In our recent interview with portfolio manager Richard Giesen of Elessar Investment Management, Mr. Giesen gave his top picks in Small Cap Value investing. Here they are:

•  Central European Distribution Corporation (CEDC)-  “[They are] the largest producer of vodka and other alcoholic beverages in Poland, Russia and Eastern Europe. This company has a dominant market share, a management team that has executed very well over time by generating very high levels of cash flow and good levels of financial productivity. We felt that their acquisitions in Russia would allow them to expand very nicely in a market that continues to grow in the
  mid- to higher-priced brands that they sell.”
• The Buckle (BKE)- “This company is in the teen retailer space, it sells mostly denim-related products to both men and women, and the management team are seasoned merchandisers who have consistently delivered the right products to their customers at the right price and at the right time. The company’s growth trajectory has largely been based on organic new store expansion and it could double its current store base by entering new geographic markets. Buckle has recently posted 22 consecutive monthly same-store sales gains in the double digits. Until recently, there has been very little sellside research coverage on this company. We bought and sold the stock well on several occasions in the past 18 months.”
• CommScope (CTV)- CommScope is in the communications technology arena, and approximately 60% of its sales are derived from wireless communications equipment. It provides products to the wireless industry for antennas, transmitter base stations and cable. The wireless exposure primarily comes from the acquisition of Andrew Corp. several years ago. The addition of Andrews to the sales mix has positively changed the dynamics of this company and its future growth trajectory. The company has seen a lot of growth in the wireless arena here in North America and overseas as well, particularly in India and China. Management indicated to us and other investors earlier this year that their growth in wireless equipment orders is very solid.”

For the complete Investing Strategies Report, including a full interview with Mr. Giesen, as well as a wide variety of portfolio managers of all styles, click here.

Nortel in the midst of bankruptcy saw its CEO, Mike Zafirovski and a large portion of the entire board announced their resignations today.  Back in November of 2008 I thought Zafirovski was on his way out.  He has survived much longer than I anticipated.  According to a story in today’s Canada Globe and Mail Report on Business,

“The direction has been set and we are now at a natural transition point as we continue to service customers, maximize value through sales and continue restructuring activities,” Mr. Zafirovski said in a news release.

“We’ve reached a logical departure point,” added Harry Pearce, the chairman of the board, who is stepping down along with five other directors: John Manley, James Hunt, Richard McCormick, Claude Mongeau, and Mr. Zafirovski.

It is sad what has happened to the once thriving telecom firm.  Keep an eye on how this all plays out.

AIG’s latest selection of Robert Benmosche, the former CEO of MetLife, is getting a fair amount of praise before he begins his new job and comes out of retirement.  Benmosche gets high praise in a story by Leslie Scism, Joanne S. Lublin and Liam Plevin of the Wall Street Journal (sub req.).  The reporters stated:

He will also be the most decisive, direct and tough leader to run the battered insurer since Maurice R. “Hank” Greenberg’s nearly four-decade reign ended amid an accounting scandal in 2005.

Mr. Benmosche, former colleagues say, is willing to upend cozy corporate traditions and make unpopular decisions. His strong personality could be just what AIG and its majority owner, the U.S. government, need to manage the company.

AIG’s subsequent selection of Harvey Golub, the former CEO of American Express, as the company’s new chairman appears to be another feather in the company’s cap.  Whether it is the government or the company making the executive selections it appears AIG is at least making some positive moves.

For more:

Insurance Networking News

NY Magazine

Reuters

Speaking with portfolio manager Larry Coats and Christy Phillips of Oak Value Capital Management,  they talked to us a little bit about what their company invests in: “Advantaged Businesses”. We asked them to define this, and they did:

Mr. Coats: Businesses that tend to generate advantaged economics and have an advantaged competitive position primarily as a result of one or more of the following positions: they have either a brand or a niche, they have some advantage from a franchise standpoint, they have a cost advantage or a scale advantage or they have a distribution advantage. They have the ability to essentially control their future, and in doing so, drive above average economics.

