Go-Anywhere Multi-Cap Strategy

04/07/2014 10:00 am EST

Focus: STOCKS

Paul Condrat of Davidson Multi-Cap Equity Fund, can look at companies small to large, and from value to growth, to find long-term opportunities for investors with a three to five year investment horizon. Here, he discusses his go-anywhere strategy and highlights three favorite stocks—an automaker, a telecom play, and a retailer.

Steve Halpern: Joining us today is Paul Condrat, portfolio manager of the Montana-based Davidson Multi-Cap Equity Fund (US:DFMAX). How are you doing today, Paul?

Paul Condrat: Great, Steven, thank you.

Steve Halpern: Well, thank you for joining us. First, can you tell our listeners about the Davidson Multi-Cap Equity Fund, and particularly highlight what types of investments you look for in the fund.

Paul Condrat: Sure, well, our Multi-Cap Equity Fund is an all-cap US domestic strategy and what we think is a big advantage for us is being an all-cap strategy.

We have the flexibility to go, really, anywhere in the market where we’re seeing the greatest opportunity, so, for us, it doesn’t matter if it’s a large-cap growth company or a small-cap value.

What we try to think about is, if we have a dollar today, where is the best place to invest that dollar over the next three to five years on a risk-adjusted basis, so, that’s kind of how we think about positioning things and changing the characteristics of the portfolio based upon where we see the greatest opportunity.

The criteria that we basically use is from a high level. We’re thinking about investments in a couple ways.

First of all, we’re looking for any new investment in the portfolio that has, at least, a 50% upside over a three to five-year timeframe and we think that’s an appropriate level of return for us being longer-term investors and we are longer-term investors. Our turnover has been about 20%, so we think that’s a good rate of return to expect. (This upside potential, of course, is based on opinion and should not be considered as assured.)

Secondly, we’re looking for companies with identifiable growth drivers or catalysts and that can be anything from a new management team, new product cycle, expansion in new market, but we want to be able to identify those factors from the very beginning.

Third, expanding profit margins. We’re attracted to companies that have that ability to expand profit margins over time and if it’s at peak margins, we’re just going to be a little more skeptical about it.

Then, lastly, companies with good balance sheet flexibility, so, as the market environment changes, the company has the ability to come in and increase the dividend, do a buyback, or make that strategic acquisition and not be constrained by their balance sheet.

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Steve Halpern: Now, you remain optimistic about the economic recovery in the US in general and you’ve noted that you see room for growth in some areas such as housing, energy, and autos. Could you expand on that?

Paul Condrat: Yeah, what we’re starting to see is, over the last several years, as many people know, companies have been very conservative and confidence has been fairly weak and we’re starting to see that that confidence is returning to the economy.

And, in a lot of those areas that we mentioned, with housing, and autos, and energy, non-residential construction, there has been a level of underinvestment into those areas and so we still see a lot of room for that to normalize. On the positive side, we’re starting to see companies have more confidence and be willing to invest into their business and grow.

Steve Halpern: Now, one of the areas that you just mentioned where you remain optimistic is the auto sector and, in particular, you’re bullish on the outlook for Ford (F). Could you explain the positives you see in that situation.

Paul Condrat: Yeah, absolutely. I think Ford is a company, right now, that Wall Street’s taking too short of a term of a view on right now. What we see is, Wall Street tends to have this 12-month price target, but if you’re willing to look out over the next several years, Ford is positioning their business very well and investing in the right areas.

Like I said, we’re starting to see companies invest in the growth and that’s exactly what Ford’s doing in their business.

The Street’s a little concerned that profits are going to be down in 2014 versus 2013, but, like I said, they’re investing into growth so they’re more than doubling the number of model launches over this year versus last year, so we think that’s going to position them for better growth into 2015 and 2016.

Also, they’re expanding production and capacity into Asia and China where they’ve done a fantastic job growing their market position. That was up most recently 60% year over year, so we think that’s going to be a more meaningful contributor to earnings over the next several years.

And then, also, their European business, which has just been in restructuring mode for the last several years, really right sized in capacity for the growth outlook in that region and in 2015 they’re very confident that that’s going to return a profitability, so it won’t be the drag that it’s been the last several years, and so, we’re optimistic on the longer term for Ford.

Steve Halpern: You’re also bullish on a company that many of our listeners may not be familiar with called TW Telecom (TWTC). Could you tell us a little about that.

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Paul Condrat: Sure, TW Telecom is a mid-cap company and it really fits our criteria of having attractive growth opportunities, profit margin expansion, and still, reasonable valuations. What TW does is they provide data, internet, and communication services to, mostly, enterprises around the country in 27 different markets.

Common theme here is investing in the growth, so they’re expanding into five new markets. They’re also adding sales force into their existing markets and we think the company has a very unique strategic asset in that it has one homogenous fiber network that goes all around the country.

We see that as allowing them to have more unique capabilities and services and products to offer their customers versus a lot of the competitors that have very disparate networks and software.

So, we think they’re very well positioned and that those investments will lead to a higher revenue growth and as the investments roll off you’ll start to see the margins increase as they get more scale, and the earnings and the free cash flow will grow along with that.

Steve Halpern: Now, an additional mid-cap that you’ve been looking at, and recommend, is Dick’s Sporting Goods, the retailer. Could you tell us your outlook there.

Paul Condrat: Yeah, I think Dick’s Sporting Goods (DKS) is a very interesting company for people to be looking at right now.

Last year they had been under some pressure, due to some weak same store sales trends over a couple quarters. Last winter was more of a warmer winter in a lot of their markets so their outdoor wear didn’t sell as well.

And then as we went into spring and summer, it was more of a wet spring and summer in those markets and their golf business had been under pressure and so we started getting interested in the stock then, over what we considered to be more short-term issues related to that.

We still see them as the largest sporting goods, athletic apparel, and footwear company being able to grow substantially. They have about 558 stores right now. The company says they can double that over the next several years, so, still, very good store growth.

But also, numerous opportunities to expand profit margins through these store-within-a-store concepts with Nike, Under Armour, and North Face, also growth in their private label business and their online business, which is doing very well and they say that’s going to have higher profit margins over the long-term, so we think they’re very well-positioned longer-term.

Steve Halpern: Well, I appreciate you taking the time. Thank you for joining us today.

Paul Condrat: Great, thank you very much, Steven, appreciate it.

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