A. Above-average investment performance is strongly linked to error avoidance, so downside risk management is stressed.
B. Equity prices often fall below intrinsic value due to short-term fluctuations such as missing earnings estimates to negative investor sentiments. This in itself creates opportunities for the long-term investor.
C. Excess cash flow is the primary determinate of a company’s intrinsic value due to its ability to increase shareholder value in numerous ways immediately.
D. Forensic analysis of financial statements reveals quality of earnings, overall strategic success, and leadership competency. Adjustments will be made to earnings to eliminate “management biases or unrealistic assumptions.” Hence, the utility of forensic analysis is more important then management guidance.
Olstein Capital reported their top holdings for the second quarter of 2011 in September via their 13-F. In conjunction with his shareholder letters and annual reports, one can determine major shifts in sector holdings, equities, and overall sentiment year to year.
The following table demonstrates the top sector holdings of the firm. In terms of changes between sectors, technology saw the biggest reduction in holdings at 3.90%. Other sectors seeing reductions are technologies, consumer services, health care and industrials. Conversely, consumer goods saw the largest increase in holdings at 4.60%. The reductions in the sectors were counter balanced by a proportional increase in financials, basic materials and Oil & Gas holdings. However, of all the secondary shifts, none exceeded 3% in magnitude.
Olstein’s firm managed approximately $545 million in 92 equities during the second quarter of 2010, and $596 million in 91 equities during the second quarter of 2011, a 9.76% increase. The following tables demonstrate the top five holdings of the firm for each time period. Between both periods, Intel (INTC), Microsoft (MSFT), Macys (M) and Legg Mason (LM) remained as part of the top five aggregate equity holding of the entire firm. Furthermore, it is quite evident that Olstein remained bullish regarding Xerox and Microsoft, as he increased their holdings by 16% and 7% respectively during this period. It can also be said that Olstein’s optimism regarding Intel and Macy’s has subsided greatly, as their positions were reduced by 21% and 19%, while Legg Mason saw a marginal decrease of 1% in holdings.
An interesting equity to note is Collective Brands (PSS). Once part of the top five equity holdings in 2010, Collective Brand's entire position was eliminated from the portfolio in 2011. Collective Brands is a shoe retailer acquired by Payless in 2007. In conjunction with the franchise of Payless behind PSS, Olstein had stated that Collective Brands business model now “presents opportunities for sales, earnings growth, and improved operating margins.” Furthermore, he believed that if margins were not to improve, their focus on paying debt will still produce significant cash flow in the future which falls in line with one of their core philosophies.
As of the second quarter of 2011, the newest positions in the portfolio are:
1. Newell Rubber maid (NWL)
a. Newell Rubbermaid is a marketer of household brands such as Sharpie and Paper Mate. Olstein initiated a position of 390,000 shares at a cost of approximately $17.4 per share.
2. Nike Inc. (NKE)
a. Nike is a specialty shoe retailer. Olstein purchased 40,000 shares at approximately $81.97 per share.
3. CTS Corp (CTS)
a. CTS manufacture and develop electronic sensors and components. Olstein purchased 57,000 shares at approximately $9.95 each.
4. Schweitzer-Mauduit (SWM)
a. SWM is a producer of specialized paper such as cigarette papers. The firm initiated this position with the purchase of 4,500 shares at $51.04 each.
5. Ferro Corporation (FOE)
a. The Ferro Corporation produces and markets chemicals and materials used in a variety of industries such as electronics. Olstein purchased 5000 shares at an average cost of $13.68 each.
The positions that were completely eliminated from the portfolio at the end of the quarter are as followed:
1. Jones Group (JNY)
a. Jones Group is a specialty retailer. 554,000 shares were sold between Q1 and Q2 of 2011 at an average price of $12.46.
2. Conmed Corporation (CNMD)
a. Conmed Corporation specializes in the development and sale of surgical and cardiac monitoring devices. To close out the position, 12,000 shares were sold at an average price of $27.54.
3. Collective Brands (PSS)
a. PSS is a shoe and accessory retailer. 388,000 shares were sold at an average price of $18.05 to close out this position.
4. Molson Coors Brewing (TAP)
a. Molson Coors is a holding company with a portfolio of brands including Coors and Carling. 90,000 shares were sold at an average price of $46 to eliminate this position.
5. Walgreens (WAG)
a. Walgreens is a national pharmaceutical retail chain. Olstein sold 120,000 shares of Walgreens after holding it 1 quarter to eliminate this position.
Economic Outlook Shift
In his 2010 outlook, Olstein noted that European sovereign debt and banking crises renewed fears of a worldwide economic recession, and illuminated the possibility of a double dip recession. However, Olstein did not believe that a double dip recession was to occur, but that the road ahead will be at the very least, “bumpy”. Olstein also stated that many top companies were trading below 10 time’s forward earnings, and that low P/E ratios were characteristics of many firms, reflecting a negative investor sentiment. As such, he felt that prices at that time were low enough to yield both a margin of safety and attractive rate of return. His final outlook was that earnings and balance sheets will improve, interest rates will increase, and that while stock prices will continuously change in response to Wall Street’s analysts, intrinsic value will remain constant. Thus, he was relatively optimistic regarding investor conditions in spite of global macroeconomic events.
In his 2011 outlook, Olstein notes that the “prospective collapse of individual economies with the Euro-zone has dominated headlines” and that the US’s deficit and economic growth has continued to unraveled investor sentiment. In response to this, Olstein states that “over-reliance on macroeconomic predictions is often misguided” as investors should invest not in market sentiment, but in the growth of high quality companies. Interest rates still remain low and that according to Olstein, the “market is selling at a 10% or greater discount to fair value”.
However, as predicted in 2010, Olstein stated that overall corporate balance sheets have improved significantly if not considered to be “in excellent shape with many companies flush with cash and…little to no debt loads”. Furthermore, Olstein feels that cash flow and earning yields of these companies are significantly higher then government bond yields, with growth predicted in the future, and thus, a superior investment. His final outlook is his affirmation of his belief that the market will reward companies along with their investors which have practiced “sound capital management, focused their priorities and deliver high-quality earnings to shareholders”.
The overall assessment of Robert Olstein is that his sentiments remained generally constant from Q2 of 2010 and Q2 of 2011. In terms of sector changes, none were too dramatic or unseen under industry standards. The fall of Collective Brands from the portfolio is perhaps the most interesting change seen in this time period. His assessment of the economy is generally optimistic, as he sees this environment as an excellent chance to purchase high quality companies.
More in-depth information regarding Robert Olstein can be found in the following article: