In our portfolio manager interviews this week, we spoke to Martin Anstee of Stone Asset Management. Stone Asset Management is an investment firm that focuses on a combination of income and growth stocks. They tend to look at a company’s “total return mandate”- the company’s dividend yield plus the companies growth in dividends over time. Here’s what Mr. Anstee and Stone Asset Management picked:

1. Rogers Communications (RCI)- “It’s probably got a higher multiple than most of companies we are investing in, at 15 times 2009 earnings. But it has an excellent growth profile at 14% per year. It
   had positive wireless additions in the latest fiscal quarter, which is 4Q08. The balance sheet is pretty good. There is no corporate debt due until 2011. Free
   cash flow is growing quite nicely. The payout ratio is reasonably low at 44%. We can see that increasing to over 50%, like some of the comps. It has good growth
   and a reasonable yield of 3%.”
2. Thomson Reuters (TRI)- “It had a good run up toward the backend of 2008 but has since come off a bit. It may return to its recent lows of C$26. But it has an excellent growth profile of 10%, which, combined with its 3.8% yield, gives it the total return we are looking for. Our target is C$38 and it is trading currently at C$28. It meets our investment criteria.
3. Toronto-Dominion Bank (TD)- [This company is] “where we still anticipate growth going forward, despite the current turmoil, because it has a very strong retail
   presence in Canada, which also makes it a reasonably defensive bank. A 6% yield and an 8% annual growth going forward meets our criteria. We have a target of
   $57.50, and stock is trading around $40.”

For the complete Investing Strategies report, including a full interview with Mr. Anstee, as well as a variety of portfolio managers across a range of styles, click here.

Swiss RE RUKN (VTX – Swiss) the large Swiss based reinsurance company that over the last number of years ventured into investment banking and fancy investment related vehicles today announced the resignation of its CEO Jacques Aigrain who become CEO back in 2006.  Aigrain, a former JP Morgan investment banker, took the firm in a similar direction followed by American International Group (AIG).  The unfortunate moves by Aigrain resulted in Swiss RE encountering serious problems and large losses.  The direction followed by Aigrain ultimately resulted last week with the company going hat in hand to Warren Buffett for an infusion of capital and increased ownership of the firm.  According to a story in the Insurance Journal by Jason Rhodes of Reuters,

Last week U.S. investor Buffett stepped in with CHF 3 billion ($2.58 billion) of new capital for the world’s second biggest reinsurer after the group reported a CHF 6 billion ($5.156 billion) writedown on toxic assets.   

 Swiss RE’s new capital injection and a recent announcement by the firm to go back to basics was still not enough for shareholders.  Aigrain had to resign.  According to a story by Liam Pleven and Neil Shah of The Wall Street Journal stated,

Jacques Aigrain, whose push for growth at Swiss Reinsurance Co. ended with big losses and a plummeting share price, said faltering investor confidence in his leadership left him little choice but to tender his resignation as chief executive.   

In an interview, Mr. Aigrain said he offered to step down because it was in the best interests of the firm, adding there was a risk shareholders would “not automatically trust” that he could “facilitate the full turnaround” of the Zurich-based reinsurer.

The company has turned to the firm’s deputy CEO Stefan Lippe.  Lippe has been in that position since 2008.  More importantly unlike Aigrain, Lippe is an insurance executive focused on reinsurance.  He will work to take the company back to its roots.  His appointment has been hailed by a number of analysts.  So far, Buffett has remained silent about the change but there should not be any problem on his part with the shift in firm direction and newly appointed CEO.  The company and its new CEO are far from out of the woods.  They have taken appropriate steps to get the business in order and move forward.  According to the Reuters story in The International Herald Tribune,

On the bright side, Swiss Re said last week that demand for reinsurance has increased, as many clients want protection to offset the erosion of their capital in the crisis and it expects the reinsurance premium cycle to harden further.   

… Lippe has serious, immediate problems to deal with; further writedowns on the company’s toxic assets cannot be ruled out and it will take time to clean up the balance sheet, analysts said.

Anyone following the reinsurance industry should keep close tabs on what Swiss RE and its new CEO do over the next few months.  For more:   Swissinfo  Business Insurance    FT.com  

On the other side of the coin, the outlook in our second focus on Business Services is more bleak. We spoke with analyst Mark Marcon of Robert W. Baird & Co about his focus in this space: Marcon focuses on employment services- otherwise known as human capital. Here’s Mr. Marcon’s take on the current economic situation as it effects his space:

Mr. Marcon: In terms of employment, this is the worst recession in decades and potentially since WWII. The nature of this recession is clearly different from your garden-variety recession. As a result, we would expect that at least through the first half of 2009, the economy is going to continue to be constrained, and because employment lags, the companies that are directly sensitive to employment will continue to see weak demand trends throughout all of 2009, and potentially into the first half of 2010.

For the complete Business Services/Education report, including the full interview with Mr. Marcon, an look at other parts of the business services sector, and stock picks, click here.

Our special focus this week is on Education. Amy Junker, an analyst on our education panel, talked to us a little bit about what she feels the environment is like for education in this turbulent economic climate:

Ms. Junker: I think it’s a positive right now for the education industry in that as more and more people either lose their jobs or are in fear of losing their jobs, they look to go back to school to get either retrained in a new career or else beef up their resume with an advanced degree, either a Bachelor’s or Master’s, to allow them to keep the job that they have. While it’s obviously a struggle for many in the US, right now for education companies, we are seeing some positive results and some very strong enrollment trends as a result of the weak economy. So it’s been at least a positive for the postsecondary education stocks.

For the complete Education and Business Services report, including the complete roundtable panel and stock picks, click here.

Heely’s HLYS (NASDAQ) the wheeled sneaker manufacturer that has been reeling since its fad faded has been forced to get rid of its CEO again.  Back in May 2008 the company was reeling and replaced its CEO Michael Staffaroni with Don Carroll.  Carroll had been with the firm for a short time as its SVP of Marketing.  At the time of the appointment, I was skeptical Carroll would succeed in turning the company around (see earlier blog).  Now Heely’s finds itself in an even more difficult place.  According to an article by Sheryl Jean of the Dallas News,

The Carrollton-based company that makes sneakers with built-in wheels for kids said Tuesday that Carroll’s resignation is effective immediately. Carroll, who became CEO on May 20, 2008, had been trying to turn the company around and broaden its product line. 

Heelys named Michael W. Hessong interim CEO until a replacement is found. He was the company’s chief financial officer for eight years until he left last May.

 Heelys has been looking to find a savior for some time.  The company rejected a buyout offer from footwear company Skeechers USA last summer.  Since then Heelys appears to have been looking to no avail for another buyout opportunity.  The company’s options are only getting smaller.  The choice of a former CFO as the company’s interim chief executive only points to the firm’s belief that some kind of buyout is their best option. Stay tuned.  For more:  Yahoo Finance AP  Dallas Business Journal   

Sweden’s fashion chain Hennes & Mauritz (H&M) HMB (Sweden), the well regarded retail darling, has appointed the founder’s thirty three old grandson, Karl-Johan Persson to replace retiring CEO, Rolf Erikson on July 1.  Erikson had already announced his retirement and the company had focused on selecting his replacement.  Persson’s father and current chairman, Stefan Persson, is the company’s largest shareholder with 36% of the company’s shares.  Under Erikson’s CEO reign the clothing retail chain has flourished.  Even during last year’s difficult market, H&M has bucked retail trends.   According to Sweden’s locale,

Hennes and Mauritz has so far bucked the economic gloom and doom, reporting strong profit gains for the full-year 2008 and announcing the creation of up to 7,000 jobs in 2009. 

The group, known for its trendy yet affordable fashions, said its year to November 2008 net profit rose 12.5 percent from a year earlier to 15.29 billion kronor ($1.89 billion) with sales up 13 percent at 88.53 billion kronor.  

The appointment of Karl-Johan at thirty three is a bit surprising because of his age but he appears to have the right qualities necessary to keep the company moving forward.  His youth may actually serve him well as the head of such a fashion conscious and low cost retailer.  According to Camden for Families in Business,

Karl-Johan  has had an operational role since 2005 and is currently head of expansion, business development and brand and new business. He has been a board member of H&M’s subsidiaries in Denmark, Germany, the US and the UK since 2000 and in 2006 he was elected board member of H&M’s parent company.  

Karl Johan will also have the benefit in the early part of his reign to turn to his father and chairman Stefan Persson for advice.  Stefan Persson had served as CEO from 1982 through 1998.  I expect that Karl-Johan despite his youth will manage to keep H&M as one of the top retail chains even during these terribly trying times.  Keep a close eye on H&M over the next year.  For more:  Bloomberg  Retail Week Monster & Critics   

Harvard Business School’s Working Knowledge, A First Look at Faculty Research published a Q&A with Harvard Business School Professor Michael Beer.  Beer and his colleagues have a book coming out this summer entitled, High Commitment, High Performance: How to Build a Resilient Organization for Sustained Advantage.  

The book looks broadly at what it takes to build a high commitment, high performance (HCHP) system inside companies. It asks and answers questions such as: What outcomes must such an organization achieve in order to sustain commitment and performance? What are principled choices its leaders must make if they are serious about building such a firm? What are the means for changing an average company into a HCHP company? What are the key design features of such a firm?

