“Yesterday’s models aren’t enough any more. Forward looking business analysis is essential to achieve superior returns in today’s markets.”
As mentioned earlier, the Westport firm emphasizes investments in small to mid-sized companies. From this specialization, the firm utilizes what is dub as “second-generation” value-investing. As expected in value investing, a bottoms-up approach is also utilized with an active search for companies with low valuation, improving financials and potential for long term growth. The divergence however, begins with the analysis of the impact of operational change upon a company. Second generation value investors believe that a change in operations, products, or leadership can change the core fundamentals of the company in ways not explicitly expressed via financial ratios. Due to the relatively lower coverage from mainstream analysts, opportunities may exist if a security unduly falls out of favor due to the aforementioned change. If an analysis yields the conclusion that the firm is indeed undervalued from its intrinsic price, another wave of due diligence is conducted in the form of comparative analysis, company visits, and management meeting.
All of the due diligence is conducted for a holding horizon of about 2 years. Each fund however, utilizes a slightly different area of focus. The Westport Fund invests in mid-sized companies with a market capitalization between $2-10 billion. This fund emphasizes capital appreciation first, with a mild appreciation for a dividend stream. The second fund, the Select Cap Fund, focuses on small capitalization companies having a market cap less then $2 billion, with an emphasis on long term capital appreciation.
Awarded the #1 “Best Fund for the Long Term” from US News in 2010, the performance of these funds has been largely positively. The Select Cap Fund had a return of 23.64% in 2010, and the Westport Fund’s return was equally comparative at 20.06%.The standard benchmark, the S&P 500, returned 15.1% in 2010, yielding an excess gain of more then 5% for each fund. Furthermore, their 10 year annualized returns were comparative, with a 6.45% return for the Select Cap Fund, and a 7.59% return for the Westport Fund. This is in stark contrast to the relatively low return of 2.95% from the S&P 500.
As demonstrated in the following charts, the top 3 sectors of the totality of the firm’s investments are situated primarily in industrials, consumer services, and health care. A minor rebalancing of the entire portfolio can be seen between Q4 of 2010 and Q1 of 2011. Some key changes to be noted include the largest sector reduction originating in the consumer goods sector, with the largest addition in the consumer services sector.
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|Overall Portfolio Composition||Q1 2011||Q4 2010||%Change|
|Oil & Gas||10.70%||9.60%||1.10%|
As seen in the following table, 31.42% of the composite fund is concentrated into the following five stocks. In addition, the firm is currently managing a sum equal to about $1.24 billion with 4 of the top 5 investments all having a market capitalization range between $2-7 billion.
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|Top Five Holdings for Q1||Symbol||Composition||Shares||Value|
|Precision Castparts Corporation||PCP||8.49%||716,134||105,400,602|
|Universal Heath Services||UHS||7.81%||1,963,100||96,996,771|
|Willis Group Holding||WSH||5.23%||1,610,900||65,015,924|
|Big Lots Inc||BIG||4.59%||1,313,056||57,026,022|
|Total Value of Portfolio||1,242,188,856|
Precision Castparts Corporation (PCP)
Precision Castparts manufactures metal components for aerospace, gas turbines, medical applications, chemical processing, and nuclear power plants. Their shares trade at $156.63, with a market capitalization of $22.47 billion. The firm paid an average price of $91.94 per share of PCP, a potential capital gain of 70.4%. PCP is the largest holding of Westport Asset Management, comprising 8.49% of the composite fund.
Precision Castparts has a P/E ratio of 22.34 and a P/S ratio of 3.54. Their dividend yield is .08%, with reported earnings of $7.01 for their 2010 fiscal year. Their revenues for the year were $6.22 billion with a profit margin of approximately 15.98%. On average, Precision has grown its revenues by 10.7% and free cash flow by 28.9% annually for the last 10 years.
Precision Castparts acquired the assets of PB Fasteners, an aerospace manufacturer, in a deal to be completed in Q1 of 2012. Analysts at Jefferies and JP Morgan placed price targets of $160 and $164 on PCP respectively.
