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Mark Hillman's Capital Management Strategies and Top Holdings: SBUX, DD, XOM, RIG, AAPL

Henry Tan

Henry Tan

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Hillman Capital Management (HCM) is an investment management firm located in Bethesda, Md. Founded in 1998, the firm is headed by Mark Hillman, with over $500 million in assets under management. Hillman, serving as both president and chief investment officer, is a career investment professional with over 20 years of experience. Assets from his former funds, Custom Asset Management and Menocal Capital Management, were merged into the current-day Hillman Capital Management. In terms of HCM’s operations, the firm currently offers two primary funds: the Focused Advantage Fund (HCMAX) and the Advantage Equity Fund (HCMTX).

The stated mission of the firm is to “make money for clients by investing in companies that we believe have sustainable competitive advantages.” To execute their investment vision, the firm stresses three core philosophical principles:

A. Companies with a sustainable competitive advantage will outperform the broad market (benchmark).

B. Market volatility can be utilized to advantageously purchase companies with a significant margin of safety from its intrinsic price.

C. Disciplined and adherence to fundamental valuation techniques will produce long term results.

A comparison of both funds yields the conclusion that each fund essentially utilizes the same investment process, with the sole difference between the funds originating from the type of assets held. While both funds seek long-term capital appreciation, the advantage equity fund also seeks additional income via a consistent dividend stream. The fund screens for equities by looking for the following qualitative characteristics:

A. Competitive industry advantage

B. Strong management that is flexible to change

C. Pricing/purchasing power

D. Barriers to entry

E. Brand/franchise strength and loyalties

F. Quality of services and/or goods

G. New products, new distribution networks, new operational technology, new management

Once the screen is conducted, a list of equities with most of the aforementioned characteristics is rendered. At this point, HCM conducts due diligence by analyzing the financial health of each company. Hillman Capital analyzes in depth the following characteristics

A. P/B ratio

B. P/S ratio

C. P/E ratio

D. Balance sheet

E. Cash flow

F. Book value

G. Sales growth

H. Present value of discounted cash flows

As a result of their investment policies, the firm’s overall performance has been positive. The focused advantage fund will be utilized as the basis of comparison due to its investment profile. In terms of performance, this fund returned 42.45% in 2009, and 14.18% in 2010. Comparatively speaking, the S&P returned 26.46% and 15.06% for the same period. As such, this translates to a relatively large excess return of 16% in 2009, and an underperformance of 0.9% in 2010.

However, when the fund is examined in terms of long-term performance, the fund boasts of a 6.30% 10-year annualized growth compared to the benchmark’s 2.72%. Since the inception of the focused fund, it has returned 18.18% annually, while the S&P returned 8.59%.

Looking forward, Mark Hillman is largely positive about the future economic climate. Hillman credits the current successes in the equity market to US economic growth. Hillman’s thesis originated from current government reports that collectively demonstrated private sector growth and a trend in increased consumption from consumers.

However, Hillman also acknowledged that the rally is a bit extraordinary when one considers the challenges the world faced, from Japan’s numerous disasters, to the civil unrest in Libya. Hillman downplayed the consequences of Libyan oil production for the near future due to “a backdrop of ample spare global production capacity, relatively high US oil inventory levels, and significant slack in both US transportation and refining.” As such, his final view upon the US economy is that “barring significant future economic shocks, the US economy should continue to expand through the remainder of 2011.”

The following charts and tables demonstrate the breakdown of the firm’s sector weights and equity holdings. As of first quarter of 2011, most of the firm’s assets are invested into the technologies, industrials and financials sectors. In terms of significant portfolio rebalancing, Hillman culled 4.40% from telecommunication stocks and 4.20% from industrial stocks in the first quarter. These funds were primarily transferred to financials and technology as attributed in their 4.30% and 3.50% growth. In terms of their equity holdings, the top five holdings comprise 25.63% of all equities held, with a long-term projected growth rate of 10.04% annually. All five holdings saw significant reductions in shares held, with an average of 12.79% reduction per equity.

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Starbucks (SBUX)


Starbucks is an international retailer of specialty coffee through its flagship coffee shops and various retail channels. SBUX closed at $40.35 with a market capitalization of $30.25 billion. Starbuck’s cost of acquisition in the portfolio is estimated at $10.17, yielding a potential capital gain that exceeds 297%. Starbucks is the largest holding of the firm, comprising 5.45% of the all equities held. From quarter to quarter, Hillman reduced his holdings of SBUX by 15.06%.

SBUX has a P/E ratio of 28.25, a P/B ratio of 8.04, and a P/S ratio of 2.79. Revenues for the year totaled $10.7 billion, with a net income of $948 million, an 8.86% margin. The dividend yield was 1.29%, with earnings per share reported at $1.43. In the last 10 years, SBUX has grown its revenues and earnings by 18.5% and 14.7% respectively.

Starbucks recently announced plans to expand further overseas in Finland with its first store opening in Helsinki Airport in 2012. In other developments, analysts at Deutsche Bank reiterated its “buy” rating on SBUX, with a price target of $46, a potential capital gain of approximately 14% from its current trading price.

