In The Playbook from Gravitational Edge on July 18, we discussed that investors seem to have a conse...
Finding Value: Under the Radar
03/04/2015 9:00 am EST
Andy Murray—co-portfolio manager of the 5-star Morningstar rated Becker Value Equity Fund—focuses on value investing ideas that are generally off Wall Street's radar. Here, he discusses a lesser known real estate play, a contrarian retail idea, a specialty metals maker, and a global media outfit.
Steven Halpern: Joining us today is Andy Murray, Co-portfolio manager of the 5-star rated Becker Value Equity Fund (BVEFX). How are you doing today, Andy?
Andy Murray: I'm good Steven, thank you.
Steven Halpern: Well, thank you for joining us. Becker is known as a boutique firm that generates its own stock ideas apart from what some might consider the noise of Wall Street. Could you tell our listeners a little more about Becker and the investment strategy behind the Becker Value Equity Fund?
Andy Murray: Sure. Well, Becker has been a value manager since the 1970s and what we look for in companies that we own are names that are out of favor.
We are long-term investors so-as you mentioned-looking past a lot of Wall Street noise where a lot of Wall Street resources are focused on predicting next quarter's earnings.
We really try and look at three, five years when we're making an investment decision about a company. We also look for high quality companies so even though we're a value manager, we're not looking for deep turnaround situations. We're looking for high quality but undervalued securities.
Steven Halpern: Now, understanding that you look at the long-term, could you share your general thoughts about the long-term market outlook both in the general outlook and the specific environment for value investing?
Andy Murray: Sure. Well, it's been a nice six year recovery in the market and we think the market is trading close to fair value or at a reasonable level of around about 17 times earnings. We don't expect a significant correction of say 20% or so.
We think that would require an economic recession in the US and we think that's unlikely over the next 12-18 months, so while we think valuations have recovered to a reasonable level, we think that's a pretty good environment to focus on the bottom up stock selection, which is what we try and do at Becker Capital.
Steven Halpern: So, let's talk about some specific investment ideas that might help highlight the overall approach of the fund and one idea is Howard Hughes Corp. (HHC). What's the attraction here?
Andy Murray: Well, Howard Hughes is a very interesting company as well as an out-of-favor name. We also look for names that are underfollowed, I think, that are a little bit off Wall Street's radar.
Howard Hughes was a spin-out of General Growth Properties which was taken into bankruptcy in the financial crisis and then Bill Ackman-the famous hedge fund manager who chairs the company-took a lot of the interest and development assets out of General Growth Properties and put them into a vehicle called Howard Hughes.
It has assets ranging from the South Street Seaport in Manhattan all the way to Honolulu in Hawaii, and if you look at the assets and try and build up a sum of parts analysis, we believe there's significant upside to the shares despite them having a pretty good performance over the last couple of years since we've owned them.
Steven Halpern: Now, you're also a fan of the retail outfit Urban
Could you share your thoughts there?
Andy Murray: Yes. With Urban Outfitters, that was a more recent purchase of ours towards the end of last year, and with Urban Outfitters, it's a classic sort of out-of-favor name. The namesake brand Urban Outfitters has been struggling with negative same store sales.
Meanwhile, about half of their sales come from anthropology, and also Free People, which is a new chain of stores and wholesale sales that have been developing so think the market's been overlooking the strength in anthropology and Free People.
In Urban Outfitters itself, we think that's got a pretty good chance of turning around and we saw some evidence of that over Christmas with the store moving from negative to positive same store sales.
So, on a headline basis, Urban Outfitters might look a little bit expensive on a PE of right about 19 times, but we think if Urban Outfitters successfully turns around the namesake brand, there's a lot more earnings potential in this business than many people most really expect.
Steven Halpern: Now, another name that a lot of listeners may not be familiar with is Allegheny Technology (ATI), which is a specialty metals producer. Can you share your thoughts?
Andy Murray: Yes, with Allegheny, this is a really interesting company, that again, is a little bit off the radar. What they do is they produce high performance metals; mainly titanium, alloys, and nickel alloys.
These are incredibly important for next generation aircraft manufacturers where they're moving away from some traditional heavier metals to metals that are lighter but also can operate in hotter temperatures in next generation engines and the company has been building over the last decade.
A full suite of assets and technologies that will position them greatly for the next generation aircraft cycle and they recently completed their build of a new steel mill, which completely will transform the dynamics of the business.
So, this was a company that was operating right about breakeven in 2014, but with the new steel mill and their new technologies and innovations on the metals side, they rapidly should come through to the bottom line over the next two, three years, so we think it's well positioned for the next three to five years.
Steven Halpern: Now, finally, another one of your ideas is the global media firm, Discovery Communications (DISCA). Could you share your outlook?
Andy Murray: Yes, with Discovery. Discovery is a really nice company. It's very well managed and the management team have a real focus on long-term, so they're not off to maximizing short-term profits, they really look towards the long-term, which is what we love to see with a management team.
Half the business is international and half the business is US, and obviously, with the strength of the US dollar, that's been a hindrance to them over the short-term as the overseas profitability is curtailed by dollar strength.
However, long-term the international outlook for pay TV looks very attractive and also in the US business, these guys deliver through their collection of TV networks, Discovery, TLC, ID, and so forth.
They deliver about 12% to viewership, but they don't get paid anywhere near that, so we think there's a great opportunity for them to continue to improve.
The affiliate fees that they get from distributors, such as cable companies and the satellite companies, but also to improve the pricing, they get on their advertising, so we think the outlook is bright for Discovery both in their international operations and also their US operations.
Steven Halpern: Again, our guest today is Andy Murray of the 5-star rated Becker Value Equity Fund. Thank you for taking the time today.
Andy Murray: Oh, thank you very much.
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