Understanding Large-Cap Stocks Beyond GAAP Valuation with Portfolio Manager Rafael Resendes of Toreador Research and Trading: One of the Best Investment Strategy Interviews of 2012

RELATED QUOTES

SymbolPriceChange
IBM159.40-0.32
MCD115.36+0.84
SO50.96-0.38
XOM87.52-0.32

67 WALL STREET, New York - December 18, 2012 - The Wall Street Transcript has just published its Best Investment Strategy Interviews of 2012. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investment Strategies - Large Cap Investing - Investing in Emerging Markets - Investing in Energy - Value Investing - Downside Protection With Upside Participation - Macroeconomic Trends

Companies include: Apple Inc. (AAPL), Automatic Data Processing, Inc (ADP), Chevron Corp. (CVX), Ecolab Inc. (ECL), International Business Machine (IBM), McDonald's Corp. (MCD), Southern Company (SO), Exxon Mobil Corp. (XOM), Yum! Brands Inc. (YUM)

In the following excerpt from the Best Investment Strategy Interviews of 2012, an experienced portfolio manager discusses his investment methodology for large cap stocks:

We capture this through a proprietary concept we call Economic Margin Decay. If you study decay rates over time, and globally, it quickly becomes apparent that valuations based on multiples are just silly, and explains why so few firms and individuals consistently assign reasonable values to companies, and instead use coarse generalizations - such as growth firms or value firms - when in fact growth is required to understand value.

In the same way that Google has the best search algorithms, understanding intrinsic value is a unique advantage Toreador has over its competitors. This allows us to understand the future performance we are paying for a firm at any point in time.

For example in 2000, quality firms traded with very low future expectations embedded in their price relative to risky firms, and as the market became unstable and overvalued. We witnessed something similar in 2007, as Toreador moved to buy safety and held that position through much of 2011. In late 2011, our fund made a very explicit decision to trade out of safety. Going into 2011, we owned names like MCD (MCD), IBM (IBM), Clorox (CLX), Coca-Cola (KO), P&G (PG), and others that served us well through 2010. Essentially, you could go down the list, and we focused on firms that were considered to be safe - very stable cash flows, low leverage, big firms, multinational presences.

However, with the euro crises unfolding in 2011, these firms were consistently being overbought as everyone reached for safety, yields and low volatility. If you look at what happened last year, the top-performing firms versus the bottom-performing firms, the top-quartile firms returned about 26%, whereas the bottom-quartile performer returned a negative 30%. The top firms were roughly two to four times larger than the bottom-performing firms market-cap wise. Again, there was a clear reach for safety. The top firms were half as levered as the bottom-performing firms. Top firms' dividend yield was almost twice as much as the bottom-performing firms and the Economic Margin of the top firms exceeded the bottom ones by a factor of three, with a third of the volatility.

At the end of 2011, however, when we sat down and we spotted the value, we found that, on average, the typical firm in the safe group had to grow its sales for the next five years at about 14% a year to justify their valuation, and the question we asked is whether such performance is reasonable or not. If you look at these firms, on average, over the previous five years, they have only been able to grow at about 6.8% a year. In other words, right now, because of the reach for safety, these firms would have to grow at about more than double what they have been able to do historically, and to us, while these are great firms, they were just too expensive.

After the crash in August, we explicitly started investing in riskier cash flows as the market had unreasonably punished firms with these characteristics. For example, risky cash flow firms were priced to grow their top line at about 4% a year whereas, historically, they have been able to grow at about 10% a year. When stocks can beat their expectations built into their price, they tend to do very well, and when they can't, they tend to underperform. That's what we saw back in 2000 with the tech bubble, expectations exceeded reality and we witnessed the tech crash. We believe we were in a bubble for quality, and investors were significantly overreaching, and as a result, we restructured our portfolio to take advantage of this.

