Philip Morris, Anheuser-Busch InBev and Nestle are stocks to hold for a decade or more, says Steven Roge, a portfolio manager at R.W. Roge & Co.
Roge, who helps manage the Roge Partners Fund, researches mutual funds, limited partnerships and companies based on several characteristics, such as improving profitability, competent management and consumers' loyalty to brand-name products.
Bohemia, N.Y.-based R.W. Roge & Co. has about $200-million (U.S.) in assets under management. The Roge Partners Fund, which invests in value and growth stocks and alternative assets, is small, with about $12.5-million in assets. The fund has risen 8.4 per cent this year, beating 72 per cent of world-stock funds followed by Morningstar. By comparison, the benchmark S&P 500 is up 6.1 per cent.
"The overwhelming theme of the fund is that we look for great allocators of capital, whether it be a mutual fund manager generating returns or a CEO of a company that does a great job of adding value," Roge says.
The values of the companies Roge targets can be rich compared to the broader stock market. But their intangible assets are worth the price, he says. In doing so, Roge avoids companies with razor-thin margins.
"The great thing about the strategy is that it doesn't depend on macro themes," Roge says. "With great brand recognition, [companies in the fund]have the ability to pass on the costs to their customers."
Roge divides his stock holdings in two baskets. The smaller basket includes companies that he calls "valuation anomalies."
"For whatever reason, it may be a temporary setback in earnings or a macro theme that's temporarily weighing down the company," Roge says. "Maybe they don't have the best brands or widest competitive moat, but in those cases we believe we're buying $1 for 60 cents. For these companies with mediocre businesses that are extraordinarily cheap, we'll hold them for six months."
The other basket, which gets a bigger focus, includes what Roge calls great companies run by great management with great brands. Among those, the turnover is relatively modest - Roge says they can be held for a decade.
Renowned value fund manager Bruce Berkowitz of Fairholme Capital used to sit on the board of directors of one of Roge's picks. Berkowitz resigned from the board only so he could buy more shares of the company. Read on to see this pick as well as others with the type of brand loyalty that Roge is betting on.
Philip Morris International
Company Profile: Philip Morris is the maker of cigarettes and other tobacco products created in a 2008 spinoff from Altria.
Key Brands: Marlboro, Parliament, Virginia Slims and L&M
Closing Price: $57.18 (Oct. 12)
Dividend Yield: 4.5 per cent
Roge's Take: "The stock continues to be undervalued because people don't want to invest in tobacco companies, whether for moral or litigation reasons. It has a brand that has been extremely dominant for many years. In the case of the international brand, they're growing in emerging markets so that gives you a backdoor emerging markets play. The product is addictive, so you tend to keep the customers that you originally court."
"The firm itself is highly profitable. Return on invested capital, which is something we find very important, has averaged over 30 per cent per year for the past several years. For every dollar they invest in their own company, they earn about 35 cents back. Most companies in the S&P 500 have a return on invested capital of about 8 per cent or 9 per cent."
"The valuation is also reasonable for such a high margin business, even if price-to-sales is at a premium. And the dividend yield also helps."
Financial Metrics: Philip Morris has a price-to-earnings (P/E) ratio of 15.2 over the trailing 12 months, slightly below the P/E ratios of its industry (16.3) and the S&P 500 (18.1). The stock has a forward P/E ratio of 13.6, in line with the S&P 500 based on 2011 earnings estimates.
Company Profile: Anheuser-Busch InBev is the world's biggest beer company.
Key Brands: Budweiser, Michelob, Rolling Rock, Beck's, Stella Artois, Hoegaarden and Labatt's
Closing Price: $62.29 (Oct. 12)
Dividend Yield: Anheuser-Busch InBev doesn't have a regular quarterly dividend established. The company paid a special dividend to shareholders in April.
Roge's Take: "I became interested in Anheuser-Busch in its former life, prior to being bought out by InBev. I was attracted to the tremendous brand loyalty among its customers. But the firm wasn't being run for its shareholders but instead run as a family business. Subsequently, there was a lot of fat to be trimmed. The management team over at InBev has a history of turning around franchises, cutting costs and operating companies for the shareholders by focusing on return on invested capital and free cash flow.
