Patient stock picking — and a relatively long time horizon — are key elements of navigating through the current market conditions, according to Robert Mark, who helps manage $270 million worth of separate-account portfolios at St. James Investment Co.
“Right now, the market overall is richly valued, but I see value in the names I own in the portfolio,” he said.
The St. James strategy, which has generated a 10% average annualized return since its 1999 inception, is built on identifying the fair value of less than two dozen stocks.
“You can only control your entry price,” Mr. Mark said. “We determine a company’s fair value, and then we wait for the right entry point, and then the fair value price becomes our sell price.”
Until now, the St. James approach has been available only for investors able to meet a $250,000 minimum. But the less affluent can get in on the action by investing in the Castle Focus Fund Ticker:(CASTX), a mutual fund being launched today.
The fund is the result of a partnership between St. James and Castle Investment Management LLC, a startup operation that seeks to bring unique investment strategies to a wider market of financial advisers and retail-class investors.
“We have long toyed with the idea of launching our own fund, but we didn’t want to take our eye off the ball [of managing money],” Mr. Mark said.
The strategy is not locked in to any specific market capitalization category, although it would likely be defined by fund analysts as having a value-oriented style.
The research process begins with about 1,700 companies to evaluate such fundamentals as balance sheet strength.
The strategy will favor companies with near-term operating challenges but long-term value and “financial fortitude,” according to Mr. Mark.
From there, the idea is to determine a company’s intrinsic, or actual, value; the objective is to buy stocks that are trading at well below that value.
Once a company is deemed undervalued, it is essential to understand the reason why.
One example from the portfolio is Exxon Mobil Corp. Ticker:(XOM), which is trading at about 6.5 times its cash flow, representing strong value to Mr. Mark.
“The market is focused on the short-term head winds facing this company, but we think it’s a pretty good value longer-term,” he said. “We’ve always had a bias toward companies that have fallen out of favor on Wall Street, because Wall Street is always focused on the next two or three quarters, but we’re focused on the next several years.”
Another example of where Mr. Mark is finding value is Becton Dickinson & Co. Ticker:(BDX), a medical-supply company best known for the production of needles.
Investors have tended to dismiss the company because of concerns about health care reform and its impact on the medical sector. But Mr. Mark said the needle business “operates independent of the economic cycles.”
In addition to keeping the portfolio concentrated to between 18 and 25 stocks, Mr. Mark is also not afraid to move to cash when he believes it is prudent to do so.
The fund currently has a 23% cash weighting.
“We’re not making a macro call with our cash; it’s just a function of what we’re finding in terms of valuation,” he said. “You have to invest based on absolute valuations rather than relative valuations.”
Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.