Some of the names that we own that I think are interesting are Bank of America (BAC). We made a big push into owning financials over Q4 of 2011. Bank of America is, I think, a really unique name in the sense of it probably has normalized earnings in the neighborhood of $2 a share. We expect that for 2012 it should earn maybe $1 a share. So in simple terms, has a p/e of 7.5 - after appreciating more than 30% this year - holding that constant with $2 of earnings, we believe investors will push its value to the low teens. Our estimate of its intrinsic value is approximately $15 a share, making it a wonderful buy-and-hold opportunity. We estimate the downside risk to Bank of America somewhere in the neighborhood of $6 if the market gets really jittery again. We see the upside at $15 plus. For us, 100% potential return with 20% downside even assuming 50/50 odds is a great investment vehicle. We actively search for those types of risk return opportunities, and as a consequence, we've made Bank of America the largest holding in our fund.

By the way, the financial sector is where we have the greatest percent of our funds allocated at the moment. We have about 28% of our fund allocated to financials, versus a market weight of 14%, primary focused on the global banks and life insurers such as MetLife (MET).

We believe the environment for financials is unique in the sense of offering what I call upside regulatory surprise. I think for the last three years, we've had a regulatory environment very hostile to financials from headlines to Washington's desire to capitalize on such sentiments. I think that environment will change. It is obvious an economic recovery will not reach its full potential with government at war with banks...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Dollar holds gains on Fed rate hike bets AFP - 9 minutes ago

    The dollar held its ground Wednesday as traders bet on a US rate hike while poor Japanese factory output pressured the yen. Investors have been piling into the greenback since Fed boss Janet Yellen hinted ... … More »

  • Tokyo stocks up by break, led by exporters AFP - 28 minutes ago

    Tokyo stocks rallied Wednesday morning as a weaker yen boosted major exporters, offsetting below-par factory output data that aggravated concerns about Japan's stalled economy. Toyota and Nissan led the ... … More »

  • Dim Sum Market Spurned by Companies After Yuan Devaluation (2) Bloomberg - 40 minutes ago

    There were only three corporate issuances of yuan debt in the offshore market this year, down from a record 73 two years ago, data compiled by Bloomberg show. Overall sales tumbled 49 percent to 118.1 billion yuan ($17.7 billion), with almost all … More »

  • Yuan Heads for Monthly Drop as Fed Outlook Renews Bearish Bets Bloomberg - 48 minutes ago

    The yuan traded in Hong Kong, which is outside of the mainland’s capital controls, fell 0.9 percent this month to trade at 6.6896 a dollar as of 11:28 a.m. local time on Wednesday. While China has hastened steps to open its onshore market, the … More »

  • Asian stocks mixed ahead of US jobs data
    Asian stocks mixed ahead of US jobs data Associated Press - 50 minutes ago

    Asian stocks were mixed in listless trading Wednesday ahead of key jobs data later this week in the U.S. that could lead to higher interest rates. KEEPING SCORE: Japan's benchmark Nikkei 225 gained 0.8 ... … More »

  • BELOW $1 MILLION: 999-year-leasehold apartment near Whampoa
    BELOW $1 MILLION: 999-year-leasehold apartment near Whampoa The Edge Property - 1 hour 7 minutes ago

    A one-bedroom-plus-study, 797 sq ft unit at Vetro is looking for buyers on TheEdgeProperty.com at $800,000, or $1,004 psf.Vetro is a 999-year-leasehold apartment located at Mar Thoma Road. The 32-unit development was completed in 2010. Schools … More »

  • China’s Top Steel Mills Warn on Outlook After Profit Rebound (2) Bloomberg - 1 hour 10 minutes ago

    China’s biggest mills including Hesteel Co. Ltd. are warning that the improved conditions and rising prices in the first half that helped them to lift earnings may soon be about to give way. “Industry prospects are not optimistic,” Hesteel, the … More »

  • Asia markets mostly down but Tokyo soars on weak yen
    Asia markets mostly down but Tokyo soars on weak yen AFP News - 1 hour 13 minutes ago

