Industrials have been my favorite sector for the fourth quarter of this year; my latest recommendati...
Four Favorites for Balanced Growth
05/06/2015 10:00 am EST
Tom Sudyka, portfolio manager of the LK Balanced Fund, focuses on long-term fundamentals; here, he discusses four favorite long-term investments, a women's retailer, an specialty aluminum products maker, a leading infrastructure play and an energy and real estate trust that has been operating since the 1880s and has just eight employees.
Steven Halpern: Joining us today is Tom Sudyka, portfolio manager of the LK Balanced Fund (LKBLX). How are you doing today, Tom?
Tom Sudyka: Great, Steve. Thanks for having me.
Steven Halpern: Can you tell our listeners a little bit about the fund and its long-term investment goals and perhaps explain what qualifies as a balanced fund?
Tom Sudyka: Sure, Steve. The LK Balanced Fund is a successor to a limited partnership that has existed since the firm was founded some 30 years ago.
To be a balanced fund in our world, or in the real world, you need to have a balance of stocks and bonds. Our Balanced Fund has been a balance of those two end assets for the entire 30-year history.
Its objective would be long-term appreciation or capital growth, but employing a…hopefully a less volatile balanced approach. Historically, we’ve been a 60/40 target. Today, we’re sitting right at about a 60% stocks, 30% bonds, and 10% cash mix, which seems appropriately conservative today.
Steven Halpern: Now, we spoke last August and you raised the concerns over deflation. Does that continue to pose a risk?
Tom Sudyka: It may be somewhat of a risk, but we’ve seen a lot of it happen already. I mean, we saw commodity deflation since last August, oil being probably the prime example. It was near $100 in August and fell into the mid-$40s and it’s recovered a little bit to the mid-$50s, but certainly we’ve seen commodity deflation there.
We’ve seen it in other industrial commodities. Even the March CPI numbers that were released showed a negative actual March-over-March return for inflation, and so at this point, I’m not sure that we’re as concerned about deflation as just the lack of inflation in the world.
Steven Halpern: Now, you also expected the US dollar to be strong. I was wondering if you still expect that to be the case, and if so, how will that impact the market?
Tom Sudyka: Yeah, we still do see the dollar remaining strong. The US does remain one of the best economies in the world. Our interest rates are higher than the world interest rates—which does bring foreign flows to our country—which, of course, inflates the value of the dollar.
The stronger dollar—we think—will benefit US importers and historically it’s hurt the exporters, and also that has us looking to include retailers or guys that can source their products at lower cost, so we’re looking for beneficiaries at this point.
Steven Halpern: Now, you mentioned retailers and one of the stocks that you like is CATO Corp. (CATO), a women’s retailer. Could you share your thoughts?
Tom Sudyka: Yeah, Cato operates over 1200 women’s fashion stores. They’re a specialty retailer, they normally like to position themselves in strip malls and maybe outside of a Wal-mart where they’d be able to get constant flow to their stores. It’s a family-owned and managed business, with a very consistent and conservative approach that has worked well, historically.
You get a 3% dividend yield, so we get paid while we enjoy their steady growth, and of course, they do stand to benefit from the lower costs because they do source their goods primarily in China and so they’ve got lower costs going forward.
Steven Halpern: Now, one of your long-standing recommendations is a lesser-known company, Texas Pacific Land (TPL), which, despite not being well-known by the public, actually traces its history back to the 1880s. What’s the attraction here?
Tom Sudyka: Yeah, Texas Pacific is a typical Lawson Kroeker name in the sense that it’s got a very simple story, it’s slightly smaller in size and has a very long-term focus. Their simple story is that every year they’re going to take their cash flow and they’re going to buy in-shares.
They’ve got eight employees, so it’s a very tiny—basically an accounting firm, if you will, that takes in the royalties on their various land pieces, either whether it’s from grazing royalties on their land or oil and gas sales, and then they buy in-shares, so we really like the simplicity of the story.
The value in the story is that we believe the asset value of the land, even the part that may not have oil and gas under it, has a value, and then of course, the large part of it has oil and gas under it and so we think we’ve long-term land value as well as asset value underneath the land, and a very simple story, so it’s been a long-term holding. We can see it being a long-term holding going long into the future.
Steven Halpern: Now, one stock on your buy list is a name that’s probably unfamiliar to most investors, and that’s Constellium NV (CSTM). What’s the story here?
Tom Sudyka: Constellium is a Netherlands-based designer and manufacturer of innovative aluminum products. They’re in a variety of markets and markets from aerospace to packaging, but the attractiveness to us is what’s going on in the automotive world. Historically, they’ve supplied the German auto makers—high-end auto makers—with aluminum products for their cars to lower the weight.
What’s going on in the US now is the continued fuel restrictions—or mpg requirements by the government—have required the US makers to increase their aluminum use in the cars, primarily trucks, actually.
Industry analysts see aluminum used by US automakers to grow—maybe grow ten-fold—in the next five years, from maybe 100,000 tons of aluminum in the cars or vehicles to—you know—a million.
And with that kind of exponential growth ahead of them, they bought a plant in Alabama to serve the US auto manufacturers, if you will, and they happen to be the main supplier of aluminum to the Ford F-150, which is the number one selling car vehicle of any type in the US.
And I think recently we’ve seen other truck manufacturers say, “Hey, we’ve got to increase the aluminum in our cars.” We like the long-term story, the valuation seems reasonable, and it looks like an attractive holding.
Steven Halpern: Now finally, you’ve highlighted a company called Chicago Bridge and Iron (CBI), which is an engineering and construction firm. Could you tell us what you like about this situation?
Tom Sudyka: Yeah, what we like about them is, well, one, they’re not in Chicago and they don’t do bridges or iron.
What they really are is an infrastructure firm, so they build various things for electrical plants, to liquefied natural gas plants, to all the pipelines in between them, to the storage tanks, so they’re basically serving the various energy end markets, but not specifically the oil and gas markets.
Unfortunately for the stock, the world says, “Oh, they serve a lot of gas markets, oil is down, stock gets crushed.” We think longer-term; the US energy independence movement is going to provide growth opportunities for CBI, because more infrastructure is going to need to be built for both improvement and expansion.
This is a company that’s well-positioned to meet that demand growth. They’ve got three years of sales in backlog, they’re trading at under 10 times current earnings, earnings continue to grow, and we consider this company a really attractive holding.
Steven Halpern: Again, my guest is Tom Sudyka of the LK Balanced Fund. It’s always a pleasure talking to you. Thank you for joining us today.
Tom Sudyka: Thanks for having me, Steve.
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