While many investors shy away from financials, fund manager Kent Croft sees strength among insurers. He discusses some stocks he likes from that sub-sector. He also names some techs in which he sees potential, and updates MoneyShow.com on his views for natural gas.
Kate Stalter: Today’s guest is Kent Croft, portfolio manager of the Croft Value Fund. Kent, we’ve spoken before and we’ve talked a little bit about the energy sector. Hopefully, we can get into that again today, but I was wondering if, in addition to energy, are there any other sectors that you like right now, that you think are worth mentioning to our listeners?
Kent Croft: Sure, there are a few areas right now that we look at, again, from a long-term, buy-and-hold-strategy viewpoint, where we think we see good multi-year visibility.
I would mention first, tech and telecom. There’s a lot of gray area between the two, but you sort of lump them together. And it’s an area where we see a lot of visibility year-over-year, going out, say, at least a three-to-five year period, given the growth and broadband usage due to further data conglomeration, as well as video-over-the Internet usage.
And so in that, you’re seeing companies that are trading at really, relatively reasonable multiples, relative to the market. You know, not like they were trading back in the tech bubble times, but trading more like normal businesses, but with very powerful long-term growth drivers.
So, a couple areas in there, like Qualcomm (QCOM) is one that sort of benefits from all things mobile and data and video-delivered and higher speed over mobile. That’s one that has come down recently, given the market turmoil, that I think is a good, long-term holding.
EMC (EMC) is another one. Again it helps, you know, big enterprises negotiate the Internet and manage data in a very sophisticated way, and they’re also a leader in crowd computing. So those are two areas there that we see good visibility and, again, good valuation.
Kate Stalter: Kent, I was looking at some of the Morningstar data for the fund, and I notice that financials is an area where the fund is quite heavily weighted at this time.
Kent Croft: Right, and in financials we’re not weighted in the banks and the bigger multi-national banks. So really, our biggest weighting there is in insurance, under the financials.
So insurance is an area where we think you have less risk overall, because in a lot of the larger financial names, there’s still basically a lot of stuff that is unanalyzable. I think there’s more visibility in and clarity to their financials. But again, it seems like shoes drop every day, with JPMorgan (JPM) and the $2 billion that they didn’t know was going to happen.
So, in insurance companies, you know what they’re invested in, whether it be good or bad, but you can value it—especially property-casualty. You’re finding companies like Ace Limited (ACE), which we own. It’s a global property and casualty company. They insure all types of risk globally, have been doing it for a very long period of time, and very good at it. But they’re trading at below book values, like eight times earnings.
Allstate (ALL), a US company, US-based, again, trading at less than book value, you know, eight to nine times earnings. Very cheap stock, and we think it’s got a good brand name, and it’s going to be around for many, many years. Again, they pay good dividends as well.
So, I think you’re finding some pretty good quality on the cheap in that area, and financials would have to go out and worry about all those other global problems associated with it.
Kate Stalter: Yeah, good point; not all financials are created equal.
Kent Croft: And in the life insurance area, too, even say a Prudential (PRU), a MetLife (MET)—those are other companies that are trading below book value. Good brand names, and life insurance is a product that’s here to stay.
Kate Stalter: At the beginning of this interview, I referenced the fact that we had talked about energy previously. Specifically, natural gas. And in the few months since we talked, there’s been some price volatility in the underlying commodity. How are you viewing that sector at this time, Kent?
Kent Croft: Actually, it has the volatility; the natural gas price went way down. It’s actually been up here of late, and oil has come down. But again, this is a decade-long view we take in natural gas, and we are continuing to see it make inroads, natural gas being used in transportation, utilities switching over from coal, getting our North American gas on the global marketplace.
We just saw the other day a transaction of a company we owned being bought by the government of Malaysia, basically buying tons of natural gas reserves up in Canada to have good supply that they know they’ve got. And they’re building liquefied natural gas facilities up there to get that gas out on the global marketplace.
So, you’re seeing Asian companies wanting to lock in long-term supply and think longer term. And I think especially in that area, given how cheap these companies have got, they still look like a bargain to us.
Kate Stalter: You were alluding to some international exposure there, and I just wanted to wrap up today: The majority of the holdings in your fund seem to be US-based, but you do have a few European companies in there, as well. Can you talk about the geographic makeup of the fund?
Kent Croft: Right. Generally, the vast majority are US-based, but you know, these days, if you look at the S&P 500, I think it’s close to 50% of the sales are overseas.
So, it’s truly a global, and when you say US versus international in holdings, there’s so much gray area now, and everything that’s happening around the world, whether it’s growth in China and how much copper they’re buying, to the slowdown in Europe, to what’s going in mines in South Africa, Brazil…really, you have to sort of put it all in the pot to analyze it.
So, what’s good about it: US companies have been the best at operating in the global environment for a very long, long time, and so we see that as a bonus going forward. That they have that comfort level, and also in US companies, even though we’ve had accounting problems in the past, our accounting standards are much higher than they are in the rest of the world. So that, at least, gives you some underpinning from a risk standpoint.
But right now, anything international, there are worries. But there are also opportunities for the longer term, as you’re having a lot of faster growing economies around the world.
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