    Tokyo stocks resumed a rally on Wednesday as the yen fell against the dollar on US interest rate talk but most other Asian markets struggled as investors were spooked by the prospects of higher borrowing costs in the world's top economy. Dollar … More »

  • China Stock Traders Bet $305 Million on Military Tensions (1) Bloomberg - 1 hour 16 minutes ago

    The ETF creators are seeking to capitalize on escalating geopolitical tensions, with an international tribunal ruling in July that China’s efforts to assert control over the South China Sea exceeded the law and South Korea agreeing to allow the U.S. … More »

  • 'Principal architect' of IS attacks on West killed in Syria
    'Principal architect' of IS attacks on West killed in Syria AFP News - 1 hour 28 minutes ago

    One of the Islamic State's top leaders, Abu Mohamed al-Adnani, described by the US as the "principal architect" of the group's attacks on the West, has been killed in Syria, the jihadist organisation announced. The truce was announced separately by … More »

  • EU ruling on Apple stirs calls for U.S. tax reform
    EU ruling on Apple stirs calls for U.S. tax reform Reuters - 1 hour 30 minutes ago

    A European Commission order requiring Apple Inc to pay Ireland $13 billion euros (11.07 billion pounds) in unpaid taxes on Tuesday drew swift rebukes from the Obama administration and lawmakers in Congress, while reigniting calls for U.S. tax … More »

  • Exclusive: SWIFT discloses more cyber thefts, pressures banks on security
    Exclusive: SWIFT discloses more cyber thefts, pressures banks on security Reuters - 1 hour 35 minutes ago

    In a private letter to clients, SWIFT said that new cyber-theft attempts - some of them successful - have surfaced since June, when it last updated customers on a string of attacks discovered after the attack on the Bangladesh central bank. The … More »

  • Gold near two-month lows on rate hike worries
    Gold near two-month lows on rate hike worries Reuters - 1 hour 43 minutes ago

    * Spot gold was little changed at $1,310.48 per ounce at 0104 GMT. * U.S. gold futures slipped 0.2 percent to $1,313.90. * Fed Chair Janet Yellen said on Friday the case for higher rates was strengthening, though she gave little clarity on the … More »

  • Singapore bank lending rises in July Reuters - 1 hour 44 minutes ago

    Singapore' total bank lending rose in July from the previous month, helped by increases in general commerce loans and lending to financial institutions, central bank data showed on Wednesday. Loans and advances by domestic banks in the city-state … More »

  • Apple to fight record EU tax bill
    Apple to fight record EU tax bill AFP News - 1 hour 51 minutes ago

    Silicon Valley tech titan Apple will fight an EU demand for a record 13 billion euros in back taxes in Ireland, a move Washington warned could damage transatlantic economic ties. Brussels said Apple, the world's most valuable company, avoided … More »

  • China H Shares Set for World’s Best Monthly Gain as Profits Beat Bloomberg - 1 hour 53 minutes ago

    The Hang Seng China Enterprises Index is up 7 percent in August, the most among 94 benchmark equity gauges tracked by Bloomberg. Banks and insurers have led the the advance, with Industrial & Commercial Bank of China Ltd. surging 14 percent, while … More »

  • Japan factory output disappoints in July
    Japan factory output disappoints in July AFP News - 2 hours 12 minutes ago

    A drop in household spending, weak exports, and disappointing inflation figures have dealt a blow to Japan's war on deflation, which will heap fresh pressure on the Bank of Japan to unleash another wave of growth-boosting stimulus. Shipments, … More »

  • Tokyo stocks open higher as weaker yen offsets Wall Street loss AFP - 2 hours 45 minutes ago

    Tokyo stocks rallied in opening trade on Wednesday as a weaker yen offset more disappointing economic data and a lacklustre lead from Wall Street. Wednesday's session started with strong gains as investors ... … More »

  • Oil prices dip on stronger dollar; rise in U.S. crude stocks data
    Oil prices dip on stronger dollar; rise in U.S. crude stocks data Reuters - 3 hours ago

