Villere and the Value of Concentration

03/09/2015 10:00 am EST

Focus: STOCKS

Value investor Sandy Villere, of Villere & Co., maintains a highly concentrated portfolio, focused on stocks that dominate specific market niches. Here, he looks at a data processing firm, a specialized player in financial services that assists employees with investment and retirement plans, and a leading men's clothing retailer benefiting from the recent acquisition of a competitor.

Steven Halpern: Joining us today is Sandy Villere, manager of the 4-star rated Villere Balanced Fund (VILLX) and Villere Equity Fund (VLEQX). How are you doing today, Sandy?

Sandy Villere: I’m doing great.  Thanks for having me, Steve.

Steven Halpern: Well, thank you for joining us. Villere is a fourth generation family owned and operated firm.  Could you tell our listeners a little about the background of the company and its overall investment strategy?

Sandy Villere: Sure.  We were started in 1911 by my great-grandfather, so we just crossed 100 years, which has been exciting.  We primarily look for small- and mid-cap growth stocks.

So we like stocks that are growing at least 15% and we like to buy those companies typically at earnings multiples that are less than that growth rate, so over time, we can get the double play.  As earnings and multiples expand, we can see that growth take place in our portfolio.  

We do believe in long-term holding, just like Warren Buffet, our favorite holding period is forever. Typically, we hold stocks for five years or more. It keeps taxes low and efficient and keeps cost down, so that’s sort of our strategy in a nutshell.

Steven Halpern: One thing that sets your portfolio apart from many others is its concentration, and for your portfolio, you focus on a highly select group of favorites. Could you explain the reasoning behind that concentration?

Sandy Villere: Yeah, we do concentrate. We own about 23 companies in our Villere Balance Fund. We believe you can kind of take two different approaches. One would be maybe buying a low cost ETF and kind of spreading your money everywhere just to try to get average work.  

We believe in trying to do above average work by laser-focusing on individual companies that dominate a particular niche, that again, trade at reasonable prices, and throw off good cash flow characteristics.  

We believe we can identify good opportunities.  And rather than, I guess, watching your entire basket of eggs, if you will, we like to look at that one basket, I guess, and focus very carefully on it, and typically, we’ll be a top five shareholder in the companies we invest in, so we stay very close to management since we manage about $3 billion in assets totally.

Steven Halpern: So, let’s look at some individual stocks to help highlight your investment strategy. First, you like DST Systems (DST), an IT firm.  What’s the attraction here?  

Sandy Villere: Yeah, so these guys, they basically provide data processing and automation services to financial services, and healthcare, and communication industries.

We really are familiar with the financial services area—which is about 60% of their revenue—because it’s mutual fund administration, which is basically where they do our back office, including being our record keeper and our transfer agent, so I’m very familiar with how they work with us as a customer.  

It’s a very sticky business. Their top five financial services customers have really been with them about 34 years. The other thing that’s exciting is their valuation. The Street really does give them no credit at all for a lot of the noncore assets that they own.

They’ve already realized about $1.2 billion of pretax cash proceeds over the last ten quarters and we think you could see that being closer to $1 billion realized over the next two years, and they’re going to use that to buyback stock and reduce debt, so it’s a cheap company when you look at the multiple of EBITDA.  

They trade around five to six times, versus their peers of eight to 12 times, because they’re just not getting that valuation for their noncore assets.  We think over time that value will be realized and the stock will work well from these levels.

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Steven Halpern: One interesting company on your list that many of our listeners may not be familiar with is Financial Engines (FNGN). Could you tell us about that company?

Sandy Villere:  Yeah, these guys; think if you’re an employee for Coca-Cola or General Electric and you get all these kinds of a myriad of mutual fund options and everything else.  

Well, what happened was, Bill Sharp, the Nobel economist basically came up with an electronic way where participants could really enter their age and risk profile and expected retirement age, etcetera, and it would spit out kind of the best possible results in terms of which mutual funds they should own and which ones they shouldn’t own.  

I love this company because it absolutely dominates its niche.  It’s three times the size of their nearest competitor. They’ve got about $104 billion in assets under management, but in this total 401(k) space, you’re looking at $4 trillion.

And when you look at just the assets they have under contract, meaning the big groups such as State Street, etcetera, that they’ve kind of contracted out with, there are $994 billion of their kind of current customers.

They’ve only penetrated 10% of the people that they’ve signed up and over time as people contribute more to these 401(k)s, they should get kind of a bump up of just 2% to 3% of just natural growth.

I like it a lot. They should grow revenues at 15%.  They should grow earnings probably north of 20% to 25%.  A long-term growth will probably closer to 30%, so it’s one that we think is going to do really, really well and had a real dominant position in the marketplace.

Steven Halpern: Finally, another name you will highlight is very familiar to both investors and consumers and that’s Men’s Warehouse (MW).  What makes you bullish on this name?

Sandy Villere: Yeah, so Men’s Warehouse is really running on all cylinders and Jos. Banks is not and that’s the company that they just acquired.  When they made that acquisition and some other noise from the prior Men’s Warehouse CEO leaving, etcetera, this stock became very attractive.  

It’s now been pushed down to where these guys are going to make about $3.50 in earnings in 2015, probably $4.50 in earnings in 2016, so you’re looking at about a multiple on the company of less than 11 times earnings.  

They’ve already identified, with this acquisition, about $104 million in cost synergies between the two. I think what’s going to happen is Jos. Banks kind of integrates into Men’s Warehouse.  We already saw this in January where their tuxedo rental system already moved over the Men’s Warehouse side, which is great.  

There are a lot of different techniques. One of the things I like to do is roll up my sleeves and actually go visit these stores and if you talk to the Men’s Warehouse sales people, they have a different selling style where they actually help you and try to get these other things such as ties and shoes when you’re just buying a suit or renting a tuxedo, where Jos. Banks really doesn’t have those types of strategies.  

I think as this stuff integrates together, it’s going to work out really well and then you’ll no longer see those crazy promotional ads where you buy one suit and get four free or something like that.

It’s going to be brought under the Men’s Warehouse style and I think that’s going to work out really well for shareholders in a beaten up stock. It just creates an opportunity for long-term investors.

Steven Halpern:  Again, our guest is Sandy Villere, manager of Villere Balanced Fund.  Thank you so much for taking the time today.

Sandy Villere:  Steve, thanks for having me.  I appreciate it.

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