Value from the Heartland

11/30/2015 9:34 am EST


Russ Kaplan focuses on long-term investing using a time-test model akin to the legendary Benjamin Graham. Here, the money manager and editor of Heartland Advisor explains his strategy and highlights some new buy recommendation for those with a 3- to 5-year time horizon.

Steven Halpern:  Our special guest today is value investing expert Russ Kaplan, editor of the Heartland Advisor.  How are you doing today, Russ?

Russ Kaplan:  I'm just fine, thank you.

Steven Halpern:  Your investment strategy could best be likened to the classic value approach of Ben Graham.  Could you give our listeners a brief overview of this investment approach?

Russ Kaplan:  Yes, we try to figure out the intrinsic value of the stock, what its really worth, and if it's below that intrinsic value, it's a good buy.  We have lots of different measures, price-to-earnings, price to sales, price-to­book.  

We want a solid financial company with low debt—and we prefer stocks that pay good dividends—and this approach has worked well for us over the years.

Steven Halpern:  In fact, this type of approach worked well even for Ben Graham and that goes back many decades, so it really is a time-tested strategy, correct?

Russ Kaplan:  It is a good strategy, but it's not a short-term strategy.  We buy our stocks for the long run and they're not going to usually perform well the next week or the next month.  We look three to five years into the future.

Steven Halpern:  In assessing the current investing environment, you have recently pointed to high levels of investor pessimism as well as strong levels of insider buying.  Can you touch on why these two factors suggest a bullish stance for the market's long-term prospects?

Russ Kaplan:  Yes, there have been lots and lots of studies that show when investors are most pessimistic, we're near a bottom—and I get this from investors' intelligence—and last reading, only 43.3% of advisors were optimistic.  

This is a pretty low number and when people are pessimistic, it usually means they've already sold, so the more value oriented investors are going to start buying.  

The nervous ones have already left and as far as insider buying, officers and directors are the people most knowledgeable about the stocks they own, so when they're doing a lot of buying—which they are now—that means that it's a good time to buy, because they're the most knowledgeable.

Steven Halpern:  Now following the recent tragic events in Paris and in other places in the world, you wrote some very reassuring words to your subscribers helping to explain why, historically, previous tragic events should not necessarily be the cause for investors to panic out of their long-term holdings.  Could you expand on that?


Russ Kaplan:  Yes, I could.  Ken Fisher in his books does a history of these going back to the San Francisco earthquake of 1906 (probably one) and over and over again, stocks go down after tragedy but soon come back up.  

One we remember a lot was the attack on the World Trade Center. The market was closed for a week in September 2001; it opened, it went down, but by about the middle of October, stocks were selling at what they were before the tragedy.

And the same thing with New Orleans in 2005, Pearl Harbor, and all kinds of tragic events like this. The market takes it in its stride.  

Steven Halpern:  Now, your latest buy recommendation that you just issued to your subscribers is Goldman Sachs (GS), which you pull up Greek buying opportunity.  What's the attraction here?

Russ Kaplan:  First of all, it fits all the criteria that we've been talking about, low PE and a price below net working capital.  It's just barely above value. It's in the $180 range.  I can see it going well over $200—and talking about insiders—it's a well-managed company; it's run by Lloyd Blankfein and he owns 1.8 million shares.  

Another thing is that they survived the crash of 2007-2009,and they're about one of the few left on the blocks as far as investment banking.  Bear Stearns and Lehman no longer exist.  

Merrill Lynch is just a shadow of what it used to be, so their only competition is Morgan Stanley and they are doing lots of business and I think the markets going to recognize that soon.

Steven Halpern:  Now, another stock you've been recommending is Precision Cast Parts (PCP), which you consider a bargain.  What's the story here?

Russ Kaplan:  Okay, we recommended it in March, and about two months later, Warren Buffett stated that he was going to buy it at $235 a share and it's almost there now, so if you own it, I would hold off and wait a little bit for the Buffett acquisition.  

It's pretty close in the price he wants to buy it at, so I would not be buying any more shares, but for those of us who did buy it in March, it's been a very good deal.

Steven Halpern:  Now, along those same lines, is there another stock that they may be thinking investors should be considering?

Russ Kaplan:  Yes, our latest recommendation is Reliance Steel (RS).  They are a specialty steel company.  They don't produce just a glob of steel like some companies.  

They have an inventory of about 100,000 different steel products, so if you're small business or an oil company and need some specialized part, they are going to have it.  

It's a well-managed company and it also fits my value criteria. The price of steel is low, but it's not going to stay low, so this is a really good time to get in.

Steven Halpern:  Again, our guest is Russ Kaplan of the Heartland Advisor. Thank you so much for your time today.

Russ Kaplan:  It's always a pleasure to talk to you.

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