FYI: Copy & Paste Barron's 3/25/14: Teresa Rivas
Regards,
Ted
The JPMorgan Value Advantage Select Fund (ticker: JVASX) has outperformed Warren Buffett since its inception nearly nine years ago, a streak that portfolio manager Jonathan Simon would very much like to keep alive.
Though Simon has not been in the game quite as long as the Oracle, he's got more than a quarter of a century of stock-picking under his belt. He has displayed a conservative bent and a penchant for companies with quality management teams focused on growing underlying value. The Value Advantage Select Fund earns a five-star rating from Morningstar and falls into the highest and second-highest percentile of its category for the past five- and seven-year periods, respectively, as well as since its 2005 inception. While the rising tide has lifted all boats over the past five years, Simon's stock-picking has added significant value: The fund has returned an annualized 28.5%, compared with a 23.8% gain for the Standard & Poor's 500, and a 22.4% average return for its pee
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Today, Simon has some contrarian picks among retailers and a space once anathema to value investo
Simon: There is one particular area of the portfolio that's been doing really badly recently and is quite contrarian: the specialty retailers. On the one hand, it's the area causing me the most pain because that's where we've suffered the biggest losses recently. But on the other hand, it could be the biggest opportunity. The holiday season was not great for anybody, except for maybe Michael Kors (KORS), and there were fewer shopping days between Thanksgiving and Christmas than there were the year before. The weather was probably a factor, and I suspect we are in for some more bad news there. But that's fine; we'll recover from that. A really disappointing one has been Bed Bath & Beyond (BBBY), but it is a company that has always proven itself long term. They've had a temporary setback, but they'll figure out how to [improve] themselves. They have a very strong entrenched real-estate position, with cash flow on the balance sheet and merchandising expertise, so Bed Bath & Beyond is probably going to be fine over the long run.
Q: There are a number of large health-care names in your top 10 holdings.
A: A few years ago Pfizer (PFE) became a big holding because the management team really started to understand that they had to simplify the businesses, focus their research and development on really promising pharmaceutical development — as opposed to just spending lots of money — and spin off peripheral businesses. So Pfizer has been a big holding because management has focused the company, and they've spun off the animal health business, Zoetis (ZTS), in a very tax-efficient way. Now Merck (MRK) is going down a similar path; its management team is going to use very similar strategy and there is opportunity there. Finally Johnson & Johnson (JNJ), on the pharmaceutical side has one of the more promising pipelines of new products. With J&J there is more diversification, with the medical technology business and the consumer business. So really those three names are almost sort of core of the health-care weighting in the portfolio: We probably have 6% or 7% of the portfolio in those three names. All obviously have good dividend yields, they trade at low- to mid-teens earnings multiples, and we think that the management teams are doing a great
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Q: The fund has a lot of financial exposure, and names like Capital One Financial (COF) and Wells Fargo (WFC) are among your top holdings.
A: Wells Fargo has been doing what it is supposed to, which is to be the big, high-quality blue chip of the banking sector. I still think Wells Fargo has significant earnings power over the next three years, particularly as interest rates normalize. There has been concern about all the money they made on mortgage originations when there was the massive [refinancing] boom, as that is not happening anymore. But I think there are enough other levers in the Wells Fargo arsenal to offset the decline in mortgage-related earnings. I like Wells Fargo a lot. It is still a core holding. It is still a massive overweight top 10 holding.
Capital One is a bit different. I'd say it has taken a bit of a breather recently. Capital One to me has a great combination of a high-yielding loan portfolio, because of credit cards and auto-related loans, combined with cheap deposits both through the branch system and also through the online deposit [business] they acquired from ING. To me that is a very powerful business model that Rich Fairbank, the CEO, has put together over the last two years; he really took advantage of the distress in the downturn. People get concerned that Capital One is not growing its loan portfolio at the moment. But really they've bulked up so much that they are really shrinking down to a more solid core, and I think the story is going to be a lot about stock buybacks and dividends.
We have other regional banks, and one of the laggards has been M&T Bank (MTB), which has been trying to buy Hudson City Bancorp (HCBK). The regulators keep making them jump through more and more hoops on the compliance side of things, and it's taking forever. My belief is that they will ultimately close that transaction, and there will be a lot of benefits to M&T. The stock has been out of favor now for about a year. But as you know I'm patient, so that's a name that I think is going to generate strong returns for the firm over the next two years.
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Q: Any other relatively new names you wanted to mention?
A: One timber REIT called Rayonier (RYN) is a contrarian pick. The company made an announcement toward the end of last year about its expansion. It was spending a lot of money in expanding one of its manufacturing facilities down in Georgia, and we were a little worried that maybe they were adding too much capacity to the global market. Lo and behold, they said yes, they expected their pricing and margins to be under pressure for the next year or so -- the stock was punished pretty badly. We did an analysis, and we thought that in the long term it would work out and so built it into a decent size position. It has a real-estate section although it is partly forest products as well, and they announced at the beginning of this year they were going to split the company in two. The stock went down a little bit on the announcement. But we still think there is great value there, so it is a name we are going to hang on to. We think that sum of the parts will be greater than you have at the moment. The other oddball thing I did this year -- I actually invested in an airline. I missed the big run-up, but we started to accumulate Delta Air Lines (DAL). So that's highly unusual, but things have really changed in the domestic airline industry. It has really consolidated down into three or four main players: American Airlines (AAL), United Continental (UAL) and Delta, and then Southwest Airlines (LUV) as well and JetBlue Airways (JBLU), which is quite a bit smaller. I think those companies are maybe not delivering the greatest customer experience, but they are delivering good value and much better service. That is translating into much better returns and profit margins for the industry. And as long as they remain disciplined, I think that the stock is relatively inexpensive still, relative to earnings. So even though I missed the first leg or so, there is still more to come.
Q: Thanks.
M* Snapshot Of JVASX:
http://quotes.morningstar.com/fund/f?t=JVASX®ion=usa&culture=en-US.
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Regards,
Ted