John Hussman's Top Conviction Picks
Dr. Hussman manages Hussman Strategic Growth Fund, which invests primarily in U.S. stocks, and Hussman Strategic Total Return Fund, which invests primarily in U.S. Treasury and government agency securities.
In the last ten years, his Hussman Strategic Growth Fund averaged 9.9% a year, and has a cumulative gain of 118%, while the S&P500 lost more than 23%. For the 12 months ended Oct. 31, 2008, his fund lost 0.3%, while the S&P500 lost more than 40%.
Prior to managing the Hussman Funds, Dr. Hussman was a professor of economics and international finance at the University of Michigan.
Hussman looks at two principles before investing: valuation and dimension. Favorable valuation means that stock prices appear reasonable in view of the stream of earnings, dividends, revenues and cash flows expected in the future. Dimension is the quality of market action, which considers the behavior of a wide range of securities and industry groups, in an attempt to assess the economic outlook of investors and their willingness to accept market risk.
These two principles make up four basic “market climates” associated with various combinations of valuation and market action. For stocks, in order of most favorable to least favorable, these climates are:
· favorable valuation
· favorable market action
· unfavorable valuation
· favorable market action
· favorable valuation
· unfavorable market action, and
· unfavorable valuation
· unfavorable market action.
In the most favorable climates, Dr. Hussman will typically hold an aggressive allocation to market risk, while in the least favorable climate, he will typically attempt to remove the impact of market fluctuations from the portfolio through hedging or reduction in the average maturity of bond holdings. The most defensive position is a fully hedged position in which the entire value of long positions is hedged.
Ross Sandler, from RBC Capital Markets has published an article analyzing Dr. Hussman and his company and said “Dr. Hussman´s Market Climates are very reasonable. Indeed, Hussman ability to invest according to them has enabled him to pick up the best companies.”
His last top five conviction picks have been the following:
Exxon Mobil Corporation (XOM): Hussman INCREASED his position last quarter
Exxon is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2010, it produced 2.4 million barrels of oil and 12.1 billion cubic feet of natural gas a day. The company is the world's largest refiner, with 36 refineries, and it is one of the world's largest manufacturers of commodity and specialty chemicals.
With S&P's AAA credit rating, ExxonMobil's financial health is beyond reproach. Cash flow from operations remains sufficient to finance capital expenditures while increasing dividend payments and buying back stock. Shareholder return is a focus of management. Over the past five years, Exxon paid almost $40 billion in dividends and repurchased $130 billion worth of stock.
With high-performing operations and global integration, Exxon is one of the best-positioned firms to weather a drop in commodity prices.
Newmont Mining Corporation (NEM): Hussman INCREASED his position last quarter
NEM is the world's second-largest gold producer. In 2010, the firm produced 6.5 million ounces of gold and 600 million pounds of copper. North America accounted for 30% of consolidated gold production, South America for 23%, Asia Pacific for 39% and Africa for 8%.
Newmont has a strong balance sheet. At year-end 2010, total debt amounted to $4.4 billion while total cash stood at $4.1 billion. The company generated $5.2 billion in EBITDA in 2010.
2011 quarterly records revenue at $2.7 billion, operating cash flow at $1.3 billion and net income at $635 million adjusted. Moreover, it increased its dividend again for the sixth straight quarter to $0.35 per share based on its average realized gold sales price for the third quarter of $1,695. This is a 133% increase over the year-ago quarter.
CEO Richard O'Brien has made significant progress streamlining Newmont. Newmont has largely shied away from accepting political risk.
Panera Bread Company Inc. A (PNRA): Hussman kept his postion UNCHAGED
Panera Bread owns and franchises bakery-cafes under the Panera Bread, Saint Louis Bread Co., and Paradise Bakery brand names, specializing in freshly baked goods, made-to-order sandwiches, soups, salads and custom-roasted coffees. As of September 2011, the firm had more than 1,500 bakery-cafes, including more than 715 company-owned and almost 800 franchised locations.
Panera is doing great financially speaking. As of September 2011, the company held about $181 million in cash and short-term investments with no long-term debt. The company can internally fund growth initiatives while also returning cash to shareholders through share repurchases.
Panera produces stable cash flow because of long-term franchisee agreements. Franchisees typically pay about 5% of gross sales from each bakery-cafe to the firm. It has a primeval balance sheet and generates sufficient cash flow to fund its expansion internally. Other cash uses include share repurchases and possible strategic acquisitions.
The Coca-Cola Co (KO): Hussman INCREASED his position last quarter
Coca-Cola is the world's largest manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups. The firm also sells a variety of noncarbonated drinks such as water, juices, and teas. Most of the company's revenue is generated outside the United States. This means that Coca-Cola is a worldwide company.
Coke's core brands include Coca-Cola, Sprite, Dasani, Powerade and Minute Maid.
Coke's financial health is solid with a free cash flow of around 20% of revenue and EBITDA to cover interest expense 16 times on average over a 10-year forecast period.
Coca-Cola's distribution network extends to more than 200 countries, thus making it extremely difficult and costly for new entrants to replicate. Coke has recently extended its product portfolio into growing noncarbonated beverage categories in response to changing consumer preferences.
The company's products represent around 3% of the estimated 50 billion beverages that are served every day around the world, creating global familiarity with its brands.
AstraZeneca PLC (AZN): Hussman DECREASED his position last quarter
AstraZeneca was formed in 1999 by a merger between Astra of Sweden and Zeneca Group of the UK. The company sells branded pharmaceutical products across several major therapeutic classes including gastrointestinal, cardiovascular, respiratory, cancer, neuroscience and infectious disease.
Strong cash balances and robust cash flows provide large space for acquisitions and share buybacks. AstraZeneca has a robust 6% yield which has increased significantly over the last five years.
In addition, AZN has 8 drugs with over $1 billion in sales and has 88 projects in clinical trials. AstraZeneca is AA- rated and its balance sheet shows a low beta (.58) and a forward P/E under 7.
The company is expanding its biologic presence in pipeline products. Astra doesn't have the largest presence in emerging markets but the company is growing the fastest in these territories. This should help offset patent losses in developed markets.