Top Holdings From The FAM Equity-Income Fund Identified By The Co-Manager; Mr. Paul C. Hogan Gives An Exclusive Interview
December 14, 2011 - The Wall Street Transcript has just published Best of 2011: Money Manager Interviews offering a timely review of the 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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PAUL C. HOGAN, CFA, is the Co-Manager of the FAM Equity-Income Fund at Fenimore Asset Management, Inc. He received a B.A. from St. Bonaventure University and an MBA from the Binghamton University, State University of New York. Before joining Fenimore in 1991, Mr. Hogan was an Officer in the Army National Guard.
TWST: Is that because of the changes in the market situation recently?
Mr. Hogan: That's correct. With stock prices declining as much as they have, it's given us nice opportunities to invest in new names for the portfolio.
TWST: So what sectors do you like right now and why?
Mr. Hogan: We like the technology sector a lot. It's an interesting area where we can achieve considerable growth over the coming years, and valuations have gotten more reasonable in that sector. We also like consumer staples and utilities, so we've been adding to positions there as well.
TWST: Are there sectors you are avoiding right now?
Mr. Hogan: We are watching industrials very closely. We really like the industrial space, and it's been one of the bright spots of the economy over the last few years. However, if industrial production is rolling over, then we have to be vigilant. All of the management teams that we are talking to have not seen any slowdown yet, but they didn't see the slowdown coming in 2008 either. We are watching the economic data.
TWST: Do you look at companies outside the U.S.?
Mr. Hogan: Virtually all of our holdings are headquartered in the U.S., but we like them to have substantial global sales.
TWST: Looking at your specific top holdings as of Aug. 31, Donaldson Company was your top holding. What do you like about that company?
Mr. Hogan: Donaldson (DCI) makes filters that go into heavy equipment, road tractors, and industrial air-filtration housings. They even make tiny filters that go into notebook computer disk drives. The filters are for air and liquid filtration, and many can be found on Caterpillar (CAT) trucks and mining equipment. The great thing about filters is that they need to be replaced. Donaldson captures the first-fit business, and they also have a meaningful and growing replacement filter operation. Donaldson is consistent and steady.
TWST: Who else is in your portfolio right now, and why do you like them?
Mr. Hogan: One of the other top holdings in the fund is Ross Stores (ROST). We've owned this stock for a decade now and added to the position on several occasions. Ross is a discount retailer selling brand name and designer merchandise. Same-store sales have been terrific, growing 5% last year on top of 6% the year before. They're running at plus 4% so far in the first half of this year, and we think earnings will be up about 17% for the full year.
Ross has the potential to double its store base over the coming years, so there's a long runway for growth. The other aspect that we like is that management religiously buys back shares. In fact, over the past 10 years, Ross has reduced the share count by about 35%, and we expect this to continue. As the company grows, Ross increases its dividend too.
TWST: What is your most significant holding in the technology sector?
Mr. Hogan: Xilinx (XLNX) is the largest producer of off-the-shelf programmable logic devices known as field-programmable gate arrays, FPGAs, with more than 50% of the market share and 66% of its orders derived from international customers. XLNX's FPGAs are used in a multitude of technologically advanced devices, ranging from telecom equipment to MRI machines. Its future growth will be propelled by the increased adoption of FPGAs, especially as technology continues to advance in the miniaturization of product offerings.
We're at a tipping point where Xilinx chips are becoming more and more compelling, and they're taking significant market share. We think this will continue for a number of years. The technology sector has been off quite a bit so far this year, but Xilinx is up 5% year to date. And the dividend, which is about 2.5% right now, makes up about half of that return. This is a good example of where a dividend is a significant component to total investment return.
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