Procter & Gamble Co. (PG) has increased earnings and dividends year over year and generated ample free cash flow, positioning itself for long-term growth through strong management and enduring competitive advantages, says Kurt Hoefer, Portfolio Manager and Research Analyst at Golub Group LLC.
“Since the beginning of 1991, Procter & Gamble’s dividend has grown at a compounded annual rate of 10.5%. This is not by accident. Over that time Procter & Gamble has generated free cash flow — that is, cash generated by its operations in excess of the company’s capital expenditures — of $125 billion,” Hoefer said.
This free cash flow has allowed P&G to fund acquisitions, buy back stock and pay dividends to shareholders despite the weaknesses in the U.S. economy, Hoefer says, making it a great illustration of the value of long-term investing in solid equity rather than fixed income.
“Compare the current 2% yield in a long-term government bond versus a 3% dividend from a company like Procter & Gamble. If purchased today, with the Treasury, 2% is the best you will get over the life of that bond. But if the future is like the past for a company like Procter & Gamble, the dividend will continue to rise as the business grows and produces higher and higher free cash flow,” Hoefer said.
Lowe’s Companies (LOW) suffered the devastating effects of the U.S. housing market crash as the company’s profit was cut in half, but it is emerging as a success story for long-term investors as the U.S. housing dynamics are on the verge of improving, says John Dowling, Director of Research, Portfolio Manager and Research Analyst at Golub Group LLC.
“As you know, Lowe’s operates in a duopoly industry along with Home Depot (HD). The U.S. housing market crash had cut the company’s profits in half. It was clear at the time of purchase that patient investors with a long-term horizon would benefit from an eventual rebound in the housing market,” Dowling said.
Dowling credits Lowe’s managment team’s commitment to repurchasing half of the company’s stock in the next five years with enabling the company to increase its earnings per share in the future.
“Since initiating the position in Lowe’s, management has remained committed to the share repurchase program and overall company margins have improved. Not surprisingly, this has led to a dramatic re-evaluation of the company’s shares by the market,” Dowling said.
Rackspace Hosting (RAX) could sustain double-digit growth levels for its managed cloud hosting offerings thanks to secular growth trends in the data hosting industry, among them cloud computing and the continued growth of Big Data and data storage outsourcing, says Todd C. Weller, CFA, Managing Director at Stifel, Nicolaus & Co., Inc.
“In the case of Rackspace, the stock has just chugged along — it’s been a great stock over a multiyear period, and it’s really around what kind of growth do they expect for 2013? Can they sustain this high 20% growth? We think they can,” Weller said. He also adds that the company’s OpenStack product offering is earning the company some big high-profile customer wins for its cloud business.
Weller says the secular outsourcing of IT infrastructure and management benefit RAX, and he says investors interested in data centers don’t have many options, leading them to focus on companies with RAX or Equinix (EQIX).
“There are just not that many investment options. And you have another angle here, which is that in many cases the REIT stocks are being looked at by REIT investors, whereas names like Equinix and Rackspace — they’re being looked at more by generalist tech, media, telecom investors, and there hasn’t historically been a lot of overlap,” Weller said.
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MetLife (MET) sells at a low p/e ratio and is out of fashion. Veteran portfolio manager Norman H. Lehrer of Alpha Cubed Investments considers the life insurance giant for his value investing strategy, which focuses on individual securities, stocks and bonds that are out of favor in the eyes of the investment community.
“We tend to look at the published data and the predicted earnings of companies, and many times you can find an anomaly between what the stocks sell for if they are out of favor and what the expectation value is,” Lehrer said. “An example might be MetLife, which I think is selling in the high 30s, and yet they have predicted earnings of $5.00 to $6.00 a share.”
Lehrer says MET has had a few problems which have caused its price to fall, but expects it to gain some of it back later this year. He says companies with a disproportionately low p/e ratio can come back into fashion, and he says the fashion change in the industry has proven profitable in the long-run during his extended career.
“Now, for no apparent reason, they can come back into fashion — maybe later this year — and sell at more reasonable p/e ratios, maybe in the 10 to 12 range. I personally have done this over the past 60 years, and I have made a lot of money. Applying this philosophy to the management of clients’ portfolios is natural,” Lehrer said.
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Home Capital Group (TSE:HCG) identifies and lends to prime mortgage borrowers who are turned away by the bigger Canadian banks and returns capital to shareholders through dividend increases year over year, says Michael McCloskey, President and Founder of GreensKeeper Asset Management Inc.
“These are people who may have had an issue with their credit in the past, but a lot of them are new immigrants to the country who haven’t established a credit history in Canada. Even Americans coming to Canada sometimes won’t have an established credit history here, and the big banks won’t lend to them. Home Capital has made a business over the last 25 years lending to that segment of the market,” said McCloskey.
While McCloskey agrees that the Canadian housing market is expensive, he says that Home Capital proves a prudent investment once one researches and understands the company. Increased dividends and a strong CEO also poise Home Capital for growth, McCloskey says.
“The Founder and CEO, Gerry Soloway, is ‘the maestro,’ as I call him. He is still running the business, and for a business that’s trading on nine times earnings, they’re the biggest player in this space by far,” McCloskey said. “If you look at their historical financials, the company has delivered dividend increases year after year. They can really expand their market share in Canada.”
Tempur-Pedic International (TPX) diluted its luxury-mattress strategy through the acquisition of Sealy Corporation (ZZ) when competition in the space became fiercer, prompting Michael McCloskey, President and Founder of GreensKeeper Asset Management Inc., to sell the stock in the $30s despite the investor community’s general approval of the purchase.
