Bill Nygren and his partners are value investors, and they invest in companies that they believe trade at a substantial discount to what they consider to be the true business value. They believe that, over time, the price of a stock will rise to reflect the value of the underlying company.
In evaluating potential investments, they focus on the following characteristics: A company's stock price and whether it is a significant discount to their estimate of underlying business value, free cash flows and intelligent investment of excess cash, and a high level of manager ownership. They look at each purchase as if they are buying a piece of a business, and not just a stock certificate.
Nygren believes that a concentrated portfolio is superior to a more diversified portfolio because each investment thus has a more “meaningful impact of investment performance.” He says: “focusing on long-term investing minimizes competition and allows the firm to focus on core business characteristics that drive growth and value.”
The firm utilizes in-house research in conjunction with company visits and industry analysis to render a more complete report of prospective investments. A bottoms-up approach is utilized to analyze investments in greater depth, with macroeconomics and market sentiment discarded due to Nygren’s style.
Bill Nygren thinks it is important to avoid value traps while practicing value investing. "A value trap is defined by disappointing fundamentals rather than a disappointing stock price," he added. "It's one of the risks of value investing." "The stock keeps getting cheaper and the outlook keeps getting worse."
Here are some of the stocks that an investor can buy at prices below what Nygren paid
Encana Corp (ECA): Nygren INCREASED his position in the last quarter
Encana engages in the exploration and production of natural gas in the United States and Canada. At the end of 2010, the company reported proved reserves of 13.9 trillion cubic feet of natural gas equivalent, based on forecast prices and costs. Daily production averaged approximately 3.5 billion cubic feet of natural gas equivalent in the third quarter of 2011 at a ratio of 96% gas to 4% liquids.
Encana's size has allowed it to attract external capital from foreign investors and minimize the impact of cost inflation from drilling rig and service providers.
Furthermore, Encana maintains a hedging policy of 50% of current-year production and 25% of the following two years' production to protect cash flows. The company has a mandate: maintain debt levels below 2 times EBITDA and 40% of total capital.
As regards future expectations, Encana's emerging liquids-rich and oil focused plays will help triple liquids production by 2015, and improve returns.
The Allstate Corp (ALL): Nygren INCREASED his position in the last quarter
Allstate is the second-largest U.S. personal lines property-casualty insurer. Personal auto represents an increasing percentage of sales while life insurance contributes less than 10%. Allstate products are sold in North America by independent agents, banks, and brokers, in addition to 13,000 company agents.
In terms of quarter results, total revenues of $8.2 billion increased 4.2% from the third quarter. On the capital management front, the company completed its $1 billion share-repurchase program during the quarter, its first buyback since the financial crisis.
The company's size gives it significant scale and cost advantages. It is able to spread its fixed costs over a larger base, which helps allow it to price policies lower than its competitors.
In addition, Allstate is restructuring its Allstate Financial segment to focus on sales through its captive agents, the core of the company's moat.
The company has eradicated risks from its balance sheet by selling its riskiest investments, placing the company on more secure financial footing.
Aflac Inc. (AFL): Nygren INCREASED his position in the last quarter
Aflac offers supplemental health insurance and life insurance in the two largest insurance markets in the world, the U.S. and Japan. In addition to its cancer policies, the company has broadened its product offerings to include accident, disability, and long-term care insurance. It markets its products through independent distributors, selling most of its policies directly to consumers at their places of work.
In terms of policies, clients, especially in Japan, are very sticky once they purchase them. Persistency in Japan usually clusters around 95% as the average customers stays with Aflac for nearly 20 years.
As the nation gets older they will increasingly demand coverage to augment the state-run health-care system.
In terms of last quarter results, Aflac's debt/equity ratio of around 30% is low relative to other life insurance peers and reasonable considering the firm's consistent profitability. The firm's credit rating is higher than those of its Japanese competitors, fostering an excellent reputation among consumers, an advantage in selling long-duration policies. Aflac's payroll deduction system helps enable it to be the low-cost provider for them.
Best Buy Co Inc. (BBY): Nygren INCREASED his position in the last quarter
Best Buy is the largest U.S. consumer electronics retailer, with 20% of the $180 billion market. Aided by the 2009 acquisition of 50% of Carphone Warehouse's retail operations, the firm now controls around 7% of the $700 billion global consumer electronics market. Best Buy also operates under the Future Shop and Five Star names in Canada and China, respectively, and Magnolia, Pacific Sales, and Geek Squad in the U.S.
An expansive product assortment, a knowledgeable sales force, and increased service offerings help to differentiate Best Buy from mass merchants and online retailers, which compete largely on price.
As regards future perspectives, Best Buy plans to grow global share through unit growth, a differentiated shopping experience, and increased technical services.
Best Buy is in sound financial health. While Debt/capital is about 0.21, EBITDA covers interest expense more than 30 times, and the Cash Flow Cushion is about 1.7 times.
Best Buy has a history of returning cash to shareholders through dividends and share repurchases, including $1.9 billion during the past three years.
The Walt Disney Co. (DIS): Nygren INCREASED his position in the last quarter
Disney owns the rights to some of the most famous characters ever created, including Mickey Mouse and Winnie the Pooh. These characters and others are featured in several theme parks Disney owns or licenses around the world.
Apart from the parks, Disney makes live-action and animated films under several labels and owns ABC, Disney Channel, and ESPN. Disney also owns a 42.5% stake in A&E, The History Channel, and Lifetime Networks. The company generates about 25% of its sales from outside the U.S. Pixar is a valuable asset too.
As regards parks and resorts, this segment is considered a late-cycle business as vacations are generally planned in advance.
Although making movies is a hit-or-miss business, Disney's large library of animated content with popular brands and characters reduces this volatility.
Walt Disney s fourth-quarter 2011 earnings were of $0.59 per share and jumped 31% from the prior-year quarter triggered by strong performances by the Media Networks and Parks and Resorts divisions.
Furthermore, the company has entered into broadcasting agreements to boost the performance of ESPN, the key driver of the Media Networks division.
Disney's financial health is solid. Debt is a low percentage of total capitalization, and EBITDA is expected to cover interest expense more than 30 times on average during the next five years.