This week I’d like to coddiwomple through central bankers, their flawed process for making pol...
How to Keep Your Head in Crazy Markets
09/20/2012 8:30 am EST
When you're managing a half-dozen funds, it's important to stay focused on your fundamental goal of long-term growth and spotting stocks and sectors that are navigating these treacherous markets successfully, says Brian Peery of Hennessy Funds.
Gregg Early: We're here with Brian Peery, who is co-portfolio manager of Hennessy Funds. Brian, I thought this might be a good time to talk about all the risk on/off, especially with Bernanke as well as Draghi and the ECB coming out with their new central bank announcements about buying bonds and QE3.
How do you see this risk on/risk off environment? How do you play it?
Brian Peery: You know, we've always been long-term investors, so for us it's never really been about shifting strategies dependent upon the market. We kind of take a longer time approach to things, and I would say that we don't change our methodology and the way we invest because of fads or trends or anything like that.
So what we're really trying to do is zero in on good value companies and reasonably priced growth companies that have good long-term perspective, as opposed to looking at a QE3 and saying OK, now's a great time to get into residual housing stocks or something along those lines based on a change in policy.
Gregg Early: I was noticing on some of your growth funds that you use price-to-sales ratio as opposed to price-to-earnings and rising revenue every year or three to four months, you know quarter to quarter. I guess within that context, what you're saying is it's more the fundamental evaluation of these companies.
Could you explain a little bit about why you use price-to-sales as opposed to price-to-earnings like so many other people do?
Brian Peery: Absolutely. We think it's a little bit of a cleaner number. I mean, when you actually get your taxes at the end of the year, your job is to take as many legitimate deductions as you possibly can to kind of get the lowest earnings.
Companies do somewhat the same thing. You know, they're really taking that top-line revenue number and trying to show the Street and the analysts a smooth earnings curve so that everything looks good, and that means potentially either pushing out goodwill or taking writeoffs against a quarter to give you that smooth line.
Well, when you're looking at the revenue side of the equation, there's nothing that's going to be manipulated about that unless they're cooking the books, so for us that's a lot cleaner number to look at.
And then, as you mentioned, we do look at the earnings, but we're looking at it more from a year-to-year basis than we are on a quarterly basis. We just want to make sure that the revenue growth that we're seeing is actually being transferred to the shareholder in the form of higher earnings.
Gregg Early: Are there any particular sectors that you're watching at this point? Anything that's looking especially interesting or exceptionally bad?
Brian Peery: You know, actually there are two sectors that we've been really long on for some time now and have continued to act really well. One is kind of the lower-income consumer. We own companies like Ross Stores (ROST) and Family Dollar (FDO).
You know, those companies have been really benefiting from the middle-income consumers who've really moved down from mid-tier stores due to economic worries. Both of them are posting same-store sales growth, you know, in the 8% realm, where if the economy is growing at 2%, those are the type of companies that we are looking at that are growing faster than the economy and are also able to manage the cost.
When we talk about QE3-and there's a lot of interest right now in a potential housing recovery because of the bond buying and the mortgage-backed debt buying from the feds. So everybody's kind of looking at that.
You know, one name that particularly stands out in that for us and we've owned for a while now is Pier 1 (PIR). Again, revenues growing kind of on that 8% year-over-year pace, but their earnings on a non-GAAP basis have increased by 36%, and their same-store sales are again around 6.5% to 6.7% for the quarter
So what you're really looking for, and what we're trying to do, is find these good companies that have a good story that we can still buy at a reasonably priced multiple and hopefully hold them for a long time.
Gregg Early: Are you seeing anything...I know the real estate investment trusts have run fairly well, at least at the beginning of the year. Do you see where REITs might have a chance to come back here, or do you think they're overheated?
Brian Peery: I don't particularly follow the REITs so I couldn't give you, you know, a pricing thing on it. In terms of the overall housing picture though, I think that we're getting more bullish on it as time progresses.
We like to wait and see a turn in the situation, and we'd rather be a little bit late to the game and take some of the risk off the table rather than trying to time bottoms. I think that that's kind of where the housing market is approaching right now.
This is certainly a time where we're very intrigued by a potential housing recovery in terms of both in what that does and in terms of wealth effect for consumers and the overall economy. So it's something we're definitely keeping our eye on, and we think that there's going to be some attractive situations for that over the next 12 to 18 months.
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