Few people would expect the newspaper industry to yield successful stock picks, but fund manager James B. Miles sniffed out a strong value find when he added Valassis Communications Inc. to his portfolio.
“This is a company that, at first blush, people see it and say it's tied to the newspaper [industry] and that's either a low-growth or negative-growth [prospect],” said Mr. Miles, manager of the Hotchkis and Wiley Small Cap Value Fund Ticker:(HWSIX). But Valassis, a company that provides coupons through RedPlum.com, as well as mail and newspaper inserts, is poised for growth — and he considers it one of the fund's best and most counterintuitive picks.
“As newspapers melt away over time, this company is in a good position to shift into the mail and deliver a greater profit,” Mr. Miles said.
A standout among its peers, the Hotchkis and Wiley Small Cap Value Fund has been able to see the benefits of a long-term perspective, having existed since 1985. Mr. Miles and co-manger David Green have managed the fund since 1997, while their team of analysts and portfolio managers has an average tenure at the firm of about a decade, setting the stage for a consistent vision, said Courtney Dobrow, a mutual fund analyst at Morningstar Inc.
“Continuity doesn't always equal investment skill, but there's a case to be made where you navigate through those markets and it's a benefit for shareholders,” she said. And it's hard to argue with an annualized 15-year return of 11.56%, particularly since most other small-cap-value funds have been around for a much shorter period.
The firm's team approach and search for deep value guides its stock picks.
A staff of about 25 searches for buying and selling opportunities, and each analyst at the firm covers an industry.
“Our view of value is the opportunity created by investors over extrapolated trends,” he said. When investors' emotions drive short-term mispricing on stocks, a rigorous analysis of companies' earnings power helps the firm seize some strong buys.
Key metrics include the return on capital relative to the cost of capital and historical profit margins versus current profit margins.
“We like to see a company that's depressed for short-term issues, and once that's re-solved, they're back up to long-term earnings,” Mr. Miles said. “We like to see investments unfold over a one- to two-year period, but we spend time assessing what the earnings will be in the next five years.”
The firm's selling philosophy is the mirror image of how it evaluates potential purchases, examining the return profile and the risk profile of holding the stock. “When we sell, it's because the company's reached its target valuation or because there's been some fundamental change in the risk profile that's made it expensive or risky,” Mr. Miles said.
Indeed, some purchases turn out to be value traps.
Holdings in residential homebuilders Beazer Homes USA Inc. Ticker:(BZH) and WCI Communities Inc. hurt the fund in 2006 and 2007, said Ms. Dobrow.
“We look to avoid value traps, but over the years, you end up with some that ultimately don't work out for you, despite your best analysis,” Mr. Miles said.
The fund's performance through the last few years has made it among the most volatile choices in small-cap value, said Jeff Tjornehoj, head of research for the Americas at Lipper Inc.
“Their performance figures show they've come a long way, but over the last few years, there's been more risk in the portfolio,” he said.
Mr. Miles views the fund's volatility as a force that can work for its long-term shareholders.
“If you watch quarter to quarter and we're underperforming or outperforming, you're going to run the chance of whipsawing yourself,” he said. “Permanent losses are the things you want to avoid, not necessarily the volatility.”
E-mail Darla Mercado at [email protected].
