, New York - September 5, 2012 - The Wall Street Transcript has just published its Large-Cap Value 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: Cisco Systems, Inc. (CSCO), Expeditors International of Wa (EXPD), Norfolk Southern Corp. (NSC) and many others.

In the following excerpt from the Large-Cap Value Investing Strategies Report, two expert portfolio managers discuss their current favorite stock picks:

TWST: Last time we spoke, three sectors you liked were technology, health care and defense. Would you say those are still the top three? If yes, please reiterate what you like about those sectors. If there is a new sector you've become particularly interested in, please tell us what it is and what you like about it.

Mr. Fattibene: I would say technology continues to have a lot of appeal. We talk about how many of the companies in that sector have fantastic balance sheets to the point that some people argue that they have too much cash. So we still see that. We are actually going to revisit our Cisco (CSCO) discussion from last year as that story has played out, and we continue to hold the stock. We still like health care stocks, and we still own defense stocks. More broadly, we are noticing many industrial names with good balance sheets and low valuations looking very interesting to us.

One of the things we are seeing in the press lately is people asking questions about whether dividend stocks are in a bubble. Are they overvalued? For us, it goes back to what Jim was talking about previously, our focus on valuations and what we are paying for a stock. I would tell you that certain sectors that have traditionally been looked at for yield, whether they're utilities, whether they are telecom, those do look more fully valued to us than undervalued right now. So our search for quality and dividends has led us to somewhat atypical sectors for income, like technology. We've had to be more opportunistic in looking at different areas.

Finally, as we said last year, we continue to be excited by the opportunity to be able to purchase very high-quality companies at what we think are attractive prices. So we have continued to take advantage of this opportunity and upgraded our portfolios as far as quality goes.

TWST: To demonstrate your investment approach, would you tell us about three stocks you like at the moment?

Mr. Wright: Actually, we will cover two new stocks and one we have discussed in the past. First, let's start with Cisco. As you mentioned, we talked about Cisco last year, and we still like it. In fact, we like it even more. The stock is up since we discussed it last June, and is now just below $19. Cisco is the largest supplier of networking equipment and software. Its big products are switches and routers. This is a great example of a company that really gets it.

Last year, they finally initiated a dividend, a fairly modest one, starting in the spring. But just last week, they announced that they were increasing their dividend, and they were increasing it by 75%. We love that kind of news. The stock now yields 3%. That indicates to us that the Cisco management team is doing much more to try to enhance returns for shareholders.

So why do we still like the stock? The company has $6 of net cash on its balance sheet so you can buy this terrific underlying business for $13. That's roughly 7.5 times current earnings and closer to seven times future earnings. We believe the stock is probably worth in the mid- to high 20s, and so we're still holders.

TWST: What other examples can you share?

Mr. Fattibene: I will talk about Expeditors International (EXPD), which is trading a little over $38 a share right now. They are involved in global trade. Say a company has got a product, and they want to move it from country "A" to country "B," Expeditors can help them through that by arranging for transport, handling the customs negotiations and other stuff like that. What's really interesting about them is they don't own any equipment that moves the products. So they don't own the ships, they don't own the planes, they don't own the trucks. They are just basically a logistics company, and their competitive advantage is their intellectual property and due diligence in relationships with the people who do own the trucks, the planes, the boats, etc.

We don't think that global trade is done growing. There are going to be ups and downs in it, but the global marketplace is becoming more and more integrated, and we think that's a trend that's going to continue to play out. We've seen major revenue declines during the Great Recession from Expeditors, but we still think the long-term trend is up in that area.

Some of the things we like about Expeditors - the company carries absolutely no debt on its balance sheet. They don't even have a pension plan, which for some companies is like debt given how many pension plans are underfunded. Just like Cisco, they have over $6 a share in cash on the balance sheet. Obviously, they are easily self-funding. They have a lower current yield of 1.5% right now, but they doubled the dividend over the last five years. While I would expect the pace of dividend increases to slow down going forward, Expeditors has both the financial capacity to increase its payments to shareholders and a demonstrated desire to do that. Even with that growth in the dividend, its payout ratio still remains comfortably under 35%.

TWST: Is there one more you wanted to mention?

Mr. Wright: The last company we want to talk about is Norfolk Southern (NSC), which is a railroad company. It's a little different from both Cisco and Expeditors in that it's involved in a much more capital-intensive business then we typically like. But that capital intensity is what gives Norfolk Southern its competitive advantage. It is a very valuable franchise. Basically, they have tracks throughout the eastern United States that really can't be replicated, and because of that they are integral to transporting products whether its coal, automobiles, chemicals or just general merchandise, etc.

Volumes have slowed a little bit because of the weaker economy. But as the economy bounces back, we are going to certainly expect volumes to improve. Right now, the company pays a dividend, and it yields 2.7%. The management has shown a real commitment to growing the dividend. It's been up almost 25% a year for the last five years.

Finally, this is a really efficient operator, and it's one of the best-run railroads in the country. With the stock at $73, we are able to buy it at fairly low valuation of about 11 times earnings, and we think it's probably worth somewhere in the high 80s, low 90s over the next 12 to 18 months.

TWST: How would you describe the risk management strategy at Harvest Financial?

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.

View Comments