"Great America" Stocks: Autos, Tractors and RVs
04/22/2016 10:00 am EST
Bill Barker, co-portfolio manager of The Motley Fool Great America Fund, walks us through the fund’s underlying strategy and highlights his favorite ideas in an American-centric market niche — auto parts stores, tractors and farm supplies and recreational vehicles.
Steve Halpern: Joining us today is Bill Barker, portfolio manager of the Motley Fool Great America Fund. How are you doing today Bill?
Bill Barker: Very well, thanks.
Steve Halpern: The Motley Fool Great America Fund (TMFGX) focuses on what you deem to be excellent companies at value prices. Can you tell our listeners a little about the fund strategy and the primary factors you consider when selecting stocks.
Bill Barker: Sure. We're looking for companies that have reasonable but interesting growth prospects in their future, usually proven by having executed impressive growth in their past, but ones which are not trading at extreme or even higher than market evaluations.
We're looking for easy to understand business models for the most part and in particular focusing on managements allocation of capital and what we can tell about management through the numbers.
Steve Halpern: Now, it might seem obvious that the phrase, great America, in the fund name but would that imply that the focus is primarily or exclusively on American-based companies?
Bill Barker: It does indeed. It is exclusively American at the moment. By prospectus it has the opportunity to go to a limited degree outside of the US, but we haven't found that necessary during the history of the portfolio so far, but it allows us if there is a spinoff of something that might be listed as a foreign entity to not be forced to sell it by the prospectus. Everything is domestic-allocated right now.
Steve Halpern: Now, you emphasized and just alluded to your focus on companies where your management team truly understands the stocks and their operations, which is reminiscent of some of the history's greatest investors like Peter Lynch and Warren Buffett. Could you expand on that focus?
Bill Barker: Well, certainly it's always nice to be mentioned in any way in their company but mostly we get to play in their company by virtue of having learned from them. Many of their writings are favorites of ours.
And it's easy to find — if you're running a portfolio of maybe 60 or 70 total investments — to limit your investments to things that you can really understand and where you really trust management and where the business model is something that you not only understand but feel that you can follow more soundly than the market does at times.
And that gives you the opportunity to acquire sometimes-obvious investments at better prices when the market is taking a short-term view.
Steve Halpern: Now you recently highlighted several stocks in the auto-related areas and one of those is AutoZone (AZO). What's the attraction here?
Bill Barker: The attraction here is that it's a company which just is able to multiply its earnings per share in the mid-teens year, year after year, and that is a rarity for companies.
They do so by opening up a few more stores every year, expanding their operations by about 3% to 4% and then selling more and having same store sales grow virtually every quarter and then improving their margins a little bit and then at the bottom, buying back shares.
So they multiply both opening stores, selling more at every store, making more on every sale and buying back their share and when you get to the end of that you just have to do a lot of things a little well over time and it adds up to roughly 15% annual growth both for stock holders and for the earnings per share.
They bought 80% of their shares back over the last 18 years or so. It's a phenomenal earnings per share growth story without being a phenomenal just having to grow the business itself by quite as much.
Steve Halpern: You also like the outlook for Tractor Supply (TSCO). What's the story behind this company?
Bill Barker: Well, this is just a great execution story there. They are a retail operator for the rural lifestyle. They are found outside of city centers and suburbs so they are more in the ex-urbs.
Again, this is a story of growing stores at a reasonably impressive but consistent base. They are now a little bit over 1,000 stores and growing at about 7% to 8% a year in terms of stores, themselves.
Improving same store sales virtually every single quarter to the tune of about 3% and they've really done a great job in the last five years on improving their margins and so all of that, like AutoZone, has added up to roughly 15% annual growth and they buy back a few shares.
It's got a lot in common with AutoZone and on top of it, it just has an excellent demographic story as more and more people find that they can translate a lifestyle outside of the major cities, faster internet access has been a driver for that and just people looking to get away from the hustle of city.
Great demographic story and a great management execution story and they're really not affected in the retail space the way a lot of retailers are by Amazon (AMZN).
They're called Tractor Supply, but they're not just selling tractors, of course, they're selling a lot of equine and large pet food and materials and sort of large bulky things that you're really not usually going to order over the internet, so they haven't been suffering to anywhere near the degree that most retailers have in the wake of the online revolution.
Steve Halpern: You also like the prospect for two companies on the recreational vehicles market. Those names might be less well known to most investors and that is Thor Industries (THO) and Drew Industries (DW). Could you share your thoughts on this particular market niche and your outlook for both of these stocks?
Bill Barker: Yeah, they're both excellent well-run companies with a long history, not just of operations but of rewarding share holders and at the moment they've both got excellent demographic trends as the US population ages into the highest sort of selling zone for their products, people over 50.
And on top of that they've just got sort of all of the macroeconomic factors you'd want to see, low interest rates, low gas prices, and good job numbers so that's a phenomenal equation.
Thor is the producer of RV's, themselves. Drew is a supplier of parts such as doors, awnings, windows, so Drew supplies not just to Thor but to the other RV manufacturers including Forrest River and Winnebago.
They're both located in Indiana, which is the center of the recreational vehicle market in the US and right now, as I say, they're just looking at a number of phenomenal combinations regarding the macroeconomic factors — things which are harder for other companies.
One other thing to mention is that the strong dollar is not hurting them because the RV manufacturing world is really a US market.
So foreign competitors are not really providing the same kind of headaches to the RV manufacturers that they are to auto makers and in particular motorcycles, so almost every factor that you'd want to see is going the right way for both these companies at the moment.
Steve Halpern: Again, our guest is Bill Barker of The Motley Fool Great America Fund. Thank you so much for joining us today.
Bill Barker: Thank you.
By Bill Barker, Co-Portfolio Manager of The Motley Fool Great America Fund