    Crude oil futures fell in early trade on Wednesday as the U.S. dollar held around three-week highs and industry stocks data indicated a build in U.S. crude inventories. International Brent crude oil futures (LCOc1) were trading at $48.27 (36.9025 … More »

  • 10 Awesome Things To Do With Your Kids In Singapore
    10 Awesome Things To Do With Your Kids In Singapore GET.com - 3 hours ago

    Looking to make the most of your weekends with your children? There are loads of places in... … More »

  • Asian shares ease, taking cue from Wall Street, oil slips Reuters - 3 hours ago

    Asian shares eased on Wednesday following modest losses on Wall Street, but were still on track for a monthly rise as investors waited to see if upcoming job data could prod the Federal Reserve into raising interest rates as soon as September. … More »

  • Kuroda Helicopter Money Denials Fail to Stop Theories Rising (1) Bloomberg - 3 hours ago

    From Japan-based economists to global investors including Templeton Emerging Markets Group Executive Chairman Mark Mobius, there’s a reluctance to rule out the controversial policy coming as soon as next month amid the monetary authority’s struggles … More »

  • Shell's U.S. deal to unlock global oil asset disposals
    Shell's U.S. deal to unlock global oil asset disposals Reuters - 3 hours ago

    Royal Dutch Shell's first oil field sale after its $54 billion (41.25 billion pounds) BG Group acquisition bodes well for its disposal talks in the North Sea, Gabon and New Zealand, according to sources, signalling buyers will meet its expectations … More »

  • Asia Stocks Rise as Japan’s Topix Rallies Amid Stronger Dollar Bloomberg - 3 hours ago

    The MSCI Asia Pacific Index climbed 0.3 percent to 138.40 as of 9:14 a.m. in Tokyo. The currency fell for five straight days through Tuesday, its longest such streak since March, on mounting speculation the Federal Reserve will raise interest … More »

  • Japanese Shares Headed for August Gain as Yen Drops on Fed Bets Bloomberg - 4 hours ago

    Banks and carmakers led gains on the Topix index as of 9:04 a.m. in Tokyo, putting the measure on course for a 0.1 percent advance in August, while the yen fell 0.8 percent against the dollar this month. Fed’s Vice Chairman Stanley Fischer said on … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.121-0.002-1.63%
    N21.SI
    0.3150.0000.00%
    5OT.SI
    0.225-0.010-4.26%
    5ME.SI
    4.09-0.01-0.24%
    Z74.SI
    0.36+0.01+1.41%
    E5H.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.285+0.035+14.00%
    5SY.SI
    0.50+0.05+11.11%
    BFK.SI
    0.53+0.05+10.42%
    BMA.SI
    0.27+0.02+8.00%
    F86.SI
    0.55+0.04+6.80%
    EH5.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.30-0.06-17.81%
    BQO.SI
    0.105-0.020-16.00%
    578.SI
    0.225-0.010-4.26%
    5ME.SI
    0.155-0.009-5.49%
    UV1.SI
    0.72-0.03-4.00%
    564.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3630-0.0008-0.06%
    USDSGD=X
    1.5207+0.0011+0.07%
    EURSGD=X
    1.7866+0.0032+0.18%
    GBPSGD=X
    75.5280+0.07+0.09%
    SGDJPY=X
    5.6882+0.0034+0.06%
    SGDHKD=X
    2.9842+0.013+0.44%
    SGDMYR=X
    9,745.7793-14.2354-0.15%
    SGDIDR=X
    4.8975+0.0006+0.01%
    SGDCNY=X
    1.0249+0.0005+0.05%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,317.90+1.40+0.11%
    GCZ16.CMX
    18.78+0.20+1.09%
    SIU16.CMX
    91.84-5.09-5.25%
    ^XAU
    2.08+0.01+0.29%
    HGU16.CMX
    46.32-0.03-0.06%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.180.00
    ^FVX
    1.570.00
    ^TNX
    2.23+0.02
    ^TYX