“The best way to make money is to buy outstanding companies at a time when market pessimism is driving them to prices that represent compelling value.”
The stated objective of the fund is to “provide long-term capital appreciation” via a value-oriented approach to investing. Auxier believes that compounding is the single most important factor to any investment plan. As such, in order to maximize compounding, they invest in leading companies in “slow-growth” sectors, as their research dictates that these sectors produce the greatest long-term performance. Auxier believes that “the true investor welcomes lower prices as an opportunity to buy quality,” and as such, values margins of safety in his investment decisions. Like most value-oriented funds, Auxier Asset Management sees the following traits as attractive:
1. Strong fundamentals
2. Consistency in operations
3. Sustainable and substantial “moat”/advantage
4. High return on capital
5. Understandable products
6. Strong and honest leadership
7. Substantial free cash flow generation
Unlike most funds, however, Auxier Asset Management has several characteristics rarely seen in the investment world. First, the fund is led by a single manager with a small team, which in itself, grants flexibility and efficiency in decision making. The reason for this is as Warren Buffet once stated at his annual meeting, the “role as chief risk officer is too important to be left to a committee.” However, perhaps the greatest differentiating factor of the fund is that Auxier’s entire personal retirement is invested into it with a policy to “not sell a single share while still manager.” This closely aligns his decision making with maximizing shareholder value, as his personal wealth is greatly impacted by success or failure.
“On each stock, we look to make money from the company’s growth in earnings and intrinsic value, together with an upward revaluation by the market.”
As a direct result of their investment strategies, the fund’s performance has been largely positive. Since inception, the fund has returned 119.29% versus the S&P’s cumulative return of 16.79% for the same period. In terms of annual growth, the fund has, on average, returned 6.78% yearly, while the benchmark returned 2.72%. As of July 31, 2011, the fund has returned 6.86% year to date, while the benchmark has returned 3.87%.
Looking forward, Jeff Auxier stated in his quarterly letter that “negative macroeconomic headlines continue to overshadow positive underlying corporate performance.” However, Auxier acknowledged that this very same negative sentiment has created opportunities to buy high quality companies at attractive prices. Furthermore, Auxier warns of the impending possibility of a huge correction in both the commodity and financial markets. In addition, Auxier notes that “inflation is worsening, especially in Asia and Latin America.” Yet, Auxier believes, there is hope yet, as earnings and cash flows have grown throughout the market. Auxier sees numerous opportunities overseas, as a growing middle class will demand a better diet, and as such, has positioned the fund in positions that can capitalize upon this.
The following charts and tables demonstrate the sector breakdown of all equities held and the top holdings of the firm as of the end of second quarter 2011 as per the firm’s 13-F filings. The fund is currently heavily invested into consumer services, health care and consumer goods. Most of the rebalancing changes that occurred were minor in nature, with no changes exceeding 1.10%. In terms of management capacity, Auxier Management had $251 million invested into approximately 132 equities in the focus fund. The reason, Auxier stated, for holding such a large number of equities is to “track” each equity to see its performance. When fundamentals change for the better, or minor irrelevant news causes the equity to plunge in price, a larger amount of capital will be allocated to the tracked position. The top five holdings comprise 12.82% of all equities held. WellPoint saw the biggest reduction in holdings, while Walmart saw the largest increase. Philip Morris and Coca-Cola remained relatively stable quarter to quarter.
Philip Morris International (NYSE:PM)
Phillip Morris International engages in the development and sale of cigarettes and tobacco products internationally. Flagship brands of the firm include Marlboro, Virginia Slims and Parliaments. PM closed at $69.20 with a market capitalization of $121.55 billion. Philip Morris’s cost of acquisition in the portfolio is estimated at $58.48, yielding a potential capital gain of 18.33%. In Auxier’s aggregate portfolio, PM is the largest holding, comprising 4.02% of all equities held. From quarter to quarter, the position of PM decreased slightly by .07%.
PM has a P/E ratio of 15.84, a P/B ratio of 36.05, and a P/S ratio of 1.82. Revenues for the year totaled in at $67 billion, with a net income of $7.5 billion, an 11.07% margin. The dividend yield currently stands at 3.70%, with earnings per share reported at $4.37. In the last year, PM has grown its revenues and earnings by 12.6% and 18.1% respectively.
Currently, the tobacco industry is in the midst of challenging the federal government’s attempt to place graphic images depicting possible long term effects of smoking. More trouble lies ahead for PM, as Australia is in the midst of requiring all tobacco products to be sold in plain packages, thus eliminating brand differentiation.
