Intrepid All Cap Fund's performance since inception corrected in this update.
) -- Investors may regard
as the best Black Friday stock picks, but fund managers say
( ICSA) and
are among sale items to buy.
kicks off the holiday shopping season this week with retailers offering special deals and promotions to draw shoppers into stores. Similarly, money managers are highlighting company stocks to lure value investors.
Value investors try to buy, as is a common saying, $1 for 50 cents. But with the stock market's recent run, investors say it has been harder to find true value picks with the promise of price appreciation. Since the start of September, the
has rallied 15%, the
Dow Jones Industrial Average
has climbed 11%, and the
Russell 2000 Value
index has jumped 17%.
"The market has moved up pretty sharply since the end of summer, and that makes my job harder as a value analyst," says Greg Estes, manager of the
Intrepid All Cap Fund
. Estes says cash is at 17% of assets and has been creeping higher as investment ideas dry up.
"As the market runs up, everyone is happy. But I'm not happy. I can't find things," Estes says. "A lot of the names I liked several months ago, those discounts have shrunk."
Just as retail shoppers need to be aware that some red sale tags aren't necessarily a good deal, value investors need to manage the risk of buying a cheap stock that won't rise -- a so-called value trap.
"It's important that you get what you pay for," says Mike McGervey of North Canton, Ohio-based investment-management firm McGervey Wealth Management. "Or perhaps on Friday, you get a bargain on a quality stock with promise for price appreciation. A stock at a great value may not provide significant price appreciation."
spoke with four investment managers who take a value approach -- along the lines of
-- to get their own Black Friday value-stock selections. Read on to see which stocks they believe trade at an attractive discount, much like the LCD televisions at Wal-Mart this holiday weekend.
Mike Benoit, senior equity analyst at Talon Asset Management, has Thanksgiving on the brain with his value picks. Talon is based in Chicago and has $1.1 billion in funds under management, with about $650 million in equities. Benoit says that, as he reflects on what he's thankful for, he can think of nothing better than Nascar.
"Second only to the NFL, Nascar is an American institution and fortunately for value investors, Wall Street has lost faith," Benoit says. "I would argue that it has never been a better time to be a fan."
is worth near $50 per share with limited downside from current levels. International Speedway is closely tied to Nascar as the company hosts more than 100 racing events a year, which generate revenue from admissions, broadcasting rights and advertising sponsorships, not to mention food and merchandise sales.
The stock closed Tuesday at $23.70, down 17% for the year. By comparison, the S&P 500 is up more than 7%. But with a $50 price target, Benoit is expecting shares of International Speedway to double from current levels. He says that view isn't hard to believe considering financial and valuation metrics.
"The company trades near book value and a market cap of approximately $1 billion, which is a huge discount to past valuation levels," Benoit says. "A good portion of revenues via media rights and sponsorships are locked in through 2014 so the top line is less volatile than you might think."
Wall Street may think the consumer is dead and blue-collar employment will never come back, a view that plays into the hands of value investors. "I can't think of a better way to be a contrarian and bet on what it means to be an American," Benoit adds.
Continuing with the Thanksgiving theme, Benoit turns to
( RAH), which manufactures and sells store-branded food products. Ralcorp has trailed the market over the past year and currently trades at a 20% discount to its peers. Fears of rising commodity prices are affecting the company's shares. But there is a lot to love about this value pick, Benoit says.
Ralcorp has a good track record of creating shareholder value over the past several years, but investors are hesitant since the announced acquisition of American Italian Pasta coupled with a slowdown in the cereal aisle," he says. "I expect as pricing becomes more rational and things settle down, the valuation gap on this name will close."
Ralcorp shares currently trade for $63.40, good for a 6% gain this year. Benoit says the company is worth at least $80 per share, which represents more than 25% upside.
Greg Estes, manager of the
Intrepid All-Cap Fund
, says his fund is finding value in a stock it has never owned before:
"I refer to them as an 800-pound gorilla," he says. "It's very large for what we normally look at. But this is a great business. It has a fabulous balance sheet. It has a net cash position of $34 billion."
The Intrepid All-Cap Fund has $22 million in total assets and a five-star rating from Morningstar. Since inception, the fund has an annualized return of 2.1%, beating the S&P 500's annualized return of -6.37%. The fund has outpaced the index by a wide margin (15% versus 3%) over the past year.
Estes says perception has been an issue for Microsoft, as investors tend to view the company through the lens of
, which are considered to be the top leaders and innovators of the tech market.
"People tend to look at a company like Microsoft at other variables besides the fundamentals," Estes says. "People judge Microsoft by how they judge Apple or Google. If they love either, they won't love Microsoft. But looking at fundamentals, I love Microsoft."
