Free Cash Flow Is Key to 2013 Success
01/25/2013 12:50 pm EST
Stocks that are kicking high cash flow yields, haven't been bid to the moon, and maintain pricing power in their sectors are great long-term buys, notes Jeff Auxier of Auxier Focus Fund.
Gregg Early: I'm here with Jeff Auxier, president and chief executive officer of Auxier Asset Management and the Auxier Focus Fund.
Jeff, I wanted to ask what your view is on 2013. We've somewhat leaped the fiscal cliff, and it looks like at this point, that that feeling has been pushed off. They've kicked the can down the road effectively until May. I guess the unemployment numbers look pretty strong, at least coming in. They're at a five-year low and the S&P is at a five-year high. So, are we looking at recovery this year or is this just some small good news in a darker picture?
Jeff Auxier: It's an interesting comment. I think it's really exciting if you're a business analyst because what I see is a lot of the inputs.
If you look at, for instance, the technology input. People are excited about the tech stocks and everything, but these iPads, you know, they're probably over 150,000% faster than the first laptop, so what we're looking at are companies that have been hurt the last five or six years with high commodity inputs and then you've got really crashing tech costs and then crashing energy costs-natural gas, I think since 2006 is down a little over 70%-so with the technology in the advance we really have the ability to over produce in these areas and that has really hurt margins.
From that standpoint, and the fact that most of the money, we've had over $1 trillion going to the bond markets since 2009 and people have not been participating, so that's encouraging. Plus, just the recessionary price points out of Europe.
We've been finding a lot of value in Europe and so the general outlook on inputs to me looks favorable and then you throw in $9 trillion of liquidity globally and you know the central banks are really providing a strong background for equities. When you're printing that much money, I mean the hidden risk is when you're looking at purchasing power. Bonds, I think, are very dangerous, just because you look at the purchasing power. When we're printing $85 billion a month, really you want to be in productive assets.
Gregg Early: And, is that, do you see where, when we're talking about liquidity, and what we've seen essentially is that a lot of the money that the central banks have been printing has been stuck at the financial institutions. They haven't really, I mean they're still trying to sort out their books, so they haven't really; it hasn't hit the economy. So as much as there is, it seems to get stuck at that level while they're trying to sort out their own troubles.
Do you see that dissipating at this point? I know that they're calling for Europe to be slow again this year. They've moved the number to what was it, the World Bank came out and said that they were anticipating slower growth than expected in Europe, but do you see where this liquidity is finally going to trickle down into the real economy?
Jeff Auxier: Well, not really. I think partly that would benefit stocks. I mean stocks don't do real well in a booming economy. I mean if you look at areas where you've got rapid GDP growth, your stocks typically don't do that well because money has gone into heavy capital spending and so we're looking at companies with enormous free cash flow yields and actually, you know a fairly benign capital spending cycle.
That isn't totally that, because that cash instead of going in the ground can find its way back to the shareholder, so yeah it's an environment where we're in a sweet spot for stocks because if you had too much of a booming economy you're going to have that capital go into the economy and your PE multiples can compress, but right now you've got a situation where private equities are loaded with cash. You've got spreads down on the junk bonds. You've got businesses with high free cash flow yields and low prices. I think that you could have another M&A wave coming up.|pagebreak|
Gregg Early: Do you have any examples of companies that you like in this particular time?
Jeff Auxier: Well, what we like fundamentally are still that driving, emerging, middle class out of Asia and we like the necessities, which are growing two to three times faster than the economy. We talked about, you know, the Unilevers; although, I wouldn't be buying Unilver (UN) here, but you just look and that's where the real strong fundamental drive is.
As far as things like, Molson Coors (TAP), which has been around, and it is one of the world's oldest brewers. They've been around since the 1700s and we still like the low ticket necessities, just because of the debt levels. But also if you look at businesses that, well, we're finding a lot of businesses still with very high free cash flow yields that are again beneficiaries.
We'd much rather be in insurance stocks that benefit from lower tech inputs and so we found real good value recently and like I say, things have kind of run up the last few weeks, but a stock like Molson Coors, you can buy a beverage company for 11 times earnings with real strong balance sheet.
Its problem is its customers are mainly unemployed and you had a hockey strike in Canada, but still we talked about before Tesco (TESO) and those kinds of businesses, Telefonica (TEF) out of Spain. We're warming up to those types of names.
We're still pretty much low ticket necessities, but at price points that are historically still underpriced. Our big thing is we want to be buying businesses like Dow 7000, so when we buy it's typically not necessarily hopelessly out of favor, but there's a problem there that we have to overcome. But that's why we're always looking for the bargain, double-, triple-play because with purchasing power risk the way it is with money printing, you have to get the double-play on your money.
Gregg Early: So, with that in mind, are there financials that you like? You used to like, what was it, Bank of New York (BK)?
Jeff Auxier: Yes, we've been a buyer, especially in the fourth quarter Bank of New York because that's a processor bank. It's been hurt because of low interest rates has hurt their cash flow, but when you can buy a processor bank at 9x earnings, that's just really good.
Again, during the episode with TARP that money was deposited in Bank of New York. They've had some short-term problems, but, we like that name now. We're not as aggressive at 27 as we were at 20 or 19, but you know those are like I say, as prices move up, a little less aggressive, obviously, but the names; I'm just looking through here, that still you're kind of interested in just current names that are compellingly priced.
Gregg Early: Well, I was just curious from the fact that you had your view of the marketplace and sometimes you're in sectors where other people might have bid up some of the companies, but you tend to find the value there that is overlooked, so I think the examples you gave are great.
Jeff Auxier: Yes, we've had a run-up. We have a lot of Molson Coors in the 42 to 41, 41, that kind of a range, but I think investors should be prepared for pull-backs.
It is a strong environment for good businesses. Last year most of that was driven by financials and Apple (AAPL). I think you're looking at much more broadly based opportunities, in terms of the high return businesses.
We have, for instance, a lot of H&R Block (HRB) where the stock dropped down to 12, and it had all kinds of problems. But they refocused just on taxes and now that stock's rebounded, but even though it's gone from 12 to 21, it still may be 12x earnings or 13x. That's what we're looking at, something that we can buy at nine and it goes to 15 and that's.
You're looking at over 60% multiple expansion there and so as long as we can keep finding those, we're excited. The general market, it's too hard to tell in the general market, but like I say, our individual picks tend to be at a pretty steep discount to the general evaluation of the market.