Walmart Stores (NYSE:WMT)
Walmart is a retailer operating primarily through their Walmart and Sam’s Club storefronts. Shares of WMT closed at $52.90, with a market capitalization of $183.70 billion. Auxier paid an average price of $54.14 per share, yielding a potential capital loss of 2.29%. As of Q2 of 2011, WMT was the second largest holding of the firm, at 2.42% of all equities held. Auxier increased his holdings of Walmart by 8.44% quarter to quarter.
Walmart has a P/E ratio of 11.96, a P/B ratio of 2.74, and a P/S ratio of 0.44. Their revenues for the year were approximately $421.8 billion, with a reported net income of $15.96 billion, yielding a profit margin of approximately 3.78%. Earnings were posted at $4.42 with a dividend yield of 2.76% per share. WMT has grown its revenues and earnings on average by 10.4% and 11.8 over the last 10 years.
Recently, Walmart won a gender discrimination lawsuit before the Supreme Court. In terms of acquisitions, Wal-Mart completed an investment for a 51% stake in the South African Massmart Holdings, a large retailer of goods similar to Walmart in Africa.
GuruFocus rated WMT with the business predictability rank of 5 stars.
Coca-Cola Company (NYSE:KO)
The Coca-Cola Company owns and markets non-alcoholic brand beverages such as Coca-Cola, Sprite, and Fanta globally. Coca-Cola closed at $68.50, with a market capitalization of $157.28 billion. The average cost of acquisition per share of KO for the firm is estimated at $62.79, yielding a capital gain potential of approximately 9.1%. Coca-Cola is the third largest holding of the firm, at 2.14% of all equities held. Auxier reduced his holdings of Coca-Cola by .07% quarter to quarter.
KO has a P/E ratio of 12.80, a P/B ratio of 5.15, and a P/S ratio of 4.56. Revenues for the year topped $35 billion, with a net income of $11.8 billion, yielding a margin of approximately 33.77%. On the same note, earnings were reported at $5.35 per share, with a dividend yield that currently stands at 2.74%. On average, over the last 10 years, KO has grown its revenues and earnings by 8% and 12.3% annually.
Recent rumors of a pending acquisition of Innocent Drinks, a UK drink provider, have been abolished by representatives from the company. In other developments, Coca-Cola announced a new stream of investments into China, with a $4 billion initiative starting in 2012 to run until 2015.
GuruFocus rated KO with the business predictability rank of 4 stars.
Johnson & Johnson (NYSE:JNJ)
Johnson & Johnson develops and markets a wide range of health oriented products through three primary operating segments: consumer, pharmaceutical and medical devices, and diagnostics. Shares of JNJ closed at $64.28, with a market capitalization of $176.15 billion. Each share of JNJ was acquired by Auxier at an average price of $62.62, yielding a capital gain of 2.65%. Auxier increased holdings of JNJ by 5.54% quarter to quarter.
JNJ has a P/E ratio of 15.39, a P/S ratio of 2.92, and a P/B ratio of 3.17. For the year, JNJ reported earnings per share at $4.18, with a dividend yield of 3.55%. The bottom line income was $13.3 billion on sales of $61.5 billion, a 21.65% margin. In terms of historical growth, JNJ has grown its revenues and earnings by an average rate of 9% and 11.3% over the last 10 years.
JNJ recently received approval from the FDA for a form of Nucynta ER, pain medication for adults. In other news, JNJ plead guilty to a misdemeanor violation investigation due to JNJ’s advertisement of the Risperdal drug, an antipsychotic.
GuruFocus rated JNJ with the business predictability rank of 4 stars.
WellPoint provides managed health benefit plans to their clients via three segments: commercial, consumer and other. Shares of WLP closed at $60.43, with a market capitalization of $21.79 billion. Auxier acquired WLP at an average price of $56.69, yielding a potential capital gain of 6.60%. Holdings of WLP saw the largest decline of the top five holdings, at a reduction of 11.34% quarter to quarter.
WLP has a P/E ratio of 7.99, a P/B ratio of .96, and a P/S ratio of .37. Revenues for the year were posted at $58 billion, with a net income of $2.8 billion, yielding a margin of approximately 4.82%. Their earnings for the year were reported at $7.56 per share, with a dividend yield of 1.65%. Over the last 10 years, WellPoint has, on average, grown its revenues and earnings by 14.6% and 19.9% respectively.
WellPoint recently announced the completed acquisition of the CareMore Health Group, an institution that provides a variety of health related services from podiatry to physical therapy all under one roof. In other news, Fitch Ratings reaffirmed their previous ratings on WellPoint debt due to it’s “…operating performance, very strong competitive position and solid statutory capitalization of its operating subsidiaries”.
GuruFocus rated WLP with the business predictability rank of 4.5 stars.
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