“What we loved about Tempur-Pedic was its profitable niche,” McCloskey said. “They panicked by making the Sealy acquisition, and they paid $1.3 billion — including debt — for a mediocre business. To us, that was an example of a great business run by a mediocre management team, so we were happy to take our 35% gain.”
McCloskey says TPX displayed poor judgment by jumping into the lower end of the mattress business. He says the company has a great brand and very efficient manufacturing capabilities, and even though the company’s balance sheet was in good shape, these reasons don’t justify his holding the stock.
“The acquisition, in our opinion, was a bad capital-allocation decision by management. Sealy, for the last three years, has not made money. Their sales are increasing because of the improving U.S. housing sector and the economy. Sealy is likely to sell additional mattresses over the coming years, but again, they’re not making any money. It’s a very low-margin business,” McCloskey said.
Markel Corporation (MKL) invests in companies rather than bonds to obtain higher returns than many of its insurance peers, and the family-owned, Virginia-based insurer also has good owner/operators, making this company a favorite of William H. Mann III, Chief Investment Officer and Portfolio Manager at Motley Fool Asset Management, LLC.
“Most insurance companies view their insurance book as being the risk side of their book, and the money that they hold on to in the float needs to be guaranteed. They put it into zero-coupon bonds and things of that nature, with returns now that are just barely above zero. Well, Tom Gayner goes out and buys companies with it, very similar to the way that Warren Buffett does,” Mann said.
Mann says the Gayner’s constructs MKL‘s portfolio very well, and the company presents great opportunities for investors looking at their investments on a cyclical basis, even as the company move quarterly similar to other insurance companies.
“Every insurance company has extremely lumpy earnings, because you’ve got whatever insurable liabilities that come up each quarter against their guesses, and then on top of that you’ve got their investment portfolio, which wiggles and waggles as investment portfolios want to do,” Mann said. “If you view it from the time frame of a business cycle versus a quarterly or even monthly or daily cycle, you see an extraordinary opportunity.”
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Ascent Solar Technologies (ASTI) carves a niche away from the traditional rooftop solar farm and applies its flexible, light-weight CIGS technology to go downstream directly to customers with its Enerplex brand and bypass its competitors to move up the value chain, says Victor Lee, CEO of the company.
“In terms of the power-to-weight ratio, Ascent is clearly a leader. If you measure by the surface area on a per-square-meter basis, our modules produce at least 85 watts, which is among the highest in the thin-film space, except that it is not comparable to SunPower (SPWR) or First Solar (FSLR),” Lee said. “If you combine the two metrics, that put us in a really good comfortable competitive position.”
Lee says CIGS technology, besides being lightweight and flexible, has room for growth as far as technology efficiency. He also highlights the capacity of these modules to absorb sunlight on cloudy days, a feature that becomes especially important in the Northern hemisphere, as it almost doubles the length of time the panels can produce electricity.
“That makes a lot of difference with CIGS technology, and we are talking about how our modules can function even up to five to six hours. And for some countries, like the tropical countries of Southeast Asia, that makes a lot of difference. If you put it on a portable solar charging device like this, you can take it everywhere you go. You still capture the sunlight, and you still can power your cell phone. That makes our products very, very appealing,” Lee said.
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The Apple (AAPL) shareholder base is turning over from growth to value investors as growth fund managers begin to question the growth potential of this technology giant, even as the company has a solid brand and a long runway ahead in terms of superior capital returns, says William H. Mann III, Chief Investment Officer of Motley Fool Asset Management.
“If you think about your average growth investor or your average growth fund manager over the last five years, they’ve essentially been mandated to own Apple,” Mann said. “[Now] people who were momentum investors and growth investors have had to look at it and say, ‘OK, it’s a $700 billion company, how much bigger do I really think it’s going to be?’ For the first time in Apple history, the law of large numbers seems to have caught up with it a little bit.”
Mann says the shedding of AAPL at growth funds can be partly attributed to their investment cycles, where the growth portfolio managers have now decided Apple’s risk/reward no longer fits their bill. Mann says, however, this cyclical shift is exactly what’s driving value investors to the company.
“[Apple is] a wonderful company; their margins are strong, and their brand is amongst the best that has ever been created. We are not looking for it to be another 100-bagger. We are looking at it as a company, with the current prices, where the odds are it’s going to do quite well,” Mann said.
Broadwind Energy (BWEN) remains one of the few wind energy players and is poised to benefit from a decrease in competition as many companies gave up on the space and the U.S. government decided to extend the PTC for wind, says Christopher Blansett, Senior Equity Analyst at J.P. Morgan Chase & Co.
“Many participants in the wind sector are moving on, rationalizing the weak demand outlook and making the decision that they have to exit before the actual end of the line occurs and the end of the PTC subsidy. I think those companies that continue to sell into the U.S. wind sector in 2013 are probably going to have incrementally less pricing pressure,” Blansett said.
Blansett says the reduced competition among wind tower companies will also result in less pricing pressure and higher margins, and he says the wind energy industry has recently seen antidumping measures which will further pricing power for BWEN, even if demand were to remain low.
“Some of the low price foreign suppliers out of Vietnam and China are not going to be as impactful in 2013 as they have been in the past. So even though Broadwind may not have nearly as good a year as last in 2012 and will likely see a significant demand decline in wind towers on a unit basis, the company may see incrementally better margins due to a reduced level of competition,” Blansett said.