Estes notes that Microsoft currently trades below seven times earnings before interest and taxes (EBIT) on an enterprise-value basis. Anything below eight on this enterprise value/EBIT basis, he says, is "pretty good."
Like Talon's Benoit, Estes also views International Speedway as a value pick. Estes agrees that the stock is out of favor due to poor television ratings. And, like Benoit, Estes likes that the TV contract extends until 2014. "The revenue is locked in for an extended period of time. That makes its cash-flow profile more of a certainty for us," Estes says.
The problem, he says, comes in reconciling the fact that people aren't going to Nascar events, yet the TV ratings on the races aren't going up. "That's counterintuitive, because you think if people aren't going to the race, they'll watch it on TV. But we're focusing on the idea that it looks like a classic value investment."
Estes also shrugs off concerns that International Speedway could be a value trap, arguing that those situations come when an elite substitute for a product is available.
"There isn't a perfect substitute for racing. It's unique enough," Estes says. "International Speedway is one of three main companies involved in racing. But they're the biggest one. And the family that runs the company runs NASCAR. They have a special relationship with racing because they decide which tracks the races are run at. International Speedway is in a good position from that respect."
The Intrepid All Cap Fund will continue to add to its position in International Speedway if the discount, currently around 25%, grows. "We tend to take the long view. Ratings will come back, and attendance will improve," Estes says. "We're not as concerned with the quarter-to-quarter shifts like the market is."
Don Wordell, manager of the
RidgeWorth Mid-Cap Value Equity Fund
, says appliance maker
is one of his top picks.
Like most other funds, the RidgeWorth Mid-Cap Value Equity Fund had a weak performance over the past three years due to the economic crisis. Even so, the $1.4 billion fund has garnered a five-star rating from Morningstar, thanks to market outperformance over one and five years. RidgeWorth is an Atlanta-based multi-manager boutique with $62 billion in assets overall.
Whirlpool is "extremely attractive on a long-term basis. The stock is clearly cheap on whatever valuation metric you want to compare it to."
Wordell says the price-to-earnings ratio of 8.5 is what sticks out most, as it is well below the market average. But he says Whirlpool is a winner thanks to an attractive dividend, strong management team and exposure to emerging markets such as China and South America.
Wordell turns to the bank sector for his second value pick.
has a 2.5% dividend yield that Wordell exepcts to grow.
"They paid their TARP back, so they're in a great position to grow their dividend," he says. "Like
raised their dividend, BB&T can do the same thing."
Wordell says regulation fears are already reflected in the stock price, which currently trades at book value. BB&T, though, is "very cheap" on what he expects the bank's earnings power will be.
"In two years, BB&T's earnings power will be in the $3.50-a-share range," Wordell says. "The stock is currently trading at seven times that number now and we think it should trade north of $10. That would get you in the $35 to $40 range."
Lastly, Wordell says
is a great value play not because of the defense unit but the luxury cachet attached to its business-jet division.
General Dynamics has 60% of its revenue dedicated to defense, and the stock trades at defense multiples of nine times earnings, Wordell says. The other 40% of the business is in the Gulfstream jet business.
"That is by far the premier global brand. I would argue that Gulfstream is a brand that is better than
, better than
, better than anything out there," he says. "The G650 jet is going to be the greatest business jet that we've known so far."
Mike McGervey of McGervey Wealth Management takes a value approach with a growth objective. "We are traditionally seeking securities that have demonstrated strong earnings and sales growth, are amongst strong industry groups, and are also leading their industries in price performance," he says. "As such, it is typically more difficult to find a bargain."
McGervey says his shopping list of bargains includes
First Cash Financial Services
( RADS). These stocks are strong growth contenders but have valuations more comparable to those of value stocks, he says.
His best bargain for Black Friday, though, is
. Michigan-based TRW supplies automotive systems, modules and components to global car original equipment manufacturers and related aftermarkets, which has made the stock an attractive bet for investors looking to play the recent initial public offering by
The stock currently trades at $48, more than double the share price at the end of 2009. Even so, McGervey says TRW's financial and valuation metrics are attractive to both bargain- and growth-hunters.
He notes that TRW's price-to-earnings and price-to-sales ratios are 7.9 and 0.41, respectively, which are below the market average. In addition, the PEG ratio, which measures value relative to growth, is 1.53. That is an indication that investors aren't paying a massive premium for long-term growth.
"That's not bad for a growth stock that has been on the run," McGervey says. "The stock has recently pulled back off its 52-week high by about 8%, creating an incentive buy opportunity which may still be available on Friday."
-- Written by Robert Holmes in Boston
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