The Busch family had no interest in doing that." Instead of destroying value continuously, now we have a management team that can add value and have the company run as a finely tuned machine. They're going to generate about $6 billion in free cash flow over the next 12 months, which will go to pay down debt. You're going to see depreciation expenses come down and interest charges come down. Once they reduce their debt, they'll institute a dividend and I think they can easily pay a 2.5 per cent dividend."
Financial Metrics: Anheuser-Busch InBev has a trailing P/E ratio of 21.4, below the industry average of 27.9 but well above the S&P 500 P/E ratio.
Based on 2011 earnings, the company has a forward P/E ratio of 16.7, a premium to the S&P 500.
Company Profile: Based in Switzerland, Nestle produces consumer goods, such as chocolate and confectionaries, powdered and liquid beverages, cereal,
coffee, ice cream, prepared food, pet care and pharmaceutical products.
Key Brands: Purina, Lean Cuisine, PowerBar, Gerber, Carnation, Poland Spring, Taster's Choice and Butterfinger
Closing Price: $54.72 (Oct. 12)
Dividend Yield: Nestle does not have a regular quarterly dividend established on its American depositary receipts (ADR). The company paid a special dividend of $1.38 a share in April, indicating a current yield of about 2.5 per cent.
Roge's Take: "I was really impressed with the management team. When they make decisions for brands and strategic decisions for the firm, they're looking out 100 years, which is unheard of. Most management teams worry about the next quarter. When Nestle makes a move, they do it very methodically and very prudently." "They have tremendous exposure to emerging markets. They've had some hidden assets that are about to be monetized, such as their position in Alcan and a position in L'Oreal. Even though the stock on a valuation basis is cheap on the surface, it gets even cheaper when you look at the hidden assets. It's a pretty simple story: They're the best in the business."
Financial Metrics: Both the trailing and forward P/E ratio for Nestle ADRs are around 16, in line with the S&P 500 over the past year but they have a higher valuation relative to the 2011 earnings estimate for the S&P 500.
Company Profile: Brown-Forman is the U.S. maker, bottler and exporter of alcoholic beverages ranging from whisky to champagne to tequila.
Key Brands: Jack Daniel's, Southern Comfort, Korbel, Don Eduardo and Chambord Liqueur
Closing Price: $61.45 (Oct. 12)
Dividend Yield: 2%
Roge's Take: "Whenever we see people with tattoos of brands on their arms, you know you have a winner. Jack Daniel's has been such a strong brand for years. It's almost the iconic American brand among hard alcohol, like Budweiser would be for beer." "They also have a tremendous amount of assets, like vineyards and storage, which are on the books at cost. The management team is very quiet and not very promotional, but they tend to make pretty good decisions with shareholder capital."
Financial Metrics: Brown-Forman trades at a premium to both its industry and the S&P 500. The company has a trailing P/E ratio of 20.6, compared with the industry average of 14.1. Its forward P/E ratio comes in at 17.3, based on 2011 earnings estimates, which is also at a premium to the S&P 500's.
Winthrop Realty Trust
Company Profile: Winthrop Realty Trust is a real estate investment trust (REIT) based in Boston. The company is lead by Michael Ashner, who has worked with big investors such as Carl Icahn on real estate deals and sold a large portion of his holdings prior to the industry collapse in 2008. Value investor Bruce Berkowitz and Fairholme Capital own almost 15% of the REIT.
Closing Price: $12.56 (Oct. 12)
Dividend Yield: 5.2%
Roge's Take: "This one falls in the growing-franchise bucket because Ashner is a great capital allocator. Ashner is self-made and is a great owner/operator. Out of his own pocket, he bought a tremendous amount of shares in the company and started running the company. He was selling properties in 2007 into 2008, saying he couldn't find anything to buy."
"Looking at the company itself, it's the most unlevered REIT in the market. It pays a very nice dividend. This REIT can be considered almost a real estate hedge fund, because Ashner will invest in individual stocks. He'll do mezzanine financing for deals. He'll buy properties outright. It's a very eclectic strategy managed by a very bright guy."
"The stock is a microcap so it's very volatile from day to day. Over the next decade or two, Winthrop has the biggest bang for the buck. Winthrop could be the next Vornado."
Financial Metrics: Winthrop Realty Trust has a P/E ratio of 11.8 over the trailing 12 months, below the industry average of 22.7 and the S&P 500's 18.1. Based on 2011 earnings projections, Winthrop has a forward P/E ratio of 10.5, also below the S&P 500's.