Value and Growth Insights From a Fund Manager

Jeanie Wyatt, CFA, CEO, and CIO of South Texas Money Management, a value and growth disciplined fund, sat down with Kapitall to share a comprehensive strategy that Main Street investors will be hard-pressed to ignore. 

Growth vs. value
According to Ms. Wyatt, by investing in both value and growth names, no matter the size, sector, or country, investors can accomplish lower volatility and achieve a natural hedge in their portfolios.

Additionally, Wyatt found a measurable benefit to keeping exposure to each sector to a minimum. "Whenever there’s a correction, there's a correction in a highly weighted sector. Even with very conservative stocks like Colgate and Proctor & Gamble (PG), as well as the technology sector." She adds, "It can really punish your performance when a sector goes out of favor, even if you have the best stocks in that sector."

Her response is to invest no more than 15% in any sector at a time. A decision, she says, that has helped to lessen volatility. "We had a research firm go back 10 years and rebalance quarterly to see what would be the sector rule to give return and lower volatility. They said you would not put more than 10% in any sectors. So we went back 20 years and came to the same conclusion, and it was even more meaningful than the 10-year study... To control your risk you have to control your sectors."

Click here for more details on the STMM's investing strategy, as explained by Jim Kee, Chief Economist and President of the firm. 

Avoiding commodities and Chinese stock exposure
In mid-2011, the consequences of overbuilding real estate in China, and the subsequent pullback, were felt around the globe. All economies felt a ripple from the drop in raw material demand, and analysts loudly predicted a hard landing for China.

Fortunately, these doomsday predictions didn’t pan out in full. China has certainly slowed its growth, but is not in a recession. But as a global driver of growth, a slowdown in China has impacted most commodities, from gold and oil to cotton, all of which had a huge run over the past few years thanks to Chinese demand.

Wyatt says her firm has acted cautiously about growth trends in China by avoiding Chinese stock exposure and holding back on commodities. "Bill Gross famously says real investments like commodities are a good place to put your money, but we disagree." For example, Oil prices have been so volatile, sweet crude went from $106 per barrel to $78 in a matter of a few months. "Sure, it had a bounce over the Iran conflict, but we generally think oil has downward price momentum."

Industry and stock favorites
"We like consumer discretionary areas," says Wyatt, despite the sector's heavy sell-off this summer. "The Gap (GPS) looks really good, the stock is breaking out. It had this headwind of high commodity cotton prices for years, but now prices have fallen and it will be the beneficiary of lower prices. Furthermore, they have outside consultants to help refresh and redesign their brand, and they’re very successful oversees and at franchising their stores."

Other discretionary names of note are Bed Bath and Beyond, which has sold off a lot, Staples, and Lowe's. She says U.S. consumer may soon benefit from low commodity prices, low mortgages prices and some stabilization in housing.

In technology, she likes Nice Systems, a sophisticated software developer that addresses online security. “It’s expensive on a P/E valuation [$38.51], but it’s growing. Revenue lines and earnings are growing. Our philosophy is that you’re going to have to pay more for it.”

Technology in cars
The latest technology trends in cars are creating renewed demand for autos, and several technology firms stand to benefit from implementation. "Tech in autos must be everybody’s must have. We're buying up both."

"There's so much tech being put in cars today. The average cars have 130k miles on it, and a lot of new models coming out make people jazzed to get new cars for themselves." We can expect several new models and model remakes to be on the market between 2014 and 2016.

Tech beneficiaries: Apple, and some of big auto part manufactures like Magna International, General Motors, and Ford have their own propriety technology. For example, GM has OnStar, and Ford's proprietary tech is called SYNC. "And let's not forget Google (GOOG)’s leap into auto with their self-driving cars, which "is absolutely a reality within the next 10 years."

Automakers: Wyatt says that although General Motors and Ford share prices have dropped considerably their sales have been improving. Emerging economy sales are good, but it’s much more important how they’re doing in the U.S.

"It's interesting, GM’s balance sheet is stronger than Ford's, but Ford is more aggressive as an automaker. The breakeven is much lower now for both of them, and they’re really working on making progress on pension liabilities. Both will be beneficiaries of demand for technology."

Most recent trades
Most recent buy: Block trades on The Gap and Bed Bath and Beyond. STMM is also looking into, but not currently buying, Pier 1 Imports (PIR), citing that their conservative and upbeat management has "done a great job in online retailing." She says they're completely revamping how they display their merchandise, with more lighting and elevated shelf space. They're also closing unprofitable stores.

Most recent sale: Raymond James Financial. Wyatt says STMM is really cautious on financial stocks. Perhaps more importantly, it had already hit their price target. "It was up 50%. Before we buy something we pick a minimum upside of 25% target price. When it hits that target price we sell."

Another major sale was Comcast. "It was a good name and we liked media because it was more defensive in a slow economic cycle. It's currently facing a huge pending lawsuit with Supreme Court. It was safest to just go ahead and book our profit."

Business section: Investing ideas
Are you looking to follow the investing advice of Jeanie Wyatt, CFA and South Texas Money Management? In addition to the insights and recent trades mentioned above, we list STMM’s top 10 holding below. The firm holds roughly 175 positions in total.

South Texas Money Management has done considerable research on each of these names, and feels confident in their ability to meet high standards in growth and value. What do you think? (Click here to access free, interactive tools to analyze these ideas.)

  1. International Business Machines
  2. Bristol-Myers Squibb Company
  3. Technology SPDR 
  4. iShares S&P SmallCap 600 Index
  5. Texas Instruments 
  6. Archer Daniels Midland
  7. Unitedhealth Group
  8. Hancock Holding 
  9. FedEx
  10. Patterson-UTI Energy 

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


 

 

Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Data sourced from MyPlanIQ and Finviz. For more data on new positions, visit J3sg.com.

The Motley Fool owns shares of Ford Motor, Apple, Staples, and International Business Machines. Motley Fool newsletter services have recommended buying shares of General Motors, UnitedHealth Group, FedEx, Staples, Apple, Bed Bath & Beyond, and Ford Motor. 

Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. Motley Fool newsletter services have recommended creating a synthetic long position in International Business Machines. Motley Fool newsletter services have recommended writing covered calls on Lowe's Companies. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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