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Investing In Procyclical Midcap Stocks - Jason L. Stephens & James T. Evans - Thompson Investment Management, Inc.

July 29, 2011 - The Wall Street Transcript has just published 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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James T. Evans, CFA, is a Portfolio Manager at Thompson Investment Management, Inc. Prior to joining Thompson Investment Management in March 2005, he was a Managing Director for Nakoma Capital Management in Madison, Wis., for five years. Mr. Evans graduated summa cum laude from Macalester College in 1997 with a B.A. in economics and computer science. He earned an MBA in finance and accounting and an M.S. in finance from the University of Wisconsin-Madison in 1999 and 2000, respectively. Mr. Evans completed the Applied Security Analysis Program at the University of Wisconsin-Madison School of Business.

Jason L. Stephens, CFA, is a Portfolio Manager at Thompson Investment Management, Inc. He started at Thompson, Plumb & Associates, Inc., in 2002, and he joined Thompson Investment Management when the firm reorganized in 2003. He was also integral in developing the firm's overall operational structure and creating its compliance program, serving as Chief Compliance Officer during this period. Mr. Stephens earned a B.S. in English and communication arts, an M.A. in arts administration and an M.S. in finance from the University of Wisconsin-Madison. He is a member of the CFA Institute, holds the Chartered Financial Analyst designation, and he serves on the board of the CFA Society of Madison.

TWST: Please give us an overview of Thompson Investment Management.

Mr. Stephens: We have approximately $1 billion in assets under management. Two-thirds of those assets are in mutual funds, and the other third is separate accounts for high net worth clients. The firm has in one form or another been around since 1984. John W. Thompson, who was the Manager of the trust investment management division at First Wisconsin Bank, which eventually became part of U.S. Bank, left the bank to start our predecessor firm in 1984 and has been operating as an investment advisor ever since. In 1987 we launched our first mutual fund, and in subsequent years we added to the fund family. We now have three mutual funds - one large-cap equity fund, a midcap equity fund and a short-term bond fund that we manage. James, John and I comanage all three mutual funds, and we also work together on individually managed client accounts.

TWST: What are some of your holdings right now and why do you like them?

Mr. Stephens: In technology, our biggest holdings are JDS Uniphase and Broadcom (BRCM). I think James talked a little bit about JDS Uniphase and why we like it. In financials, Eaton Vance (EV), ITG (ITG) and Associated Banc (ASBC). We haven't had a really large exposure to lending banks for a while, and we recently started increasing the exposure a little bit. In that area, one of the things that we're thinking is that the losses that are running through midsize bank income statements should peak by the end of this year. There are a number of metrics that you can look at when you're looking at banks and the future severity of bank losses. During the recession, we had no clear indication of when the earliest indicator of future loan losses was going to peak. Well, it peaked a while back, so the banks pretty much know where their losses are going to top out. And we don't necessarily believe that the market respects that. Investors understand it, but they don't believe it yet. Our exposure to lending banks is anticipating that their earnings should start looking better by the end of this year and into next year, by virtue of the fact that their losses will be in decline.

Mr. Evans: Just another common sense way of looking at it is that there are a finite number of loans that were made between 2006 and 2008 at the peak of the real estate market, and eventually you have either written them all off, had them all refinanced, had the owners sell the houses or whatever. So the presumption is that in the new environment, the banks are being a little bit more careful. Therefore, the losses on the loans that are being originated today are going to be far less than the losses that were on the loans originated in 2007, 2008. Ultimately there was a finite number of peak-year loans.

Mr. Stephens: From our perspective, as those losses peak and start to decline. As some of the new capital requirements that banks have been waiting to hear about are revealed and as their nervousness is reduced, we should start to see a little bit more lending. And bank earnings growth will start to pick up. We think this phenomenon will be more pronounced than investors are expecting.

Mr. Evans: Some of these guys trade at discounts to tangible book. They used to trade at two times normal book, not even tangible. So we're not forecasting that things are going to go back where they were in 2007 as far as bank multiples, but there's room for them to double or in some cases even triple, without getting anywhere close to what they were before.

The remainder of this 32 page Investing Strategies Report can be immediately viewed by purchasing online.


The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with Portfolio Managers. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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