Villere’s "Off the Radar" Values

08/08/2016 10:00 am EST


A 4th generation firm, Villere & Co is well known for a long-term strategy focused on finding value and quality among less well-known stocks. Here, we talk with Sandy Villere about the firm's two funds and a trio of top ideas that are off the radar of most Wall Street analysts.

Steve Halpern:  Our special guest today is Sandy Villere, fund manager at Villere & Company.  How are you doing today, Sandy?

Sandy Villere:  I'm doing well, Steven, thanks for asking.  I guess the market's been up about seven sessions in a row, so can't complain.

Steve Halpern: Now, before we look at your individual funds, could you give us some overall background of Villere & Company.

Sandy Villere:   Yeah, so, Villere & Company was founded by my great-grandfather in 1911, so we're over 100 years old, and I'm now the fourth generation to be working here.  We manage about $2.5 billion for separately managed accounts, anything from foundations, endowments, and then we also have our Villere Balanced Fund (VILLX), as well as our Villere Equity Fund (VLEQX).

Steve Halpern:  So, you manage two extremely respective funds.  The first, as you mentioned, is the Villere Balanced Fund, which is well known for its contrarian value approach.  Could you tell our listeners a little bit more about the fund and underlying strategy there?

Sandy Villere:  The Balanced Fund was started in 1999, and essentially it's got to be 60% to 70% in stocks, 25 to 40% in bonds, but the stocks that we select are going to be smaller than your typical balanced funds.  You're not going to see the household names, like the McDonald's, etc., in the fund.  

You're going to see smaller, undiscovered equities that share kind of a few common characteristics.  We like to find companies with low debt and strong cash flow.  We like companies with low price to earnings relative to their growth, and we like companies that really dominate a market niche.

And sometimes to be able to buy those companies, we either have to be a little bit contrarian or out of favor or just nobody's really heard of them yet because there's only a handful of research analysts that are riding on the companies, if any, and so because they're inefficient, we find a lot of value in these smaller names.

Steve Halpern:  Now, could you also tell our listeners about the Villere Equity Fund, which uses what you call a diamonds in the rough style.  

Sandy Villere:  Yeah, so, in the Equity Fund, we're going to be closer to 100% in stock, so it's going to be very similar stocks in the Balanced Fund that are going to be in the Equity Fund, buying the same types of small, undiscovered names.

So our style is really buying really just on fact-picking pure and simple.  We like to go visit company management ourselves.  We like to interview competitors and suppliers and anybody else that can give us an insight into these businesses.

And just like the Balanced Fund, the Equity Fund is going to hold stocks for typically five years or so, resulting in turnover that's going to be less than about 30%, so we think this is a good, really small mid-cap fund, and just different than the Balanced Fund in that it just doesn't own bonds.

Steve Halpern:  Now, as you mentioned, all of your holdings tend to be less well-known companies, often off the radar of many of the folks on Wall Street, and one individual stock you like is called Financial Engines (FNGN).  For those who have never heard of this company, can you explain the story here?

Sandy Villere:  Yes, so this is about a $1.6 billion market cap.  It was founded in 1996 by Nobel economist Bill Sharpe.  They're trying to help corporate 401(k) participants choose among all the mutual funds that they're offered to really better invest for the future.  

They're now the largest independent registered investment advisor, and they help over about 9 million employees at over about 600 companies, and this is every company from AT&T, Microsoft, IBM, etc.  

They just closed an acquisition of the ninth largest registered investment advisor, the Mutual Fund Store.  They paid about $516 million for it.  They closed that at the beginning of February.  

The nice part is this was owned by Warburg Pincus, and Warburg took all stock, so now they own 13% of the combined entity, and I think that says a lot about what they believe the future of financial influence is going to be.  

They've got $150 million in cash, no debt on the balance sheet, and we think it's going to work well.  Just given the uncertainty around Brexit, these guys do make money on assets under management just as we do, and we think that -- because the market's been uncertain -- it's kind of allowed a window where you can buy this company at a reasonable price.

Steve Halpern:  Another less known company is LKQ (LKQ).  Can you tell us about this firm?

Sandy Villere:  Sure. So this is a common term for “like in kind and quality” because they're essentially supplying refurbished and recycled auto parts, mostly the body shops that are exactly like new or OEM parts, but they're 20 to 50% cheaper.

So when you wreck your car, you take it into a body shop, and the body shop basically turns it over to the insurance company, and the insurance company's going to mandate using these cheaper recycled parts when they go to repair your car.

So a couple of trends right now that we like, number one, with low interest rates, insurance companies are really having a hard time making any return on their cash hoards they're holding, and so we think that being able to save money on using recycled parts is going to be a good trend.  

Also, we have low gasoline prices, and that just means more miles driven, and that's going to mean more car accidents, which also helps LKQ. So it's grown about 18% and trading at a reasonable in a 16 to 17 times earnings, so we like this company a lot.

Steve Halpern:  Now, finally, you're also bullish on the shares of Steris plc (STE), and that company's involved in infection prevention and contamination control.  What's the attraction with this stock?

Sandy Villere:  This company's history goes all the way back to 1894 with the founding of the American Sterilizer Company.  What turned us onto it is that it's really a very basic, boring company.  

About 80% of their revenues are really recurring in nature, so think of things like detergents for their laundromats and hospitals and pharmaceutical companies, research labs, cleaning linens, etc.

The stock is based in London, so on the Brexit news, basically, the stock sold off about 10%, and they've allowed us to buy a very, very high quality company that's got 80% recurring revenue at a very reasonable price.

And it does pay a 1.5% dividend yield while we wait, so we're excited about this business, and I think they're going to have nice growth looking out into the future.

Steve Halpern:  These stocks that you've mentioned in particular -- along with the overall strategy of your funds -- is it safe to say these are all long-term investments that you would expect to be holding for years to come?

Sandy Villere:  That's exactly right.  We really like to invest in companies, not ticker symbols or stocks, if you will.  We like to buy and hold for the long run, and when the trends are in our favor.

These companies look like they have the ability to make good money, looking out over the next three to five to seven years, we're going to buy and hold and stick around for the long run for sure.

Steve Halpern:  Again, our guest is Sandy Villere of Villere & Co.  It's always a pleasure to talk to you.  Thank you so much for your time today.

Sandy Villere:  Thank you, Steven, I appreciate you having me.

By Sandy Villere, Editor at Villere & Co

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