GuruFocus rated SBUX with the business predictability rank of 3 stars.

E.I. du Pont de Nemours & Company (DD)

E.I du Pont de Nemours provides products and services through their seven operating segments in the following sectors: agriculture, performance chemicals, performance coatings, performance materials, safety & protection and pharmaceuticals. DD’s shares currently trade at $54.85 with a market cap of $50.94 billion. The average cost of acquisition per share of DD is $43.69, yielding a potential capital gain of 25.5%. E.I. du Pont is the second largest holding of the firm, comprising 5.37% of all equities held. From quarter to quarter, DD’s position was reduced by 12.90%.

DD currently has a P/E ratio of 15.31, a P/B ratio of 5.49 and a P/S ratio of 1.53. Revenues topped $32 billion, with a net income at approximately $3 billion, yielding a margin of 9.32%. Earnings were $3.58 for the year, with a dividend yield at 2.99%. In the last 10 years, E.I du Pont de Nemours has grown its revenues and free cash flow annually by an average rate of 4.2% and 17.2%.

DuPont recently signed an aquaculture agreement with AquaChile to collaboratively raise fish and provide nutrition for them. In other developments, DuPont also owned innovation centers in both Taiwan and India, which serves as an area in which representatives from industry, government and academia can meet and collaborate on various projects ranging from consumer devices to renewable energy materials.

GuruFocus rated DD with the business predictability rank of 1 star.

Exxon Mobil (XOM)

Exxon Mobil explores, manufactures and markets crude oil, natural gas and petrochemicals for sale. XOM currently trades at $85.22 per share, with a market cap of $422.57 billion. The estimated cost per share of XOM in the portfolio is $78.12, yielding a capital gain of 9%. Exxon’s position decreased by 12.10% from quarter to quarter, and is the third largest holding of the firm, comprising 4.98% of all equities held.

XOM has a P/E ratio of 12.11, a P/B ratio of 2.81 and a P/S ratio of 1.07. Revenues totaled $383.221 billion for the year, with a net income of $31 billion, yielding a margin of 8.19%. Earnings for the same period were reported at $7.04 per share, with a dividend yield of 2.21%. On an annualized basis, over the last 10 years, XOM has grown its revenues and earnings by 0.5% and 14.3% respectively.

Exxon Mobil is looking to liquidate a significant portion of its retail operations in Malaysia that is valued at approximately $336.5 million. In other news, Exxon Mobil is currently in litigation with Indonesian villagers regarding Exxon’s liability in the killing and torture of the villagers by soldiers at an Exxon natural gas plant. This case was revived after the federal appeals court said that companies are not immune from liability under the Alien Tort Statue.

GuruFocus rated XOM with the business predictability rank of 1 star.

Transocean (RIG)

Transocean is an offshore driller of oil and gas wells operating through two business segments: contract drilling services and other operations. Transocean current trades at $64.44 with a market capitalization of $20.59 billion. The estimated cost per share of RIG is estimated at $68.16, yielding a capital loss of approximately 5.5%. Transocean’s position was reduced by 11.55% quarter to quarter.

RIG has a P/E ratio of 49.85, a P/B ratio of .94, and a P/S ratio of 2.09. Revenues for the year topped $9.5 billion, with a net margin of approximately 10%. Transocean reported earnings of $1.29 per share, with a dividend yield of 4.90%. On average, over the last 10 years, RIG has grown its revenues and free cash flow by 9.6% and 50.8% respectively.

Transocean’s vice president and chief accountant, John Briscoe, recently left to pursue the same opportunity at Weatherford International. Recently, a deep-water drilling rig owned by Transocean in Ghana was evacuated after it started to take on water.

GuruFocus rated RIG with the business predictability rank of 2.5 stars.

Apple (AAPL)

Apple manufactures and markets a variety of products ranging from computer operating systems to flagship household names such as the iPod. Apple currently trades at $393.30, with a market capitalization of $364.55 billion. AAPL was acquired at an estimated cost of $259.91, yielding a capital gain of 51.3%. From quarter to quarter, HCM reduced their holdings of Apple by 12.33%.

AAPL has a P/E ratio of 15.57, a P/S ratio of 5.17, and a P/B ratio of 6.99. Earnings for the year topped $25 per share, with revenues reported at $198 billion, and a profit margin of 5.75%. Historically, over the last five years, Apple has grown its revenues and earnings by 32.1% and 56.4% respectively.

Deutsche Bank recently placed a price target of $500 on Apple, while reconfirming their “buy” rating. According to Bloomberg, Apple is in the preliminary stages of joining the bidding for Hulu, an online content provider.

GuruFocus rated AAPL with the business predictability rank of 1 star.

For more information regarding Mark Hillman’s investment philosophy and his current stock portfolio, please visit:

http://www.gurufocus.com/ListGuru.php?GuruName=Mark+Hillman

Rating: 2.5/5 (10 votes)

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