Nygren looks for unloved companies that are increasing the value of their businesses. Over the years he has often favored dividend payers and companies that are repurchasing shares. He likes such stocks because they have strong cash flows and are using the money to enrich shareholders.
Lately, Nygren has been emphasizing buyback companies and moving away from utilities and other dividend payers. He says that in recent years, income investors have shifted away from low-yielding bonds and moved to utilities. Because utilities have been slow growers, they typically sold at multiples that were about two thirds of the figure for the S&P 500, he says. But now they trade at a premium to benchmark.
"Investors have bid up the prices of dividend stocks, and they have not paid up for many companies that use all their excess cash for share repurchases," he says.
Nygren likes DirecTV (DTV), a company that does not pay a dividend. Although the satellite TV company has grown rapidly, the shares sell for less than 10 times earnings estimates for next year.
Since 2006, DirecTV has doubled its sales to about $30 billion and almost doubled profits to $2.6 billion. During the same time, it has about cut in half the number of shares outstanding. The share repurchases have increased the value of the stock, says Nygren. "While the total earnings have doubled, earnings per share have quadrupled," he says. Another stock he likes is Discovery Communications (DISCA), which operates such cable channels as Discovery Channel, Animal Planet and Military Channel. In the past year, the company has repurchased about 10% of its shares, and the earnings have been increasing at a double-digit rate. One of the fastest-growing channels is Investigation Discovery, a true crime specialist. "This is a great business, but income investors have no interest because there is no dividend," says Nygren. Follow @StanLuxenberg This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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