A Wall Street Transcript Interview with John P. DeGulis, a Partner and Portfolio Manager at Sound Shore Management, Inc.: Fundamental Value in Contrarian Picks in Mid- and Large-Cap Equities

Wall Street Transcript

67 WALL STREET, New York - January 7, 2014 - The Wall Street Transcript has just published its Value Investing and Other Strategies Report. This special feature contains expert industry commentary through in-depth interviews with highly experienced Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Small Cap Investing - Contrarian Approach to Investing - Quality of Business - Value Oriented Strategy - High-Quality Companies - Long-Term Intrinsic Value - Asset-Heavy Companies - Multicap Contrarian Investing

Companies include: Cardinal Health, Inc. (CAH), McKesson Corp. (MCK), AmerisourceBergen Corporation (ABC), CVS Caremark Corporation (CVS), Southwest Airlines Co. (LUV), Life Technologies Corporation (LIFE), State Street Corp. (STT), Google Inc. (GOOG), EI DuPont de Nemours & Co. (DD), Texas Instruments Inc. (TXN), Novartis AG (NVS), Citigroup, Inc. (C), Marsh & McLennan Companies, In (MMC), QUALCOMM Inc. (QCOM), Agilent Technologies Inc. (A), Pfizer Inc. (PFE), Applied Materials Inc. (AMAT), Sanofi-Aventis (SNY) and many others.

In the following excerpt from the current Value Investing and Other Strategies Report, an experienced contrarian value portfolio manager discusses his methodology and top picks for 2014:

TWST: Could you please give us an overview of the Sound Shore Fund and a profile of the key management team?

Mr. DeGulis: The Sound Shore Fund is the only mutual fund we run here at Sound Shore Management. We run it the same way we do our institutional separate accounts. It's a disciplined fundamental value strategy, investing in mid- to large-cap equities. The portfolio is reasonably concentrated and represents what we believe are the best risk/reward profiles from our universe of investable stocks. Our seven-person investment team is dedicated to this product and only this product. It's a consistent strategy we have managed for 35 years for our institutional separate accounts and for the Sound Shore Fund since 1985.

TWST: How concentrated is the fund, how many stocks do you carry?

Mr. DeGulis: Approximately 40 stocks, equally weighted.

TWST: Could you give us an idea of the fund's core investment philosophy with perhaps some examples of a particular stock that has performed well in the portfolio, and how that might exemplify the fund's strategy or other valuation requirements?

Mr. DeGulis: We are contrarian value investors, so price matters, valuation matters, but it's only a starting point. Our process analyzes not only absolute valuation measures, but also relative to a company's own history. For instance, you may have a company trading at 12 times earnings when its historical normal valuation might be 15 times earnings. That's an opportunity for Sound Shore, versus a stock trading at 10 times earnings that has historically traded around the same level. We are more interested in the former, because the market has embedded an expectation of higher valuations, having looked at this company over longer periods of time. This often signals that the stock had better returns and higher growth prospects. We have to decide if there is a case to be made for those higher valuations to return. But again, this is just a front-end process to discern the opportunity set.

We then dig in and do our fundamental analysis to determine whether it is a company we want to own. You will find the overall portfolio is cheap relative to the S&P 500. But our average stock position is going to have at least a third more upside and a downside of 10% to 15%. We like that two-to-one ratio on an average stock. For example, take a stock like Cardinal Health (CAH)...

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.

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