Marian Kessler, manager of the Becker Value Equity Fund, looks for high quality, out-of-favor stocks trading at undervalued prices; here, she discusses her investment strategy along with three of the fund's top holdings.
Steve Halpern: Joining us today is Marian Kessler, co-portfolio Manager of the 4-star Becker Value Equity Fund. How are you doing today Marian?
Marian Kessler: Doing very well, thank you very much.
Steve Halpern: First, before we begin, let me let listeners know that the symbol for your fund if they want information is (US:BVEFX). As a large-cap value fund, you use bottom-up fundamental analysis to search for undervalued stocks. Could you explain a little about your strategy and what metrics, in particular, you favor to determine whether or not a stock is undervalued?
Marian Kessler: Yes, we use, in our philosophy and process, four primary criteria for potential inclusion of a stock in our fund, and those four criteria are: a stock must be out of favor, as measured by sentiment and trading range, but it must be a high-quality company, so we're not a speculative or a distressed investor.
We buy high-quality balance sheets. We buy attractive valuations, either relative to the market, or relative to the stock's historic norm.
Probably most importantly, we buy stocks where we can identify, in the course of writing up a thesis, a stable to improving roadmap to the future, so it' not enough to buy a cheap stock, we have to find a stock that has gone through some cyclical issues and is undervalued, but has very strong go forward fundamentals.
Steve Halpern: In effect, you're looking for some type of catalyst that would suggest that the undervaluation is going to change.
Marian Kessler: We're not looking for a catalyst, necessarily. We are looking for the ability of management to executive on a business model going forward, a business plan.
Steve Halpern: You've shown a five-year annualized return of 18.3% following this philosophy. What factors do you believe allowed you to show such a strong performance through a volatile market period?
Marian Kessler: We really have a focus on bottom-up stock selection. We try to avoid the emotion, panic, concern with macro issues, sector issues, and focus on individual stock selection.
Stock selection, over a course of a cycle, provides about 75%, or so, of our total performance return, so stock selection is individual, just a fully integrated research process in-house, very fundamental, very cash-flow driven, very return on invested capital driven.
Steve Halpern: I understand that your approach is bottom-up, so you're looking at the company first, but when reviewing your portfolio, the top sectors now are technology, financial services, and energy. Could you briefly touch on what you find attractive about those sectors, or why your stock selection has pushed you towards holdings in that area?
Marian Kessler: Again, we don't identify sectors that we're going to be interested in. It's a fall-out of a process from a bottom-up standpoint. We are cognizant of diversification and being not too far off of our benchmark. The fund bench is to the Russell 1000 Value, Large-Cap Value Index, and we're not closet indexers.
We're not benchmark driven, but we are benchmark aware. The fact that we have an overweighting now in tech, versus the Russell 1000 Value, is just a function of the process. With that being said, we found some very attractive names in the last five quarters or so in the tech's base and they are an eclectic group.
|pagebreak|Steve Halpern: One of the tech stocks that rank among your top holdings is Cognizant Technology (CTSH). Are there some insights about that?
Marian Kessler: That stock was purchased last year and quite a lot lower than it was now. It was undergoing some investor rotation out of the main concern because of immigration legislation that had onerous provisions, that was pending in Congress, and the stock traded down on some concerns that this immigration legislation would be passed.
Specifically, it would limit the number of visas to be issued for foreign workers and a requirement that H1B wages would be equivalent to workers in local geographies. Passage of the bill really faces long odds. It's been put on the backburner. The stock has risen very nicely, was our best performer, actually, in the last quarter, in the fourth quarter of this year.
Very interesting IT Consulting, business process outsourcing provider, primarily to US clients, but it does use a lot of highly skilled foreign workers.
Steve Halpern: You also hold a position in DirectTV (DTV) among your top positions. What is the outlook there?
Marian Kessler: Also, a 2013 add to the portfolio. It joins a couple of other media names in the portfolio, specifically Time Warner and Viacom.
But Direct TV, there was a number of concerns about cord cutting and structural disadvantages relative to cable that resulted when we bought the stock in a pretty depressed valuation.
The stock was trading at 11 times 2014 earnings and about six times EBITDA. Again, it's been a pretty good performer. We bought it in the 50s. It is the leading satellite paid TV provider in the US. It has 20 million subscribers here and is number two behind Comcast, which has about 22 million subscribers.
The company has a very good and fast growing operation also in Latin America. Very cash flow positive, extremely strong balance sheet. Generates a tremendous amount of free cash flow and has a high return on investment capital, well in excess of their cost of capital.
Attractive valuation, but again, the concerns drove the stock down as concerns have been somewhat alleviated and the company has been able to grow their subscriber account in ARPU, despite these concerns about structural problems.
In addition, Berkshire Hathaway owns a little over 6.5% of the company and Direct TV has bought back about two-thirds of its stocks since 2006, so it has used it's free cash flow to buy in stock.
Steve Halpern: Finally, another position you hold at the Becker Value Equity Fund is IAC InterActive (IACI). Could you tell us a little about this company?
Marian Kessler: Sure, it is a lesser-known company. It has a smaller market cap. We can buy down into the mid-cap space. It's got about a $6 billion, a little bit less, market cap.
IAC InterActive is a media and Internet company. It has core areas of search applications, online dating; probably its best-known asset is Match.com. It has searched application, which is Ask.com, Dictionary.com, About.com, so interesting search engines that have been very profitable for them.
Match.com has great margins, 30% + margin business and is very rapidly growing. When we bought the stock, it was trading at about six times enterprise value EBITDA and about 13 times earnings, so a fairly good discount to the market as a whole. We think there's a lot of catalyst potentials.
A spinout of Match.com is a possibility, 25% of sales and, again, very high margin business. This is bit of a sum of the parts company, which we think even though the stock has done well it still has a great deal of potential ahead of it.
Steve Halpern: We really appreciate you sharing some of your ideas. Thank you for joining us today.
Marian Kessler: I really appreciate your time. Thank you.
