Mining for stock market bargains

Dec 2, 2013 @ 12:00 am

Runtime: 8:04

As the spreads between high quality and low quality equities narrow, Don Yacktman, co-portfolio manager of the Yacktman Fund, is finding opportunity in companies like Procter & Gamble and News Corp.

Video Transcript

This week on WealthTrack, five-star Yacktman Fund manager, Don Yacktman, mines for bargains in the stock market. How is this Great Investor using tried-and-true methods to strike investment gold? Where he is digging is next on Consuelo Mack WealthTrack. The last time I interviewed him in January of 2012, he described the values in the market as "amazing." I asked him how he feels now. -We tend to be very bottom-up. -Yes, you do. -And the best indicator probably is our cash position which is, again, from bottom up, and it's about a 20% level, so it's varied between zero and 30. -So, you're in the high end of your historical cash. -Higher than normal, yeah, and it's-- -So, what does that tell me about how you feel about the market then? -Well, the dilemma is this. We'll always feel comfortable on a relative basis. -And explain to our viewers what that means. -Well, because we have-- of our process, we have two goals. One is to protect our clients' money, and that is from bad decision making and also from inflation, and the other one is to grow our clients' money by making equity double-digit-type returns and beat the S&P from one market peak to the next market peak. And we use-- what we use is risk-adjusted, compounded forward rates of return. So, like a CFO and a management team having projects out there, if they can find enough above their cost of capital, they should do it. So, within the parameters of our prospectus, we will fill it up as much as we can, but what happens is we'll either hit some lids, and we're in an environment now where it doesn't pay to downgrade, and the spreads between high-quality and lower-quality equities has narrowed pretty dramatically, and so we're in very high-quality securities. -So, when you said the spreads between high-quality companies and low-quality companies have narrowed dramatically, you're talking about the returns-- -Yeah, the forward-- -that you're getting? -rates of return. -Yeah. -We-- As we perceive them,-- -Right. -we think they're-- that you're just as well off in most cases to own things like our top holdings which are Procter & Gamble,-- -Right. -Pepsi, Coke, Fox. -News Corp, right, exactly. Yeah. So, have there been times when you've actually with Yacktman Fund -- 'cause I'm looking-- I mean, it's 7% annual turnover which is very unusual -- have there been times when you've actually kind of gone down the-- you know, the quality scale and actually bought low-quality companies just to participate in a-- in a market? -Yeah. Typically, when you have very disruptive periods, you will find that the tail of the bell curve gets elongated, and there'll be more opportunities, but opportunities usually come from declines, not from rises in the market. As the market is rising, it's just like the compounded rates of return get lower, not higher. -So, when were you in a disruptive period that you actually, you know, when and-- and again, I'm thinking of your turnover rate which is so low. So, have there been actual, you know, times when you've-- when you've like had a much higher turnover, and when you see opportunities? -Yes. In '08 and '09,-- -Right. -our turnover rate was probably about 70%. -Seven, zero. -Seven, zero. -From 7% now. -Right, because what happened is you got in this disruptive period, we used up all our cash, and then we were starting to use up securities that had lower rates of return to take on something that may have doubled. For instance, selling Procter & Gamble to buy News Corp and Viacom would be an example of that. Whereas Procter had held up very well, the other two had been cleaned out. -With the thought of preserving capital being one of your major goals and then having these double-digit forward rates of return you're talking about,-- -Uh-huh. -and you're talking about actual forward rates of return in the stock performance. Right? That's-- -Correct. -That's what you're talking about. -Right. -So, you know, looking at your top holdings, I mean, Procter & Gamble is still there, one of your largest holdings, and News Corp which you've held for a while as well. So, you know, what-- where does your-- the conviction come where you decide to stay with the Procter & Gamble and-- you know, and not do some more trading at this point? -Well, what you'll see is some trading on the edges, and then because we've had so much positive cash flow, some of those turnover numbers are really a little deceptively low-- -Uh-huh. -because if you don't buy-- when you get new money, if you don't buy exactly in line with what you have, it's turnover, but it doesn't show up in the turnover numbers. -I see. -So, like Coca-Cola, for instance, if you go through the last, say, 10 years or 15 years, 15 years ago, Coke hit its all-time high at 44.5. We thought it was over-- overpriced for that price, but like five years later, we started nibbling and it was roughly half of that kind of price. And by '07, it was our largest holding, and we had over 10% in it, but then as it ran up, we basically reduced its holding size and it dramatically went lower because the compounded rate of return was going lower, whereas in the last quarter, we added back some Coke because the price had come in, and so the forward rate of return had gone up. -So do you-- do you have a maximum, you know, percentage that you'll have of a stock in a portfolio? I mean, for instance, right now, News Corp is 9% of your portfolio. Is there, you know, kind of no matter what happens, you're gonna say we're not gonna go beyond 10 or we're not? -Yeah, I would say we don't go above 10 very often,-- -Right. -but it's actually the Fox part of News Corp. The other one is the-- is the-- which is the old News Corp, which is the newspaper. -Newspaper business. -It's a small part. The big driver in Fox is really Fox Cable News. -Right. And so, you still have conviction in the Fox part of News Corp, in other words. -More so. -So, what is it about that business that you're still saying to your shareholders in the Yacktman Fund, "Look, you know, we still wanna keep it at 10%?" -Well, it's not probably as big as it was at one time,-- -Uh-huh. -but remember this company, because they really found a niche in the news business that wasn't being covered basically, and it's bigger than MSNBC and CNN combined. -And that's in this country alone which is-- -In this country, right. -a major media market. Right? -And then from that, they're kind of doing add-on stuff like Fox Business News, Fox Sports, and so, they're spreading out in those areas. And in addition to that, they have moved from more of an ad-driven business to a fee-driven business as they've made this move which is more of a solid evergreen-type income stream. -Uh-huh. So, that's kind of the future that you see as well if you're looking at a media company. I mean, you own Viacom as you said at one point too. So, you probably are very-- you know the business. -Yeah. -That's kind of a-- That's a direction that you like to see a media company taking? -Well, we like-- we like this business model very well,-- -Yeah. -but if you look at like the media companies where they've become a smaller percentage of our portfolio because they've done so well, Viacom, Comcast as well as, you know, obviously Fox and Liberty Media, whereas now, some of these big companies like Coke and Procter and Pepsi have underperformed the S&P over the last couple of years, so that on a relative basis, they just look better to us going forward.


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