Here’s a few “Advantaged Businesses” that Oak Value recommends:

1.  MasterCard (MA)- “In our pursuit of advantaged businesses, we have found over time that processing businesses with solid brands, superior market shares and high fixed cost often produces significant operating leverage, and as a result has the potential to generate very high returns on capital. Those types of businesses tend to be attractive to us and we found that we had the opportunity to allocate capital in
   the Fund’s portfolio away from the more credit-sensitive holding in Capital One
   and into such a business as MasterCard. The valuation of MasterCard became very attractive during the fourth quarter of 2008, and having followed it since it
   went public several years ago, we were able to take an initial position. Our
   average cost base was actually around $135 a share, the stock is trading today
   at $171, so the stock has traded up nicely since then.”
2. Avon (AVP)- “We added Avon to the Fund’s portfolio and continued to build the Avon position through the third and the fourth quarters. Avon is a name that we have owned a couple of times over the life of the Fund. We first bought Avon after the devaluation of the Mexican peso in the mid-1990s as the company demonstrated their ability to take advantage of volatile currency markets and further developed their exposure in emerging economies. Then once again, around the turn of the century with the devaluation of the Brazilian real, we were given the opportunity to come back to Avon. Most recently, with the volatility that we have seen, we’ve had the chance to come back yet again to the shares of Avon.”
3. Chesapeake Energy (CHK)- “Chesapeake is actually one of the first pure play energy names that we’ve owned for sometime in the Fund. As you know, Chesapeake is one of the largest producers of natural gas. This company’s business model is highly dependent on the underlying prices of commodities, which normally is not a business model we’re attracted to. However, because they’re a low cost producer, it does give them a competitive advantage. We think that that low-cost producer aspect is critical when you have the commodity prices being down quite significantly. Their ability to manage production and produce gas more efficiently than many of their competitors, in our opinion, really does put them in the position of emerging as a stronger competitor when you start to see volumes pick back up.”

For the complete Investing Strategies report, including  a full interview with each of these portfolio managers talking about their investment strategy and stock picks, click here.

As part of our REITs report we spoke with Merrie S. Frankel Senior Credit Officer & Vice President Real Estate Finance at Moody’s Investors Service and she gave us her view on the REITs Industry. She predicts most US REIT rating actions to be negative in the coming year, she has a stable outlook for retail, office, multifamily and health care REITs but a negative outlook on lodging:

“Now the least stable is clearly lodging -  on that we have a negative outlook and negative fundamentals on the business. Every company is cutting back on business travel, mine included, and cut­ting back on expenses. People are doing “staycations” now, so lodg­ing is the least stable.”

Companies mentioned include: Kimco Realty Corporation (KIM), Simon Property Group Inc. (SPG), Federal Realty Investment Trust (FRT), Realty Income Corp. (O), Prologis (PLD), AMB Property Corp. (AMB), First Industrial Realty Trust Inc. (FR) and General Growth Properties Inc. (GGP).
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In a recent interview with Brian Ruttenbur of Morgan Keegan & Co. Inc. he examined the Homeland Security Sector. Interest in the space has waned among investors but value investors are coming back, and the big defense names are extremely cheap.

“The defense companies are getting more and more into the security space because it’s a faster growing area. Core defense budgets are going to see a 2% to 4% increase per year over the next five years. But security budgets are expected to grow much faster. We see the big defense primes actually coming into the space and becoming the primes in homeland security and other areas.”

Cyber Security Buzz

“There is one big growth area within security in the federal government and that’s cyber security. Cyber security is a big buzz phrase because of the Obama Administration. The cyber security spending per year could be as high as threefold or fourfold higher than levels they are at now.”

Homeland security will continue to grow very strongly within the federal government, particularly cyber security, which could be three or four times higher than current levels.

Companies mentioned include: Northrop (NOC); General Dynamics (GD); Lockheed Martin (LMT); Cogent (COGT); FLIR Systems (FLIR); NICE Systems (NICE); L-3 Communications (LLL); Raytheon (RTN).

