3 Aerospace Stocks with Soaring Returns

02/17/2012 6:30 am EST

Focus: STOCKS

As manager of the Morningstar four-star Fort Pitt Capital Total Return Fund (FPCGX), Charlie Smith searches for outperformance everywhere. Today, he names some telecom and aerospace companies he likes, and discusses why natural gas companies look especially attractive.

Kate Stalter: Today's Daily Guru guest is Charlie Smith. He's the chief investment officer for Fort Pitt Capital, as well as manager of the Fort Pitt Capital Total Return Fund.

Charlie, tell us a little bit about the fund. What are your investment objectives?

Charlie Smith: The objective is to maximize total return, whether it comes from appreciation or income. The fund today is tilted a little more towards yield, a little more towards income. But we'll take returns wherever we can get them, whether they come in the form of price appreciation or cash in our pocket...either one.

Kate Stalter: Tell us about your strategy when it comes to market cap. Do you go primarily into larger caps, or is it a multi-cap strategy?

Charlie Smith: It's multi-cap. We really have no bias either way. If the marketplace is willing to give us smaller companies at low prices, we'll buy them. If the market is willing to give us bigger companies at low prices, we'll buy them.

Our price discipline sort of trumps market cap. We're really agnostic. We'll take a good value wherever we can find it.

Kate Stalter: Having said that, give us a little bit of an overview of what type of holdings you're in right now, and perhaps a couple of specific examples.

Charlie Smith: Sure. As we all learned in junior high school, there's a certain amount of risk in being different from the crowd, but we also know that in our business the only way to be better is to be different.

If you have a money manager who has a portfolio that looks like the S&P and charges you a fee, over time your results are going to be S&P minus the fee. We know that we are different on purpose. We build a portfolio which looks different from the marketplace on purpose.

Right now, for example, in our portfolio we've got about a quadruple weight in telecom and cable, partly because we believe that the economy is in sort of a steady, grinding deflationary mode. We want to own what I call lifeline businesses, businesses where the cash flows are steady, and-as we heard in the case of Comcast (CMCSA)-increasing quite nicely.

So, we are significantly overweight in the telecom area; as I said, about four to five times overweight. We like the dividend yields we get from these businesses, but we also like the fact that capital expenditures as a percentage of revenue for names like Verizon (VZ), AT&T (T), and Comcast are steadily declining, so that means more cash freed up for shareholders.

As we saw from Comcast, they announced a 44% increase in their dividends. So we think not only are we sort of creating a buffer to the downside by owning these steady-Eddie type companies, but there's a chance for cash flow growth as well.

Kate Stalter: What other sectors do you like and see potential in, going forward?

Charlie Smith: Well, we also like the industrial area, and particularly with a skew towards aerospace.

Across the world, air traffic continues to rise. In fact, even throughout the financial crisis and the recession in 2008 and 2009, we saw worldwide air traffic continuing to grow. You combine that with the fact that the fleets around the world are generally aging pretty rapidly, and we think there's a terrific opportunity in commercial aircraft.

So, names in our portfolio that would reflect that include Boeing (BA), and then Honeywell (HON), which has a big business in avionics, which obviously is important in controlling these airplanes.

Hydraulics is another area we think has promise. We own Parker-Hannifin (PH) in that area. So, we think there's a terrific opportunity in aerospace growing from the increase in the worldwide air traffic.

Also, there's the area of natural gas, and particularly gas turbines. As everybody knows, the revolution in oil exploration and discovery that's come about because of horizontal drilling and fracking has created a glut of natural gas around the world. We think there is going to be significant switching of electricity-generating capacity over from coal to natural gas in the next five years.

We think there's a terrific opportunity for companies that make natural gas turbines, because there is going to be huge demand increases there. That would include companies in the supply chain, specialty metal companies, and stainless steel companies. We think there's a real opportunity there, as well.

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