Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
Long-Term Value with Villere
09/26/2014 10:00 am EST
Lamar Villere is the fourth generation of his family behind Villere & Co. funds, which focus on long-term investing through a concentrated portfolio of holdings; here, he explains the underlying strategy and highlights some favorite investment ideas.
Lamar Villere: I’m doing great, thanks.
Steven Halpern: Villere is a fourth generation family owned and operated firm. Could you tell our listeners a little about the background?
Lamar Villere: Sure, so the company, we were founded back in 1911 by my great grandfather. We’re based down here in New Orleans, and the firm has been operated continuously by four generations of our family, so right now I work with my father George Villere, my uncle Sandy Villere, and then my two cousins Sandy Villere, Jr. and George Young.
Steven Halpern: So let’s look at the strategy behind the funds that your family operates and you focus on stocks with strong financials and maintain a long-term focus and very concentrated portfolio. Could you expand on that overall approach?
Lamar Villere: Sure, so we definitely like to see growth. We tend to focus on companies that are growing at a rate faster than their price to earnings ratio. So, basically we like growth but we’re very concerned about potentially overpaying, so we’re very focused on finding good value in our stocks.
We like companies that have relatively low debt and companies that dominate their markets, whether it be a small market or a large market, companies that really have some reason that we think that they can continue to outperform the other competitors in their space with some good high barriers to entry.
Primarily, we’re focused on small-caps, small- and mid-caps, but occasionally when we see a large-cap opportunity that is down and out for some reason that we think is short-term in nature, we’re not afraid to step in on those as well.
The nice thing is we’ve got a long holding period and a long-term horizon. We tend to hold stocks five, even ten years, so that enables us to look and really focus on the long-term and I think that’s been reflected in our performance.
Steven Halpern: Now, another thing that sets you apart—in addition to the longer-term focus—is that you’re concentrating your portfolio not on a wide swath of hundreds of companies but really honing in on some select favorites. Could you explain the reason behind that concentration?
Lamar Villere: Sure. We absolutely think the best way to beat benchmark is certainly not to look just like the benchmark, so we try to pick potentially somewhere in the range of 20 to 25 of our absolute best ideas, our top names.
And even within that, we find you can be adequately diversified and with that few or that small a number of stocks, you’re really able to see the performance impact of a company outperforming, so when one stock does well, it actually shows in the numbers and that’s one of the reasons I think we’ve been able to separate ourselves from our competition.
Steven Halpern: So let’s look at a handful of the stocks that have made it onto this very selective list of your holdings. First, you point to Sanchez (SN), a play on domestic shale. What’s the attraction behind that?|pagebreak|
Lamar Villere: Sure, so, obviously, there’s a lot of groups that have come out in the last several years focused on the shale plays. Sanchez is one we like for a number of reasons. One reason we like it right now is it’s down about 26% off of its highs.
The whole energy group has traded off with declining oil prices, but the reasons we really like these guys, first of all, when we first got into the name they were primarily focused on the Eagle Ford Shale in Texas, which is a very popular and very successful play and they were doing a good job with that.
They had just also acquired some territory in the Tuscaloosa Marine Shale and that one was a little bit more questionable, but the nice thing was you really weren’t paying for that in the stock. The investors were taking a wait-and-see approach and so that was potential upside without a whole lot of risk as we saw it.
What’s more interesting about the stock is that, back in June, they bought Shell Eagle Ford Shale assets. They paid about a half-a-billion dollars for 100,000 net acres. That essentially doubled the size of Sanchez’ Eagle Ford holdings. We think they got just a fantastic value here, and they’ve got 176 producing wells but also a massive undeveloped opportunity down there.
We think in the Eagle Ford alone, this stock is a very good buy right here, and then, if you add in the potential upside from the Tuscaloosa Marine Shale assets, we think it’s a great place to invest.
Steven Halpern: Now you also point to EverBank (EVER), which you note is growing a lot faster than its peers. What’s the outlook for this banking firm?
Lamar Villere: Sure, EverBank is sort of fundamentally different from the bulk of its competitors.
When we look at the majority of the traditional banks that are out there, a lot of their money is spent on putting up these beautiful giant buildings, these bank branches on, kind of, the most expensive corner and the most expensive pieces of real estate in every town in America.
We kind of noticed that none of us have really stepped foot in a bank in years and maybe that wasn’t the best place to spend their money.
What attracted us to EverBank is that rather than focusing on trying to attract clients by having the fanciest bank branch and the prettiest sign, EverBank has really focused on execution and so they attract deposits by paying a much higher rate than their peers.
In fact, they can pay money market rates closer to 1%, whereas the national average is about 0.06% so just a dramatic difference because they don’t have all this expensive cost structure that they need to take care of.
Then, on both the loan and the deposit base, the nice thing about them is that this group is based in Jacksonville, Florida, but it’s not a Florida bank. It’s very diversified nationally and so you’re not looking at this, okay what happens if the Florida real estate market cracks?|pagebreak|
Well, it will hurt them but they’ve also got exposure all over the US so you’re not really putting all your eggs in one basket.
For a group like ours—where, as we noted earlier, we are a very concentrated manager—we don’t want to hold ten different banks in every market in the US or every key region in the US; this is a good way for us to get exposure to a broad swath but with a strategy that we really like.
Steven Halpern: Finally, you suggest a company called LKQ (LKQ), which is a play on auto parts and collision repair. Could you tell our listeners a little about this company?
Lamar Villere: Sure, so LKQ actually stands for Like and Kind in Quality and that refers to if you get in a fender bender and you take your car to the collision center, those guys are required and what your insurance company has promised that they will replace your parts with something like and kind in quality when it needs to be repaired.
LKQ, rather than the collision center ordering a brand new piece to get made and manufactured for you, which is very expensive and takes a long time, LKQ keeps a massive inventory all over the country of alternative auto parts for these collision repair centers.
The reason that’s popular with the collision repair centers is because they’re able to get the part very quickly for you, and they’re able to get it cheaply; so you’re happy, your insurance company is happy, and they can do it and they have got an unmatched distribution network.
Really, we think of it as like an Amazon Prime but for alternative auto parts, where the collision repair center, it could call around possibly get a cheaper price but it knows it can go to LKQ, get a very reasonable price, and get it the next day, so that you’re able to get back in your car and get on the road. We like the model very much.
They’re growing their revenues 8% to 10% organically, and they’re also doing a lot of tuck-in acquisitions and there is a lot of growth in Europe that they’re focused on right now, so we thinks it’s a good place to be.
The company had a great second quarter but it’s still down 18% year-to-date so we still think there is plenty of value left here.
Steven Halpern: Again, we’re speaking with Lamar Villere of the Villere Balanced Fund and the Villere Equity Fund. Thank you so much for taking the time to join us today.
Lamar Villere: Okay, great. Thank you so much, Steve.
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