Disney and Allstate Highlight the Purloined Portfolio
Posted: October 16, 2018
For fun, and hopefully for profit, I like to peek in on the holdings of rival money managers I respect.
Once a year, I compile a small collection of this stolen fruit, under the name of the Purloined Portfolio.
My friend Randall Eley has just had the honor of seeing his Edgar Lomax Value Fund receive a five-star rating from Morningstar. From his fund, I select Allstate (ALL).
Like all property & casualty insurers, the Northbrook, Illinois, company is to some extent at the mercy of hurricanes, tornados and earthquakes. But it has been profitable in 14 of the past 15 years, and nicely profitable lately.
Scott Black, who heads Delphi Management in Boston, has the closest thing to a photographic memory I’ve seen in an investment manager. Name a company and the chances are good he can tell you its earnings history and current valuation.
From his holdings I pluck Walt Disney Co. (DIS). Yes, its growth rates are in single digits. But the company is richly profitable. And it owns many gems: The Disney Channel, ABC television, 80% of ESPN, Pixar, Lucasfilm, Marvel Entertainment, the famed theme parks, and of course the Disney movie studio.
Disney stock now sells for the smallest multiple of earnings I can remember, except for in the depths of the Great Recession in 2008.
My mentor in the investment business was David Dreman, head of Dreman Value Management in Palm Beach, Florida. From his holdings I select Laboratory Corp. of America Holdings (LH).
Steady progress in sales and earnings has been a hallmark for Lab Corp., which has some 40 testing centers and conducts about half a million medical tests daily. It also does drug development work through its Covance unit. The stock sells for less than 14 times earnings, at which price I think it’s a bargain.
From my fellow Bostonian Ken Heebner, who has an outstanding long-term record but has struggled lately in his CMG Focus Fund, I pick a short sale on Simon Property Group (SPG), which owns many of the best shopping malls in the U.S. A short sale is in essence a bet that a stock will fall.
I believe, as apparently does Heebner, that mall owners won’t be able to raise stores’ rents in the future as they did in the past. Mall traffic is down in many places and even glossy retailers aren’t racking up profits the way they used to.
David Katz is chief investment officer at Matrix Asset Advisors in New York. From his Matrix Advisors Value Fund, I pick Zimmer Biomet Holdings (ZBH), a leader in orthopedic reconstructive implants, such as knee and hip replacement devices.
The aging of the U.S. population is one reason to like this stock. Ten-year revenue growth averaging about 9% a year is another.
Charles Royce, who runs the Royce Pennsylvania Mutual Fund among others, is known for his love to mid-cap and small-cap stocks. From his holdings I select Cohu (COHU) of Poway, California, which makes semiconductor test equipment, metal detectors and closed-circuit television systems.
Cohu has a very strong balance sheet, with debt only 3% of stockholders’ equity. Its profits have been erratic, but better in recent years.
This is the 15th time I’ve compiled a Purloined Portfolio. So how did the first 14 do? Twelve of the first 14 lists were profitable, and eight beat the Standard & Poor’s 500 Index. The average gain on my stolen recommendations has been 14.5%, which compares with 9.4% for the S&P 500 over the 14 one-year periods.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Last year, I had four gains and three losses. The best gainer was Fabrinet (FN), up 18%. The worst loser was NetEase (NTES), down 20%. In aggregate, my picks gained a mere 1.6% while the S&P 500 returned 10.2%.
Note that I didn’t interview the managers I admire. I just selected one stock from each of them based on their filings to the Securities and Exchange Commission. Most of the filings were from June 30, 2018; David Dreman’s was from March. That means it’s possible that a manager may have sold the stock I selected.
Disclosure: I own Allstate, Fabrinet and Zimmer Biomet for one or more clients.