By Philip van Doorn, MarketWatch
George Young, a portfolio manager of the Villere Balanced Fund, says investors ought to apply the same logic to buying stocks as they do consumer goods on Black Friday.
“If you are interested in buying a pair of shoes and see them in the window for $100, and now see them on sale for $80, you are more likely to buy them,” he said. “What about the stock market? You might take the same attitude.”
In an interview Nov. 26, Young named three small-cap/mid-cap stocks that he believes are particular bargains right now. The fund is operated by Villere & Co., which is based in New Orleans and manages about $2.3 billion, mainly for private and institutional clients. The firm runs highly concentrated portfolios and focuses on, but is not limited to, smaller companies that they are familiar with through meetings with management and competitors.
“There are a lot of intriguing stories” in this market, Young said.
He explained how investors shy away from opportunities:
Three stock picks
Young mentioned three companies he likes for long-term investments, whose shares he believes are attractively priced. All have declined since the end of September:
Here’s how they have performed this year through Nov. 27:
Howard Hughes Corp. (NYS:HHC) builds master planned communities (MPCs) and owns the South Street Seaport in New York. Young said Villere & Co. and its clients have owned the shares for about five years.
Young said it can be difficult for investors to measure the value of this type of company because MPCs require very long-term investments, with the payoff (and most profits) coming from the sale of developed property. He said he and his colleagues were impressed with HHC’s management team.
“We like that the CEO and CFO are incentivized through stock options that are five to 10 years out,” he said. “They cannot sell them until those periods have passed.”
Having skin in the game is a theme that Young touched on when describing how Villere & Co. operates. The four co-managers own the same stocks they recommend for clients and hold in the mutual funds they run.
First Hawaiian’s (NAS:FHB) main subsidiary is First Hawaiian Bank, which has the leading deposit market share in the state. Until recently, the company was 55% owned by BNP Paribas SA (OTC:BNPQY) . But after three public offerings of shares, that ownership percentage has declined to about 18%, according to Young.
Young said the bank was very well-positioned for loan growth because of the “huge presence” of the U.S. Navy, Air Force and Army, as well as tourism and vacation-home purchases. FHB’s third-quarter return on average assets had improved to 1.31% from 1.15% a year earlier, while its return on average equity had improved to 11.01% from 9.03%. The rising-rate environment has helped, with the bank’s net interest margin expanding to 3.11% from 2.96% a year earlier.
Young said he feels comfortable with FHB’s “stable” management team and said another attractive attribute for the stock is a dividend yield of 3.80%.
Axon Enterprise (NAS:AAXN) was formerly known as Taser, and changed its name to reflect its new focus on body-worn cameras for law enforcement officers and the storage of the video data. Axon was formerly the name of Taser’s body-camera division.
“So they give away the cameras” to municipalities for their police forces, Young said, because “storage of the data will ultimately make more money than the cameras.” There’s an obvious need for body cameras, but storing and retrieving the data is a complicated business. There are various rules about how long the data need to be stored, and many important details to be managed. “If it is a minor, you have to cover the face. If there are license plates of uninvolved bystanders, you have to cover those,” Young explained.
“Since the Taser people have relationships with all of these municipalities, it is kind of a lay-up to sell them body-worn cameras and related services,” Young said.
Axon’s third-quarter sales were up 16% from a year earlier to $104.8 million, while its cloud services revenue rose 47% to $23.9 million. On a projected annual basis, recurring revenue rose 60% to $101.6 million.
Villere has owned the shares for about three years, and Young said the name change and focus on data storage was “very wise.”
Get used to volatility
Volatility in the stock market has driven away some investors. But that would be a mistake, according to Young, who invests for the long run.
The Dow Jones Industrial Average (DOW:DJIA) has fallen 6.5% since the end of September (not including dividends), while the S&P 500 Index (S&P:SPX) is down 8%. From all the craven headlines in the financial media, one might expect that the U.S. economy is already in the doldrums or that the end of the world is nigh.
The S&P 500 has even been in “correction territory” during this period (meaning a decline of at least 10% from a peak), but “corrections happen more than once per year on average,” according to John Buckingham, editor of The Prudent Speculator.
“A lot of people have seen a lot of volatility over the past two months, which has not been fun, but over the past 10 to 20 years, these periods have become blips in the rearview mirror,” Young said.
In other words, you’re probably used to these pullbacks, and if you are not, you had better expect them and ride them out. If you panic, which is easy to do, your returns will likely suffer, as you will be very unlikely to move your money back into the market before it has already moved higher than it was when you sold your shares.
Here’s a two-year chart for the S&P 500:
Over the past two years, the index has risen 21% (not including dividends), but you can see that this period has included several significant declines, which of course supported elevated levels of gloomy daily financial media headlines.
Villere Balanced Fund
Young said the Villere Balanced Fund’s (NAS:VILLX) allocation is about 22% bonds. The fund has $245 million in assets and typically holds between 20 and 30 stocks. It can hold up to 50% bonds as part of its strategy of providing “sustainable long-term growth with reasonable valuations,” according to Villere’s description of the fund.
The fund is ranked two stars out of five by Morningstar, as its recent performance hasn’t been good.
“We fell victim to a bunch of stocks with earnings that were slightly weak, and they were whipped with, say, 25% declines,” Young said. “I went out and bought more. In a year we’ll know if we were right.”
“With smaller-cap stocks that have less liquidity, if short-sellers can borrow the shares, they go right down. This affected a few of the stocks,” Young added. He emphasized that Villere has always made long-term investment decisions based on detailed, bottom-up analysis and close contact with the companies.
Young said there really is no appropriate benchmark index for the Villere Balanced Fund. So here’s how it has performed against its Morningstar category and the S&P 500, through Nov. 27:
|Total return - 2018||Average annual return - 3 years||Avg. return - 5 years||Avg. return - 10 years||Avg. return - 15 years|
|Villere Balanced Fund||1.1%||4.6%||2.1%||11.5%||6.8%|
|Morningstar category: Mid Growth with 70% to 85% equity allocation||-2.5%||6.1%||4.8%||8.7%||6.6%|
|S&P 500 Index||2.1%||10.9%||10.5%||14.1%||8.6%|
|Sources: Morningstar Direct, FactSet|
Here are the fund’s top 10 stock holdings as of Oct. 31:
|Company||Ticker||Industry||Share of fund||Total return - 2018 through Nov. 27|
|Visa Inc. Class A||(NYS:V)||Finance/Rental/Leasing||6.2%||20%|
|Steris PLC||(NYS:STE)||Medical Specialties||5.1%||33%|
|Progressive Corp.||(NYS:PGR)||Property/Casualty Insurance||4.2%||12%|
|Kearny Financial Corp.||(NAS:KRNY)||Savings Banks||3.7%||-8%|
|Howard Hughes Corp.||(NYS:HHC)||Real Estate Development||3.6%||-17%|
|Euronet Worldwide Inc.||(NAS:EEFT)||Data Processing Services||3.5%||35%|
|Pool Corporation||(NAS:POOL)||Wholesale Distributors||3.3%||21%|
|Weight Watchers International Inc.||Other Consumer Services||3.2%||11%|
|LKQ Corp.||(NAS:LKQ)||Automotive Aftermarket||3.2%||-32%|
|Genesee & Wyoming Inc. Class A||Railroads||2.1%||2%|
You can click the tickers for more information about each company.
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