3 Stocks for the Patient Investor

Back in the 17th century, Sir Isaac Newton famously said that his great achievements were made possible by the fact that he "stood on the shoulders of giants."

No, this wasn't a gaggle of Gulliver's Brobdingnags, but rather giants of the mind: great scientists and mathematicians -- both Newton's predecessors and contemporaries -- who not only taught him fundamentals, but also challenged his mind to go one step further. The upshot is that even a natural genius like Newton didn't achieve mastery on his own. He had help.

Like Newton, we too must seek out the giants in our field if we plan to become master investors. And when it comes to investing in small cap companies, the first giant I look to for a boost is Chuck Akre, manager of the Akre Focus Fund.

Is he a baby giant?
Although the Akre Focus Fund only launched in September, Akre's been in the business 40 years. He recently opened up his own fund after resigning his as a sub-advisor and the founding manager of the very successful FBR Focus Fund.

During his 13 year tenure at FBR Focus, the fund generated 12.6% annualized returns and never trailed the S&P 500 in any rolling five-year period. That is, in a word, impressive. And it's proof enough that Akre is a giant worth listening to.

So what's Akre's secret to finding great stocks? According to his firm's website, it's as simple as:

  • Select investment opportunities to preserve and grow capital.
  • Develop a focused portfolio that seeks to identify "compounding machines."
  • Invest for long term results, recognizing that volatility can create powerful opportunities.

Of course, nothing is as simple as it sounds. The first and second principles -- essentially finding companies with strong returns on capital and top-flight management trading at attractive valuations -- is difficult enough, but as we all found out during last year's panic, it's the third principle -- patience -- that's the most challenging for us individual investors.   

Simon says
Raise your hand if you hastily sold an otherwise good investment during the market downturn. C'mon, fess up.

Yeah, I did, too. It's a mistake I've learned from and hope not to make again, for it's precisely because the small cap market is less-followed, less-liquid, and more-volatile than large caps that you need to have patience on your side. It can take years -- not months -- for your investment thesis to play out -- and for other investors to climb on board. 

Akre lives this principle -- at the time of his resignation, the highly-successful FBR Focus fund had a portfolio turnover rate of just 17, meaning the average holding time for securities in the portfolio was just over five years, years which saw both low volatility and high volatility.

To put this figure in some perspective, the average domestic mutual fund has a turnover rate near 100% (or an average holding period of one year), which doesn't even sound all that bad when you consider how frequently the shares of these major companies turn over:

Company

Average 3-Month Daily Volume

Shares Outstanding

Average Holding Time per Share

Citigroup (NYSE: C  )

513 million

22.9 billion

45 days

Wells Fargo (NYSE: WFC  )

51 million

4.7 billion

92 days

Bank of America (NYSE: BAC  )

208 million

8.6 billion

41 days

Ford (NYSE: F  )

82 million

3.3 billion

40 days

Fannie Mae (NYSE: FNM  )

41 million

1.1 billion

27 days

*Source, Yahoo! Finance, as of Dec. 23, 2009.

Twenty-seven days? Forty days?! That's not investing -- it's a game that, as small investors, we simply can't win, nor should we really want to.

What's the small investor to do?
In his most recent shareholder letter, Akre gave some advice for the small investor: "So, you ask, 'What do we do now?' Or perhaps, 'How should we be thinking about our investments?' The individual investor has a great advantage, in that he is able to think 'long term.' … We also believe that the only thing to focus on is the fundamentals of the individual assets (stocks, bonds etc.)."

So let's focus on some fundamentals. Taking a page from Akre, I screened for companies with:

  • Market caps between $100 million and $2 billion
  • Return on capital greater than 15% in each of the past three years
  • Insider ownership greater than 5%
  • Price to average five-year earnings per share under 20

Here are three of my results:

Company

Market Cap

3-Year Average ROC

Insider Ownership

Price to Average 5-Year EPS

Universal Travel Group (NYSE: UTA  )

$167 million

39%

24.4%

15.7

VSE Corp

$215 million

29%

20.8%

14.8

Ambassadors Group (Nasdaq: EPAX  )

$229 million

26%

6.5%

10.4

*Source: Capital IQ, a division of Standard and Poor's, as of Dec. 15.

It's an intriguing group of stocks. Universal Travel is a China-based travel and cargo transportation company, VSE provides logistics and information technology services primarily to U.S. government agencies, and Ambassadors Group organizes and promotes international travel programs for students and professionals.

All three appear to have economic tailwinds behind their businesses and certainly aren't trading for outrageous prices today. In short, they're ideal portfolio candidates for the patient investor.

Foolish bottom line
As individual investors, our two greatest advantages over the large institutional traders are our ability to be patient and finding overlooked small companies. By making better use of the unique advantages we have, we stand a much better chance of achieving long-term investing success.

If you're committed to becoming a more patient and focused investor, you've now got three stock ideas to get you started. If you'd like even more guidance, we're offering 50% off of the usual subscription price of Motley Fool Hidden Gems through Sunday -- and we throw in a free copy of Stocks 2010, our flagship report, as well. Just click here to get started.

Fool analyst Todd Wenning wishes you a healthy and charitable New Year. He does not own shares of any company mentioned. Ford is a Motley Fool Stock Advisor choice. The Fool owns shares of Ambassadors Group and has a disclosure policy as wise as an old owl.


Read/Post Comments (5) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 24, 2009, at 9:08 AM, wrldtrvlr wrote:

    UTA parted with the cargo handling business about 2 months ago.

  • Report this Comment On December 24, 2009, at 9:09 AM, wrldtrvlr wrote:

    UTA parted with the cargo handling business about 2 months ago.

  • Report this Comment On December 24, 2009, at 9:09 AM, JimmyhDrake wrote:

    What do you think? Health Care is preped to go. A good investment posed to go with it is MSNW. .48.cents, it seen $5.00 in 07'. Look this penny peach is poised to explode and take advantege of the new legislation.It's a staffing agency who employ's thousnads of professionals, from all feilds, to staff hospitals,nurseing homes, and serves home health care paitents.Travel nurse's all over the U.S. With hundreds of branch's spread stratigecally through out America.You cant loose with this peach

  • Report this Comment On January 05, 2010, at 5:32 PM, foolishfollies wrote:

    Our friends at caps sure didn't make the Ford call. What is that up? About 80% in the last couple months? With a two star rating. Oh well. I'm proud of Ford. The only American Icon who didn't feed out of the socialist pork trough. I would by a ford long before any car from Government motors.

  • Report this Comment On January 05, 2010, at 6:02 PM, tkell31 wrote:

    Jim, you may want update the pitch on your bruised and slightly rotten "peach." Price is at .36 now.

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