By Robert Barker Who says the pros know the path to all profits? Just ask any of the national champion intercollegiate portfolio managers, who on Apr. 30 will open the trading day in ceremonies at Nasdaq's MarketSite on Times Square in New York.
The students, from the University of Dayton, Rice University, and Stetson University, are respective winners in growth, value, and "blend" -- a mix of growth and value -- categories for the risk-adjusted performance of their live, real-money portfolios and their ability to explain their picks. The contest was sponsored by the National Student Investment Strategy Symposium.
The team from Stetson's Roland George Investments Program, including graduating seniors Michelle Dass, Katie Norsen, Brian Rachwalski, and Jack White, posted the highest returns -- 37% in the year ended Jan. 31. The Wilshire 5000 index, which captures the entire U.S. stock market's performance, fell 3.5% over the same stretch.
To find out how they excelled, and what stocks they like now, I reached White by phone at Stetson's DeLand (Fla.) campus. Along with noting that he and Norsen are actively looking for work as investment analysts, here are the edited excerpts of what he had to say:
Q: Why did your portfolio perform so well?
A: It's forming a strategy and sticking to our policies. We have four policies: undervalued asset situations, inordinately low price-earnings ratio situations, improving margins and earnings, and takeover candidates. So we basically look for those kind of stocks, and we try to stick to what we say we're going to do.
Q: I see. And how many names did you have in the portfolio over the course of the year?
A: We stuck with about 40 stocks.
Q: What were your biggest positions?
A: Panera Bread Co. (PNRA), Philip Morris (MO), and PerkinElmer (PKI), which we sold.
Q: Let's start with Panera Bread. That's not a familiar name to most people. Why did you pick it, or keep it in the portfolio?
A: Panera Bread is a high-growth-stage company with health-conscious restaurants. It gets its money from a fee-for-franchise business. So at the time we purchased it, it was trading at $7, which was about its book value. But it had a growth rate of about 35%, so we saw this as a highly undervalued company. It fit into either the undervalued asset situation or improving margins. So we liked it for both of those reasons.
Q: Is it still a buy, do you think?
A: Not in our reckoning as far as value is concerned. It might be in the growth category. We've reduced our position, just because it took a larger weighting in our portfolio.
Q: Now, how about Philip Morris? It's a complicated stock. How do you guys view it?
A: Well, at the time of purchase, it was trading at a p-e of 4. Now, everybody knows Philip Morris, which has enormous free cash flow. So we saw this as something that the market just tended to discount because of the [tobacco] litigation that was going on. We just saw this as one of those things that you just had to jump on because if you knew the company and its long-term outlook, you had to have faith that it was going to go back up to $60-plus.
Q: What was your average cost in it?
A: It was $22. We valued it somewhere around $55. So it's getting [near] to that point.
Q: How do you evaluate Philip Morris's impending spin-off of shares in its Kraft Foods operation?
A: 'm not too sure about the details on that company, because I was not the analyst. But we used a net-asset-value [analysis]. Kraft was a portion of that.
Q: So you think when investors are able to value the two separate pieces in active trading, there will be more upside for Philip Morris?
A: Exactly. Similar to AT&T (T) right now, with the four separate companies it is thinking of splitting into. AT&T, trading [now] at $21, is separately worth more like $41.
Q: So the sum of the parts in Philip Morris you see in the mid-$50s?
A: Yes, we do, and we're reevaluating it right now to see if it's worth more.
Q: Now you mention AT&T as a similar circumstance or situation. Is that a new name you've added to the portfolio?
A: Yes. We've added it in the last two weeks. We saw it as a undervalued asset situation as far as the sum of the parts. Once they break apart, we can get rid of the parts we don't like so much, like the long-distance aspect of the company, and hold on to the ones that we feel are in their growth phases.
Q: Other recent buys?
A: One is MFC Bancorp (MXBIF). Not really a highly known bank.
Q: That must be a small-cap, huh?
A: It's definitely a small-cap -- basically a fee-for-services to high-net-worth Europeans. It generated a 25% return on equity, with 20% increase in earnings year-over-year.
A: I don't know if you know the story of See's Candies, which [Warren] Buffett always speaks about. But we think we another one of those See's Candies stories. You probably have heard of the Topps Co. (TOPP).
Q: That's the baseball card company?
A: Cards, and they also sell the blow-pops. Right now it's trading at a p-e of 5. It has a return on equity of 50%-plus and $150 million in cash. Much like See's Candies, its cap-ex spending is over, so all its doing right now is generating free cash flow. We feel this is one of those Buffett stocks that once people find out about it, they're just going to jump on it, and we want to get on the bottom floor.
Q: A key assumption in your analysis there is that Topps' capital spending is over, or at least its heavy capital spending is over. How can you really know that?
A: I wouldn't say all of it, but much of it. Topps has been around since 1938, so it's not like they're new to this. It's not an Internet company. Baseball cards are made of paper, and the candy I would say is just sugar.
Q: The stock is around $10. What do you reckon it's worth?
A: More like $16 to $20.
Q: You probably know better how to invest than a lot of people twice or three times your age. What advice would you give struggling individual investors?
A: I could probably sum it up in three phrases: good companies, great prices, long-term focus. It doesn't have to be a complicated process. Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BW Online.
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