Top Stock Winners In The Current Economic Climate: Founder Of OMT Capital Reveals His Portfolio Holdings And Selection Process
August 24, 2010 - The Wall Street Transcript has just published TWST Investing Strategies Report offering a timely review of the General Investing sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Thomas Henwood, CFA is the Founder, Chief Investment Officer and President of OMT Capital, and portfolio manager for OMT's long-only product as well as the firm's long/short hedge fund strategy. Prior to founding OMT Capital, Tom served as President of Emerging Growth Management in San Francisco from 1996 to 1998. He was portfolio manager of the long-only accounts from 1994-1998 and managed the long-short hedge fund from 1994 to 1996. Tom graduated from the University of Illinois in 1965 and earned an MBA from the University of Chicago in 1969. He earned the CFA designation in 1975.
Josh Wilson, CFA is a Co-Portfolio Manager and Analyst with OMT Capital. He joined OMT Capital in 2002. His areas of focus include software, services, healthcare, and retail. Prior to joining OMT Capital, Josh worked as an Associate at J.P. Morgan Capital, the private investment arm of J.P. Morgan, where he focused on telecommunications and media investments. Josh graduated from Dartmouth College with an AB degreein 1996, magna cum laude, and received an MBA degree from Harvard University in 2002
TWST: Would describe the process of selection in your portfolio for the longs, and then the criteria that you look for in the small and mid-caps?
Mr. Henwood: I'll give you a quick comment and then I would like Josh to expand upon it a bit. The three criteria that I mentioned earlier were growth, quality, and 50% appreciation potential. That involves seeking and interviewing companies to find those that meet our criteria. As you can well imagine there is not a broad array of companies that fit those criteria.
Mr. Wilson: On the growth point, we're not looking for hyper growth, but our growth bias is really a function of the belief that sustainable growth in earnings and cash flow are the ultimate drivers of value for a business. Quality is really the most important criteria that we focus on. What we're looking for are ethical and capable managers whose incentives are aligned with investors, and we're talking about ownership and incentive compensation. We'd like those rewards to be based on cash flow and returns on capital as opposed to measures of stock price or adjusted EPS growth. We think that those things are manipulatable whereas cash flow and returns really reflect what's going on with the business. We'd like to see well-structured, healthy balance sheets and an earnings picture that reflects the economic and cash flow realities of the business. We want defensible business models and leaders in respective industries in order to assure that the economic model is sustainable. In the last piece - on valuation - we're really focused on businesses that are trading below our estimate of intrinsic value. Our assessment of value is based on our conversations with the management team and through our due diligence process of talking with suppliers and customers and competitors. The output of that is our financial model.
TWST: What are some of the names of the holdings you have that you feel meet these criteria and what makes them attractive for your portfolio?
Mr. Wilson: I'll give you an example. This is a name in the consumer space called Carter's (CRI), which makes baby clothing. Carter's is a great business run by Mike Casey. Carter's is certainly a leader if you look at market share in the children's clothing market. Their business is divided into a couple of parts. The first is a wholesale business where they sell Carter's clothing through stores like Kohl's, JCPenney, et cetera. The second piece of the business is the mass channel business, where they have sub-brands that are sold exclusively through Target (TGT) and Wal-Mart (WMT). Then the third business is a retail business, where Carter's operates almost 300 stores around the country that sell their clothing. What we think is attractive about Carter's is that it has a management team that has done a great job of focusing on the business. Carter's did have some struggles several years ago, particularly in their retail business and they brought in a man named Jim Petty who has really helped turnaround that business. He has done a wonderful job there.
Their wholesale business has continued to grow very nicely through servicing their accounts and taking market share within their accounts from other children's clothing manufacturers. The mass channel business has also grown within Wal-Mart and Target although the Wal-Mart business has actually been challenged over the past 18 months. That's something that we begin to see turning around here. The other big opportunity within Carter's was that they acquired OshKosh (OSK) back in 2005. OshKosh has been a challenging integration for them. The vision is that OshKosh is another leading brand that really focuses on the slightly older segment of children. Whereas Carter's might be focused on the zero to three-year old market, OshKosh is really focused on that toddler and young child market, and so there should be a natural ability to expand the strength of Carter's into the OshKosh brand. This is a business that is trading at about ten times earnings today, just over five times EBITDA, and we think that that is an extremely cheap price to pay for a company that has been able to sustainably grow earnings over a long period of time, that has the potential of significantly growing OshKosh business. If you were to look at the OshKosh wholesale business, it is today less than $100 million business compared to the $500 million revenue of Carter's wholesale. We think that OshKosh could be as big as the Carter's business over time.
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