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Speaking with portfolio managers in the most recent issue of TWST, we asked them to lay out- in general- what challenges they see on the horizon for investors. Here’s what they had to say:

• A. Michael Adams, Adams Financial Concepts- “Going forward, it’s a matter of hedging your bets for inflation or financial crisis. I think the odds are that we come out of this fine. But I think that there is a significant probability that we fall back into a recession, we have a double dip W recession, where the economy gets better for a year and then collapses again, or that we have inflation. I think there is a significant probability for each of those possibilities. I think investors have to be very, very cautious and planned in their investments. It’s important to understand what you own and maintain communications with the person managing your accounts. As I do for all of my clients, I will be watching the government actions closely, continuing to look for growth opportunities both on the equity and fixed income side.”
• Kenneth Smith, Empirical Wealth Management- “Currently, it’s my view that the biggest challenge are the emotional and psychological biases that all investors have. I am writing about this now in a client letter; we have a propensity as humans to take current trends and then project them indefinitely into the future and make decisions based on that. What I mean by that is that we’ve had two really difficult markets within the decade. I fear that investors will give up on markets at the wrong time just as they have in the past. Consider 1979, when an article titled “The Death of Equities” came out in BusinessWeek. The article talked about how smart investors were moving out of stocks and into hard assets. The subsequent 10, 20 and 30 years were brutal for those who followed that advice. I fear that investors will be susceptible to new “structured products” claiming to offer the higher return without the risk.”
•  Dennis Fitzpatrick, D.B. Fitzpatrick & Co.- “If you look at the yield curve at the beginning of the year, the 10-year was at 2% and the short end of the curve was getting real close to zero. There was significant risk that interest rates would increase as a result of the inflationary pressures due to the dramatic increase in the money supply and the deficit financing resulting from the Bush/Obama stimulus packages. As a result, we think you should be defensive on fixed income. Although fixed income has done very, very well over the recent past, we think it’s overvalued vis-a-vis equities going forward. You should be very, very careful and be certain that you’re quite short in your duration management in fixed income portfolios. I think that there’s going to be significant pressure for increasing interest
  rates in 2010, 2011.”

For the complete Investing Strategies report, including  a full interview with each of these portfolio managers talking about their investment strategy and stock picks, click here.

Ken Lewis, Bank of America’s embattled CEO, continues to oversee more executive management changes.  Just in the last few days the Bank announced a number of major management changes.  Speculation continues to grow that a potential successor is being developed for Lewis’ job.  According to a story by David Mildenberg for Bloomberg,

Bank of America Corp., under pressure to overhaul management and reduce risk, set up a five-person competition to replace Kenneth Lewis as chief executive officer.

The bank yesterday shuffled senior management… Liam McGee, who headed consumer banking, left and was replaced by Brian Moynihan in a division that has provided most of the Charlotte, North Carolina-based bank’s revenue and profit.

Moynihan, 49, who ran wealth management and corporate and investment banking, is the top CEO candidate, according to analysts including Richard Bove of Rochdale Securities. Possible successors include ex-Citigroup Inc. executive Sallie Krawcheck, hired yesterday to head wealth management, home-lending chief Barbara Desoer and Chief Financial Officer Joe Price. Also in the running is Tom Montag, a Goldman Sachs Group Inc. veteran.

The speculation on who may take Lewis’ place is just that — speculation — but it is very likely he is getting close to the end.  Keep a close eye on the top players and what next steps take place.For more:Financial PlanningBoston.comCNNMoney.com Time.com

In the most recent issue of TWST, we spoke with L. Farrell Crane of Energy Opportunities Capital Management, a portfolio management firm focusing on the Energy Sector. He talked us a little about where he feels the pressure on oil prices is going to come from, and when we’re going to start seeing things getting worse going forward:

Mr. Crane: In this recent economic downturn we have seen reluctance on the part of the oil producers to increase capital spending given uncertainty with respect to what they expect to receive in terms of oil prices going forward. That slowdown, again, is like stepping off the treadmill. If we doubled our spending and production fell, it is not difficult to predict what will happen to supply when spending is held constant or, worse yet, reduced. We expect that we are going to see some supply problems manifest themselves beginning in 2010 and more considerably so by 2011 and 2012. Obviously the specific timing of a supply crunch will depend on the extent to which we see an economic recovery or continued slowdown. Clearly any increase in global economic activity and a related increase in energy demand will only accelerate the timing and exacerbate the issue. I think, ultimately, the supply challenges are going to be the driving factor in oil prices going forward.

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

Karen Kane, a corporate governance consultant, recently wrote a blog piece examining the shift many board of directors are experiencing in relation to their work.  While I consider Ms. Kane’s post with a grain of salt there is a bit of truth in what she says.  Anyone interested in the role of board members or in corporate governance should check it out.