Two Picks for Long-Term Value Investors

12/05/2016 7:00 am EST

Focus: STOCKS

The media are calling the election of Donald Trump a new era. How do we invest in this new era? The answer is to invest the same way as we did in the old era. I am not changing my investment style one bit, asserts Russ Kaplan, money manager and editor of Heartland Advisor.

Throughout many administrations a long-term outlook, combined with buying solid financial stocks that are undervalued has proven to be a winning strategy.

When I purchase a stock for our managed accounts, I buy as if I were buying the entire underlying business, not as if I were trading on a short-term basis. This is a basic point of value investing.

Another tenet of value investing is that we are not trading a stock; instead, we are owning a stock. A stock is a percentage of a business and to us it means we are silent partners in managing a business that we own.

When we own a business one of the least important things we are monitoring is the price at which we might be selling it. Instead we are interesting in all the things we would be doing if we were actively running the business such as sales, research and development and management.

Investing this way has helped sharpen our judgment about many mergers and acquisitions because we use the same criteria we would use if we were buying all of a business.

I am recommending Southwest Airlines (LUV), which specializes in low fares and short destinations. It serves 97 cities and is ever expanding.

There is no question of Southwest’s soundness with a Value Linerating of “A”. With very little debt and a free cash flow of $2.65 billion, there is a lot of opportunity for growth. At this time Southwest has 321 planes on order. That, over time, should increase the bottom line.

Southwest has a long-term point of view. The CEO Gary Kelly owns 505,000 shares and four institutional funds own 31% of the company. 

I am also recommending D. R. Horton (DHI); unlike other home building companies, the company is also involved in mortgage services.

The 26 states the company is involved with are solidly past the financial crisis of 2007-2009 and the company itself is past that period as well.

In fact, I do not believe the investment community has gotten beyond the crisis, given the low price the company fetches in relation to its fundamentals. For example, the Horton trades at a price/earnings ratio of 12, a return of equity of 13.5%.

The company owns 7% of the stock and the officers and directors own 7.2%. This almost guarantees us a long term perspective and not a concentration on just the next quarter.

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By Russ Kaplan, Editor of Heartland Advisor

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