 Beer was quoted in the article,

“CEOs of HCHP companies think very differently about their employees. They see them as an asset and care about them as people.” As a result they manage downturns differently from the norm, too.

Beer has examined a number of CEOs who have lead firms in a different manner than most of us are use to, particularly when you think of companies facing the current difficulties they have been forced to endure.  I highly recommend anyone interested in leadership/management read the article and consider purchasing Beer’s new book when it comes out this summer. 

Carl Icahn, management gadfly and investor, has gotten back on his high horse and made some valuable suggestions on how to control corporate managements in today’s troublesome business environment.  According to Icahn,

The real problem (not just executive pay) is that many corporate managements operate with impunity—with little oversight by, or accountability to, shareholders. Instead of operating as aggressive watchdogs over management and corporate assets, many boards act more like lapdogs.

Despite the fact that managements, albeit with some exceptions, have done an extremely poor job, they are often lavishly rewarded regardless of their performance. We must change this dismal state of affairs if we are to rebuild our economy in a sustainable way that rebuilds confidence. If we don’t, these problems will keep recurring as investors pile into the next Wall Street innovation or asset bubble, enabled by the kinds of managements that nearly sank Wall Street.

The problem, as I have long maintained, is that boards and managements have been entrenched by years of state laws and court decisions that insulate them from shareholder accountability and allow them to maintain their salary-and-perk-laden sinecures.

What we need are fewer government rules at the state level that protect managements. We need to return capitalism—our great national wealth machine—to its roots, where owners call the shots to managements, not the other way around. 

Icahn goes on to suggest ways to help correct the problem.  While most of Icahn’s suggestions are self-serving, since he is a major investor himself who often attempts to change a company’s management he is frequently invested in, he is nevertheless, on the right track. His latest blog piece makes a number of valuable suggestions that should get consideration by investors and the powers that be.  The blog piece is worth a read.  

Our top picks this week come from Paul Hogan, Co-Manager of the FAM Equity-Income Fund at Fenimore Asset Management. Fenimore is a value manager that visits with management on an annual basis, and conducts original in-house research on each of the companies they invest in. Here’s what they’re recommending to us this week:

1. Cognex (CGNX)- “The market cap is roughly $0.5 billion and the dividend yield is 4.5% — a nice yield on a technology company. Cognex is the leader in machine vision. It gains market share every year and has no debt. It has roughly $6 per share in cash and that’s how we get the company trading at just over 2 times cash on the balance sheet. We think earnings are going to look poor for the next few quarters, but that doesn’t scare us because it has a huge cash cushion. We’ve followed Cognex since 1992. We know the products and management team well.”
2. John Wiley & Sons (JW.A)- “This is a $2 billion market cap company and the dividend yield is 1.5%. John Wiley & Sons is a publisher that has very high margins. They publish scientific, technical and medical journals, and have a higher education business where they publish college textbooks. Wiley also offers electronic versions of those textbooks through WileyPLUS and that’s growing very nicely.”
3. Forward Air (FWRD)- “Despite its name, Forward Air is a trucking company with a tremendous network. Forward Air has hubs placed outside of airports and its trucks run routes on a certain timetable. It’s similar to a bus running a route and regardless of how many people get on or off, that bus travels the same path daily. This is a way for freight forwarders to get cargo from point A to point B and do it knowing the shipment will arrive at a specific time. Reliability is very high and customers are willing to pay for this assurance. A number of companies have tried to compete in this arena, but most have gone out of business because Forward Air is such a tough competitor.”

For the complete investing strategies report, including complete interviews with Mr. Hogan, as well as several other portfolio managers giving their own picks and outlooks for 2009, click here.

Douglas A. McIntyre wrote a piece for Time that attributed many of the recent problems top companies have been facing as a failure of the respective companies’ board of directors.  McIntyre is very close to the truth.  Boards have for too long just gone along and followed the lead of top management.  It is now time for them to accept their real responsibilities to help guide management to make sensible corporate strategy and important business decisions.  According to McIntyre,

… Each of these four companies ( referring to Bank of America, Citigroup, General Motors and Ford) has directors who chose not to ask hard questions and demand answers. How does a bank that was making $1 billion a year suddenly make $10 billion? How does a car company that nearly went out of business when oil prices rose sharply over three decades ago decide to reduce spending for the development of fuel-efficient vehicles? Boards have some understandable reluctance to cross some lines if they may not have a tangible effect on company results. The Apple (AAPL) board clearly decided that Steve Jobs had some right to his privacy about his health. That may have been bad for investors. No one may ever know.Several of America’s most famous companies have fallen on very hard times recently and investors might want to ask whey their boards appear to have done nothing demonstrable to help shareholders.  

The short piece is worth a quick read.  Let’s hope boards get a chance to read the piece as well.