GuruFocus rated PCP with the business predictability rank of 1 star.
Universal Health Services (UHS)
Universal Health Services operates hospitals, health centers, ambulatory, and oncology centers. UHS currently trades at $54.95, with a market capitalization of $5.37 billion. The average estimated price of each share in the portfolio is $27.07, yielding a potential capital gain of 102%. UHS’s position was reduced by 4.08% quarter to quarter, and is the second largest holding of the portfolio, at 7.81% of the composite portfolio.
Universal Health Services has a P/E ratio of 19.91, a P/B ratio of 2.65, and a P/S ratio of .95. UHS reported revenues of $5.5 billion, and a net income at $275 million, a 4.95% margin. Their earnings for the year were$2.76 with a dividend yield of .36%. Historically, over a 10 year period, earnings and revenues have grown by 9.3% and 10% respectively.
Analysts at RBC capital and at Jefferies placed price targets of $60 and $52 respectively on UHS. Revenues were projected via company guidance at $7.6 to $7.7 billion for the FY of 2011 with earnings in the range of $3.65 to $3.80 per share.
GuruFocus rated UHS with the business predictability rank of 3.5 stars.
DeVry Inc (DV)
DeVry provides educational services and profession development to their clients. DeVry currently trades at $54.08 with a market capitalization of $3.72 billion. From quarter to quarter, Westport reduced their holdings of DV by 6.27%. DeVry is the third largest holding of the firm, comprising 5.30% of the overall portfolio.
DeVry has a P/E ratio of 11.78, a P/B ratio of 3.22, and a P/S ratio of 1.92. Revenues for the fiscal year of 2010 totaled at $1.9 billion, with a profit margin of 14.62%. DV has a dividend yield of .44% and earnings of $4.59 for the year. Revenues and earnings have historically grown by 12.3% and 16.3% annually for the last 10 years.
The DeVry board recently authorized a share repurchase program up to $100 million through June of 2013. In addition, they acquired ATC international, an accounting and finance training center with operations in Europe and Asia.
GuruFocus rated DV with the business predictability rank of 1 star.
Willis Group Holdings (WSH)
Willis Group Holdings provides insurance, reinsurance, and risk management consultancy to their clients internationally. Willis trades at $41.05 with a market capitalization of $7.06 billion. An average price of $25.49 is estimated per share of WSH in the portfolio, yielding a capital gain of 61%. From Q4 2010 to Q1 2010, Westport increased their holdings of WSH by 6.62%.
The Willis Group has a P/E ratio of 24.73, a P/B ratio of 2.67, and a P/S ratio of 2.07. Their earnings for the year were $1.66, with a dividend yield of 2.53%. Revenues totaled $3.3 billion, with a profit margin of 13.39%. Earnings were reported at $1.66 per share, with a dividend yield of 2.53%. Earnings and revenue have grown historically by 38.4% and 7.2% over the last 10 years.
WSH announced plans to establish a life solutions group that will offer risk mitigation and advice of utilizing financial leverage.
GuruFocus rated WSH with the business predictability rank of 4 stars.
Big Lots Inc (BIG)
Big Lots is a retailer of home décor, food products, health and beauty supplies, and household cleaner products. Their shares trade at $32.42 with a market capitalization of $2.44 billion. Big Lots overall position remained steady quarter to quarter.
In terms of financial operations, Big Lots has a P/E ratio of 11.28, a P/S ratio of .49, and a P/B ratio of 2.52. Big Lots reported revenues of $4.9 billion, with the bottom line income at $222 million, a 4.49% margin. At the moment, they offer no dividend, and their reported earnings for the year totaled in at $2.87 per share. Over the last 5 years, on an annual basis, revenues and free cash flow has grown by 10.6% and 11% respectively.
Big Lots recently made plans to expand outside the United States with the purchase of Liquidation World in Canada for approximately $36 million CAD. Looking forward, the company lowered EPS guidance for the year to $2.75-2.90 per share. Big Lots announced a $400 million share repurchase plan to be conducted.
GuruFocus rated BIG with the business predictability rank of 1 star.
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