Value Expert Eyes Buffett-Style Strategy

10/09/2015 10:00 am EST

Focus: STOCKS

Russ Kaplan, editor of Heartland Advisor, uses a Warren Buffett-style strategy, perhaps explaining why two stocks in his portfolio have been recent targets of Buffett's holding company. Here, he explains his strategy and highlights some favorite value ideas.

Steven Halpern:  Joining us today is value investing expert Russ Kaplan, Money Manager and Editor of Heartland Adviser.  How are you doing today, Russ?

Russ Kaplan:  I’m just fine.  How are you?

Steven Halpern:  Very good; thanks for taking the time.  Your investment strategy focuses on strong fundamentals and undervalued stock prices.  Could you explain your overall strategy in a little more detail and tell our listeners a little about the Heartland Adviser?

Russ Kaplan:  Okay. I research individual companies and look for companies that are financially strong but undervalued. I use present value analysis.  I’m a big student of Warren Buffett and I’ve read everything about him and I use his strategies.

But I concentrate on individual companies and not macroeconomic events.  I really don’t care what the Federal Reserve might do or what China might do, those kinds of things.

Steven Halpern: Now you’re fond of quoting John Templeton’s famous saying that the time to buy is at the point of maximum pessimism.  Could you explain how you employ this strategy when looking at stocks and deciding whether or not we’ve reached that point?

Russ Kaplan:  Yes, I check how other analysts—this isn’t the only indicator—but when all kinds of analysts are pessimistic about a company and it is a good company, I think we’re pretty close to maximum pessimism.  Now an example of that is the oil stocks.  It seems like absolutely no one likes them.  Barron’s or Goldman Sachs just made a prediction oil is going to $20 a barrel.  

I remember that in 2007 they said oil was going to $200 a barrel right before it started falling, so that is an example of maximum pessimism.  We can’t pinpoint it for sure, but we can get close.

Steven Halpern:  Now, with over 30 years’ experience in the market, you’re patient and you’re comfortable stepping in during all weak periods, but many investors tend to buy and sell at exactly the wrong time.  Why is it so hard for the average investor to follow a contrarian approach?

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Russ Kaplan:  It is psychological and human nature.  People get scared when the market is low and they panic.  It’s part of our biology. The human mind hasn’t changed since the Stone Age and we have a tendency to flee when we see danger.  

That’s why it’s good to have a good investment professional helping you who can talk you out of selling at bad times, but the main reason is just human behavior.

Steven Halpern:  Now, highlighting the success of your strategy, Warren Buffett recently acquired one of your holdings, Precision Castparts (PCP) and then just following that announcement, Buffet also purchased a 10% stake in a second one of your holdings, Phillips 66 (PSX).  Now, Precision Castparts has been acquired, but in terms of Phillips 66, do you still consider that stock attractive for investors?

Russ Kaplan:  I certainly do.  It again goes with my oil thesis.  Like Buffett, I like to hold things for very long periods of time and I think that some of the integrated oils like Exxon, ConocoPhillips, Chevron Texaco are good buys now.  They will survive low gas prices and flourish when gas prices come back up again.

Steven Halpern:  Now, in addition to your view that oil is undervalued, you’ve also suggested that some mined metals are trading at discounted prices and along those lines, one of your new recommendations is Freeport-McMoRan (FCX).  What’s the attraction here?

Russ Kaplan:  Okay, well, I did not get in at the bottom, but I look at—in this case—I look at what insiders are doing and just recently Carl Icahn bought an 8.5% stake in the company.

Usually he is very successful and he takes troubled companies and turns them around, and also James Moffett, chairman of Freeport-McMoRan just bought 100,000 shares of it.

I think these people are very well informed and they know when to get in, and in the case of Icahn, he takes troubled companies and turns them around, and just like oil, I think metals are trading at their lows.

But it won’t be at their lows forever and I think they will come up eventually. Freeport-McMoRan will survive and will flourish when prices go up.

Steven Halpern: Are there any other market sectors where you’re currently seeing long-term value, and perhaps before you go, you might share a name or two?

Russ Kaplan:  Yes, other commodities like the agricultural ones, Archer Daniels Midland (ADM) is good and John Deere (DE) and Caterpillar (CAT), which serve the agricultural community, are good buys right now.

Steven Halpern:  Again, our guest is value expert Russ Kaplan of the Heartland Adviser.  Thank you so much for taking the time today.

Russ Kaplan:  Thank you.

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