Schlumberger (SLB), Anadarko (APC), Chevron (CVX), Caterpillar (CAT) And Disney (DIS) Are Top Picks For Large Cap Manager Chelsea Investment Management Company
December 20, 2011 - The Wall Street Transcript has just published Large Cap Value and Other 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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Frederick J. Ruopp Sr., CFA, founded Chelsea Management Company in 1971 to provide investment counsel to individual and institutional clients. He continuously has served as the Chief Investment Officer of the firm, actively managing portfolios for more than 40 years, and has presided over the company's growth from inception to its current size, managing assets in excess of $1 billion. Mr. Ruopp also leads the firm's research and investment committee. Before founding Chelsea, Mr. Ruopp handled retirement portfolios at the First National Bank of Chicago and spent several years at Lehman Brothers Holdings Inc., where he managed investments for the firm's partners and their families. He was also a Senior Investment Officer of Transamerica's insurance and investment counsel operations. A graduate of the University of Illinois, Mr. Ruopp earned his MBA from Northwestern University's Kellogg School of Management.
TWST: Are there particular sectors you are overweighting or underweighting right now?
Mr. Ruopp: We have had for some years now almost zero financials, and we continue that. We keep looking at them, but the negatives are high enough that we are not ready yet to get back into financials. We've been out of financials since about 2005. We are overweighted in energy, oil and natural gas. We are overweighted in gold shares, which fall under the classification of metals, but pretty much all our metal stocks are Canadian gold-mining companies. And that's really the fire insurance in our portfolio. If your house burns down, you are glad you have the fire insurance. If it doesn't burn down, it may seem at times to be a nuisance, but when you need it, you have to have it. Actually, the gold shares, even over the past five to 10 years, have been performing reasonably well, and we think they are going to continue to perform well.
TWST: What are some of the firm's top picks or investment ideas?
Mr. Ruopp: The first thing is that we do have an overall view of the outlook for the economy in this country and the rest of the world. Increasingly, you have to look at the rest of the world. The U.S. doesn't exist as an independent economic entity anymore. We're all very inter-related. We made a judgment some years back that the energy crisis and shortage was real, and that there was an opportunity there, so we have oil and natural gas stocks, as well as service companies, people like Schlumberger (SLB). In the oil and gas stocks, we have tended to like the E&P people, the exploration and production, rather than the refiners, and so we own Anadarko (APC) and Chevron (CVX) and companies of that sort. We also own some of the oil and gas pipeline companies and the E&P companies, which are either still limited partnerships or else one or two like Crescent Point (CPG.TO) that have converted from limited partnership into a corporation, but yet they are still paying a 6% yield.
We like those vehicles primarily for yield, most of them are paying about 6%. We also think they will continue to see some growth of earnings. At 6%, you don't have to grow earnings too much more than 3% or 4% a year to have a nice return out of a stock. So we like that area. And then we do like leaders in their field. We like Honeywell (HON). We think Honeywell is a leader in their field. We like Caterpillar (CAT), a leader in their field. We like Disney (DIS) and Costco (COST). Costco is definitely a leader in their field. So companies that are leaders with really strong managements, strong balance sheets and good records of earnings and dividends. We all like to talk about turnarounds.
Turnarounds always take two or three times as long as you think they will, and so we like people that are demonstrating that they can do the job already. Those are some of the areas we like. I mentioned the golds, and the energy, and some of the capital goods people like Caterpillar and Honeywell, and 3M (MMM) is another stock we like very much. We also have, for most portfolios, electric utility and telephone stocks. Again, we get from 4.5% to 6% yield, and with just moderate growth on top of it, it comes out with a very nice long-term gain. For the first time in a long time, we think some of the pharmaceuticals look interesting, particularly somebody like Johnson & Johnson (JNJ) selling at 12 times earnings with a 3.5% dividend yield and an unbroken chain of years of increasing the dividend every year.
If everybody has some residual worries about the economic cycle in this country, pharmaceuticals pretty well exist outside of the economic cycle, because we have to have them. So those are interesting companies that have done well and continue to do well. Some of the areas we don't have - I mentioned financials, and we don't buy airlines, and we don't buy truckers. We are taking a look at some of the railroads. Warren Buffett, who is on top of everybody's list as a smart investor, has made some money there, and we think there probably will be more money made.
TWST: What leads Chelsea to exit a holding? Are there any recent examples you can share?
Mr. Ruopp: Number one would be if it attained our target price. Number two would be industry conditions change and company conditions change adversely, so that we no longer can reach our target. Number three, if we decide that we were just too hopeful and made an error in judgment and things aren't going to grow in the way we thought it would, that's another good reason for exiting.
The fourth one would be if you get into a period of market overvaluation - which obviously we haven't had for some time - then it might be wise to take a look at everything you own and sell some of the things you think are most vulnerable to market decline. As far as what we've sold recently, we sold Microsoft (MSFT) a few months ago. It had reached about $90, to my memory. We bought it at about $35 on the way down, and after a long period of some years, it's still down in that area. We decided that the competition is heating up from people like Google (GOOG). Despite the huge cash flow they have, they seem to have difficulty bringing through earnings gains, and so we exited Microsoft.
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