Should An Investor Look Toward Growth Stocks In This Market Climate? President Of Aster Investment Management, Richard Aster, Reveals His Take Along With His Top Picks In This Exclusive Interview
December 27, 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.
Recent Wall Street Transcript Special Reports.
Richard F. Aster Jr., President of Aster Investment Management, Inc., was born in Southern California. His formal education includes undergraduate and graduate degrees in economics from the University of California, Santa Barbara. Mr. Aster worked for the U.S. Department of the Treasury and invested privately before joining Newburger, Loeb & Company, a New York Stock Exchange firm, in 1970. He worked for Newburger, Loeb for almost two years as a West Coast Analyst before joining Robertson, Colman, Siebel & Weisel, which became Montgomery Securities and subsequently Banc of America Securities, Montgomery Division. Mr. Aster's responsibilities at Montgomery Securities included formulating the firm's economic overview and investment strategy. His primary areas of research included emerging growth stocks and special situations covering a broad number of industries. Mr. Aster successfully managed accounts on a discretionary basis during this period. He left Montgomery Securities in March 1977 to form Aster Investment Management. Mr. Aster started the Meridian Growth Fund (MERDX) in 1984, the Meridian Value Fund (MVALX) in 1994 and the Meridian Equity Income Fund (MEIFX) in 2005.
TWST: Given the current environment, are there particular industries or sectors that you find favorable right now?
Mr. Aster: We don't find many areas that are particularly favorable at this moment. Investments are based on our traditional bottom-up approach. For the last couple of years, we have owned less health care than we normally do. We believe that under Obamacare there will be pressure on reimbursement levels and this will be bad for company earnings and returns, especially for service providers. So we've underweighted this sector. Our heaviest area of concentration is technology, specifically software companies, because they meet our criteria. There are a number of small and medium-sized software companies that are market leaders, have good returns on capital, strong balance sheets and are growing domestically. In addition they have significant international exposure - at least 40% of their business. Growth rates are particularly strong in emerging markets. Valuations are reasonable, and that's important.
TWST: What are some of your favorite names or top investment picks right now? Perhaps you would give an example from a few different sectors.
Mr. Aster: A recent addition to our portfolio is Advance Auto Parts (AAP). Advance Auto Parts is a retailer of automotive aftermarket parts, accessories, batteries, maintenance products and so forth. The stores are located in North America. Two-thirds of their business goes to the do-it-yourself, DIY, market, and one-third goes to the do-it-for-me, DIFM, market. This is a large market growing at approximately 3% to 4%, and it is highly fragmented with the top 10 participants combining for about 40% of the market. Advance Auto Parts has about 5% market share in DIFM and 14% in DIY, and is one of the top three players. We estimate earnings growth will be in the area of 12% and come from unit expansion, comparable sales increases and margin expansion. The company has a strong return on capital and generates excess cash flow, which will benefit shareholders also. Importantly, this is a business that holds up better than average in difficult economic times, fitting with today's environment. The valuation is reasonable. There is nothing fancy here, but we believe that at the end of the day, you're going to get good performance.
Another holding is Arcos Dorados (ARCO). Maybe you don't speak Spanish, but Arcos Dorados means golden arches in Spanish. The company is the largest McDonald's (MCD) franchisee. Its territory is most of South and Central America. The market addresses over 600 million people, and it is growing nicely. The middle class is expanding, and the market, I believe, was around 35 billion in 2010, and has been growing at around 15% per year. McDonald's has 12% of the market and the nearest competitor, Burger King, has about 4%. It has good returns and financial characteristics. So we have a market leader, an expanding and underserved territory, and one of the world's best brands. It appears to us that Arcos Dorados, whose business is not cyclical, can grow at an above-average rate for an extended period of time. The company has a market value of 2.8 billion, which we believe is reasonable for such a valuable franchise.
TWST: How about a software company example? You said that was an area of concentration.
Mr. Aster: Autodesk (ADSK)is a software holding and a market leader, providing computer-aided design software, CAD, for industrial, architectural, engineering among other business applications. The product is used to create digital prototypes early in the design process. The software then flows through to manufacturing, purchasing, sales and cost accounting. AutoCAD, the company's primary product, is the prevalent standard format taught in universities and used by small businesses - 34% of their business is in America, 43% EMEA and 23% Asia Pacific. The company has good returns on capital, no debt, a high level of cash. And while the business does have a cyclical element, the valuation is attractive.
TWST: Have you exited any investments recently?
Mr. Aster: Yes, there have been a couple of companies where we had small positions, Lumber Liquidators (LL) and NetScout Systems (NTCT). We took initial positions. Management didn't appear to be executing and performing as we anticipated. We experienced small losses, sold our positions and moved on.
TWST: In the context of the broader market, is this a good time to focus on growth stocks? Is this a market where there are ample opportunities for an investor?
Mr. Aster: We don't focus on timing, but it's probably as good as any. There is plenty to worry about, but that's usually the case. Today it is not hard to find good small/medium-sized growth companies that are reasonably valued and doing well. Most companies have become more efficient during the last several years. They've reduced their cost structures by closing inefficient plants, increasing labor productivity and consolidating where possible. They are better positioned to withstand difficult times, especially compared to 2008. If we ever get solid growth, they will have a significant amount of earnings leverage.
TWST: What is your outlook for the market for 2012?
Mr. Aster: Nobody can consistently predict the market, including me. My view, for what it's worth, is that as long as the economy and earnings continue to grow and interest rates remain favorable, we will be alright. There is another point on our strategy that I didn't mention. William and I, in addition to the companies we own, monitor an additional 50 to 100 companies that we believe are possible investment candidates. We like the businesses, but we don't own the stocks for one reason or another. It may be valuation, the economy or the industry or a company-specific problem. We continue to research and monitor this group of companies, and if we are patient, in a number of cases, we will eventually purchase the stocks. This has been a primary source of new investment ideas for us over the years.
The remainder of this 25 page Large Cap Value and Other 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 CEOs and research analysts. This Large Cap Value and Other Investing Strategies Reportis available by calling (212) 952-7433 or via The Wall Street Transcript Online.
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
For Information on subscribing to The Wall Street Transcript, please call 800/246-7673