Do you like to go against the crowd with your investment choices? Then you might find value in the stock-picking strategies of Becker Value Equity Fund, which has had quite a run favoring underdogs and dismissing Wall Street recommendations. Fortunately, co-portfolio manager Marian Kessler was kind enough to share details of Becker's bottom-up stock picking strategy.
A bit of background: The 4-star Becker Value Equity Fund
Let's talk strategy -- What do you look for?
"We focus on individual stock selection. We're not top sector rotators or macro driven. We pay attention to companies rather than headline news. We do our own in-house research instead of using Wall Street recommendations, figuring their interests are not necessarily aligned with our own."
When searching for an out-of-favor stock, it must meet what Marian calls "relative" and "absolute" valuations. "Relative" meaning it is trading at a discount to historic norms, and "absolute" meaning it is trading at a discount to the market as a whole.
"It's not enough for a stock to be cheap," says Marian. "The company must be developing a roadmap of how they are going forward." For that roadmap, the fund looks to the balance sheet for low debt to capital and improving operating margins and revenue growth. "If you have good capital management, your earnings flow from there."
On avoiding value traps: "Stocks need to show a positive spread of return on capital relative to cost of capital through good times and bad -- this has helped to avoid situations where stocks look cheap but are not earning their cost of capital."
These screens are done in addition to visiting companies, checking a firm's sourcing, supply pipeline, input providers, rating agencies, and analyzing how management benefits shareholders in the long run.
Let's talk stock specifics -- What are some favorites?
Teck Resources Ltd
"The stock suffers from concerns over demand for TVs and other display items and China's manufacturing capacity," she explains. "I think Corning could also benefit shareholders from a possible breakdown from the company. Their low margin slow growth fiber optics business, which was their big growth business a decade ago, could be separated from their much higher margin and faster growing glass business. If they were to pull apart, I think we'd see stock go much higher, although I don't know if management would ever do it."
It was out of favor in the low $30s over concern that Amazon and Netflix would take over control of content, but that is something their strong management has been successful in hanging onto. They found that people are willing to pay extra for HBO and quality entertainment, and with mobile devices they get more volume and revenue off their film library. "It's not a particularly cheap stock. It's trading 17 times earnings and has an enterprise value/EBITDA of 8.6. But from an asset value, it has enormously attractive assets and management has been a good long-term grower. We think it's still reasonably valued, and are happy to add to our position."
Any advice for new investors?
"Buy what's understandable to you. Buy what you know. Don't buy into stocks or strategies or mutual funds if you don't know why they're doing what they do. And be careful about holding names you love. Don't fall in love with stocks."
Are you looking to follow the investing advice of Marian Kessler and Becker Value Equity Fund? In addition to the insights and recent trades mentioned above, we list Becker's top 10 holdings below. The firm holds roughly 60 positions with fairly equal weighting.
Becker has done considerable research on each of these names and feels confident in their ability to surprise and increase in value. What do you think? The list's average one-year return is 29%. (Click here to access free, interactive tools to analyze these ideas.)
- JPMorgan Chase
- Verizon Communications
- Time Warner
- Dun & Bradstreet
- PNC Financial Services Group
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.
The Motley Fool owns shares of Amazon.com, Intel, Microsoft, Netflix, PNC Financial Services, JPMorgan Chase, and Corning. Motley Fool newsletter services have recommended buying shares of Corning, Intel, Amazon.com, Microsoft, 3M, and Netflix. Motley Fool newsletter services have recommended creating a diagonal call position in 3M. Motley Fool newsletter services have recommended creating a synthetic covered call position in Microsoft. Motley Fool newsletter services have recommended creating a bear put ladder position in Netflix. The Motley Fool has a disclosure policy.