FYI: Copy & Paste 5/3/14 Grace L. Williams: Barron's
Regards,
Ted
While many investors think U.S. stocks are fully valued, Bill Nygren of Oakmark Funds sees plenty of opportunity, particularly among financials. Moreover, Nygren says many of America's best companies can be bought at a market multiple.
The self-described "very frustrated Chicago Cubs fan" has hardly frustrated investors, delivering breathtaking long-term returns. Over the past five-, 10-, and 15-year periods, Oakmark Select (ticker: OAKLX ) has generated annual returns of 21.99%, 8.4% and 9.18% easily outpacing the S&P 500 at 18.17%, 7.7% and 4.2%. Year-to-date, the fund has returned 7.59%, compared to the index at 4.2%.
Name: William Nygren
Age: 55
Title: Co-portfolio manager
Education: B.S. in accounting, University of Minnesota; M.S. in finance, University of Wisconsin
Hobbies: Chicago Blackhawks and Cubs sports fan
Nygren, who has run the fund since 1996, can also nimbly navigate down markets. In 2001, his fund surged 26%, outpacing the S&P by a staggering 38 percentage points. Morningstar rightly named Nygren its Domestic Stock Fund Manager of the Year. Today, Morningstar rates the fund four stars and assigns it a gold rating.
As a concentrated fund, Oakmark Select may not be for the faint of heart. Its top five holdings comprise roughly 30% of the portfolio, and the fund holds just 20 stocks. Nygren's enviable track record should assuage concerns, however. His secret sauce? Nygren looks for names trading at a large discount to their intrinsic business value; a business value that grows over time; and management that is economically aligned with outside shareholders.
Barrons.com recently spoke with Nygren about his long-term outperformance and where he sees value today.
Barrons.com: What has contributed to your long-term success?
Bill Nygren: We bring a private-equity perspective to public-equity investing. By that, I mean we take the very long-term time horizon that private equity firms typically take, and try to anticipate how investors might view a company differently five years from now. We are very, very long-term investors and being able to buy a great business at an average price is just as much value investing as buying an average business at a great price.
Q: There's a guy from Nebraska who takes a similar approach. Looking at sectors, your fund is overweight in financials. Let's talk about that.
A: First up is Bank of America ( BAC ), which sells at about two-thirds of book value. We believe that within a couple of years, they should be earning at least 10% on that book value. If they do that, then the stock is selling today at about seven times earnings. Even if they can't grow organically because of the high quality of their balance sheet, (they basically are at Basel III standards already) all of the earnings can be returned to shareholders through dividends and share repurchase. So, even if you don't believe that long growth provides great opportunity for the banks, a stock like this is very cheap.
Fund Facts
(as of May 20, 2014)
Oakmark Select Fund (OAKLX)
Assets: $5.1 billion
Expense Ratio: 1.01%
Front Load: None
Annual Portfolio Turnover: 24%
Yield: 0.09%
Source: Morningstar
Q: Tell us about some other financial names.
A: I used Bank of America as an example, but really, the story for any of the financial names in our portfolio would be similar. American International Group ( AIG ) is selling at about 70% of book value, JPMorgan Chase ( JPM ) sells at a significant discount-to-book value. Capital One Financial ( COF ) is at a small discount-to-book value, but it doesn't have as many legacy-housing-cost issues as JPMorgan and Bank of America have, so it's at a little lower current P/E, but not at quite as much recovery potential as the other two have. The P/E distribution in the market today has become extremely narrow, so most stocks sell pretty close to the market multiple if you look at just a couple of years.
Q: Another financial name you own is MasterCard ( MA ).
A: MasterCard has a tremendous tailwind because of the global conversion of cash transactions to plastic. They will have an above-average-growth rate for as far into the future as we can see, adjusted for the quality of their balance-sheet forecasting out just a couple of years. The market isn't demanding investors pay much of a premium at all for MasterCard. So rather than saying because everything is priced the same, there's nothing to do, we are taking the opportunity to buy higher-quality businesses.
Q: Your top holding is TRW Automotive ( TRW ). What's the story there?
A: If you look across the auto parts industry today, most companies are selling at about 15 times earnings. At $80, TRW is selling at about 11 times. One of the reasons is they have made large investments in plants in China. We anticipate that within about two years, the plants will become highly profitable and TRW in two to three years could be making $10 a share and selling at the same 15 times earnings which the average auto parts company is selling at.
Q: Moving to the energy space, I see you own Apache ( APA ). Tell us about your conviction here.
A: In the oil and gas industry, it's rare to find management teams that are as good at capital allocation as in the rest of the market. Most oil and gas executives reinvest all of the cash flow they generate because they are focused mostly on top-line growth. Apache is a little bit different in that they are willing to grow per-share value through shrinking the number of shares outstanding. Most analysis looking through asset by asset would suggest that Apache is at a much larger discount-to-value than the average oil and gas stock. Management has been active in selling assets that they can get 90 cents on the dollar for and using those proceeds to buy back their own stock at 60 cents on the dollar. When we find management teams that are as excited about growth through a shrinking share base, as they are through a top-line growth, we find that those companies tend to perform much better over the long term.
Top 10 Holdings
(as of March 31, 2014)
TRW Automotive Holdings (TRW)
TE Connectivity (TEL)
Bank of America (BAC)
Capital One Financial (COF)
Apache (APA)
Medtronic (MDT)
DirecTV (DTV)
American International Group (AIG)
MasterCard (MA)
JPMorgan Chase (JPM)
Source: Morningstar
Q: Two of your holdings, DirecTV ( DTV ) and Comcast ( CMCSK ), are making headlines right now on acquisition news. What do you like about the companies and where do you see them headed?
A: One of the things we've most admired about DirecTV's management team is their willingness to commit all of their excess capital to repurchasing stock when they thought it was the most value-added acquisition they could make. Over the course of the last five years, Direct TV has reduced their shares outstanding by over 50%. The recent $95 per-share deal with AT&T (T) would have been something much smaller than that had management not so aggressively reduced the number of shares outstanding.
Q: And Comcast?
A: One of the reasons we own Comcast is the management team there has also done a very good job of capital allocation, largely adding value through share repurchases. We believe the Time Warner Cable ( TWC ) acquisition will get done at a price that was even less than Comcast's own stock was selling for after we consider synergies. It's likely that the transaction gets approved by the Justice Department. They don't operate in the same communities, so it is not reducing choice for customers, in fact, approval of a deal like Comcast Time Warner is actually pro-consumer because it gives the cable supplier more ammunition in the fight against higher-programming fees.
Q: Thank you for your time.
M* Snapshot Of OAKLX:
http://quotes.morningstar.com/fund/oaklx/f?t=oaklxFund Is Ranked # 36 In The (LCB) Category By U.S. news & World Report:
http://money.usnews.com/funds/mutual-funds/large-blend/oakmark-select-fund/oaklx 
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