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Ask Top Guru Donald Yacktman Your Investing Question

Fox Business

Holly LaFon

255 followers
GuruFocus is interviewing investing guru Donald Yacktman, co-CIO of the $6.3 billion Yacktman Funds, in February, and will be asking readers’ questions. To ask a question, enter it in the comments section below. Donald Yacktman had another remarkable performance in a volatile market. For 2011, while the S&P returned 2.1% and the average diversified U.S. stock fund returned -2.9%, the Yacktman Focused Fund and the Yacktman Fund returned 7.4% and 7.3%. In the last five years alone his cumulative return is 47.2%, compared to -3.1% for the S&P 500. He has also beaten 99% of his peers in the last three, five, ten and fifteen-year periods.

Portfolio Positions

The disciplined investors at Yacktman Funds have stuck with the world’s highest quality businesses, most of which offer products or services integral to society. Their top holdings are PepsiCo (PEP), News Corp Cl. A (NWS), Procter & Gamble (PG), Microsoft (MSFT), C.R. Bard (BCR), Cisco Systems (CSCO), Sysco Corporation (SYY), Coca-Cola (KO), Pfizer (PFE) and U.S. Bancorp (USB).

“I’ve been doing this for over forty years, and I can’t remember another period of time where I’ve seen so many high quality, profitable businesses selling at prices relative to the market this cheaply,” Yacktman said in an interview recently.

In the fourth quarter, Yacktman’s biggest additions to his holdings were Research In Motion (RIMM) and Avon Products (AVP). He also surprised followers by venturing into financials, with new positions in Goldman Sachs (GS), Bank of America (BAC), State Street Corp. (STT) and Northern Trust Corp. (NTRS).

How He Does It

Businesses that Yacktman likes will have:

· High market share in principal product and/or service lines

· A high cash return on tangible assets

· Relatively low capital requirements allowing a business to generate cash while growing

· Short customer repurchase cycles and long product cycles

· Unique franchise characteristics

The price must also be less than what an investor would pay to buy the whole company, and they will wait for the lowest possible price to buy a stock. The company describes their approach as “objective, diligent and patient.”

A side note about Donald Yacktman is that he was often criticized for his contrarian moves during the tech bubble. While many other managers were going headlong into Internet stocks, he positioned his portfolio in undervalued small caps, believing that Internet companies were dangerously overvalued. When the bubble burst, he was proved right. His fund then had a streak of beating the market from 2000-2002, while the S&P 500 produced negative returns.

About Yacktman

Yacktman founded Yacktman Asset Management Co. in 1992, after serving for 10 years as senior portfolio manager of the Selected American Shares mutual fund, and was named Portfolio Manager of the Year by Morningstar in 1991. From 1968 to 1982, he was a portfolio manager with Stein Roe & Farnham. He holds a B.S. magna cum laude in economics from the University of Utah and an MBA with distinction from Harvard University.

Asking a Question

GuruFocus will speak with Donald Yacktman this month and ask him our readers’ questions. To ask your questions, enter it in the comments section below.

See Yacktman’s complete portfolio here, and also check out his Undervalued Stocks, Top Growth Companies and High Yield stocks.


Rating: 4.3/5 (12 votes)

Comments

The Science of Hitting
The Science of Hitting premium member - 2 years ago
A couple of potential Q's:

"Whitney Tilson of T2 Partners has said that Microsoft should borrow against their O.U.S. cash, and use the billions in debt proceeds to seriously increase their cash to shareholders via dividends and buybacks; what are your thoughts on this proposal?"

"How do you think about PepsiCo's long term growth potential? Are you concerned about the potential for value destruction as management continues the push towards "Good For You" products (the JV with Mueller in yogurt that was discussed in October of last year comes to mind)?"

"Procter & Gamble is currently dealing with some competitors who are cutting prices in the face of commodity cost increases in an attempt to grab share, and has announced price increase reversals in certain categories as a result; what are your thoughts about P&G's moat in terms of some increasingly commodity-like industries such as hand soap, cough syrup, etc, which are subject to private label competition? While innovation can win on the higher end (Tide Pods, for example), how do you think they'll fair with their lower-end brands as retailers continue to push their own products?"

Thanks in advance for your time Mr. Yacktman; it is much appreciated.
cyrano
Cyrano premium member - 2 years ago
It's a pleasure to have the opportunity to ask you a question. How much extra should you pay for return on assets? i.e. for two nearly identical companies, one has a consistent ROA of 15% and another one has a consistent ROA of 20% what should be the percent difference in price?
kirrct
Kirrct - 2 years ago
Thank you for taking the time to share your wisdom and experiences. You mentioned recently that purchasing pepsi at today's prices is like shooting fish in a barrel. You have since significantly increased your position in Avon. Can you please share your thoughts on Avon including how you would characterize the investment opportunity in AVP at today's prices? Thank you
ksegounis
Ksegounis - 2 years ago
Concerning RIMM, what is your thesis behind accumulating more. The company pipeline of products are not good, there has been management change and finally customers are switching to the Apple products. What are they required to do to increase their competitive advantage and increase market share?

Thank you
akhund2008
Akhund2008 - 2 years ago
With growth slow down in US & Europe slipping into recession Emerging Markets particularly Asia may offer relatively less volatile & attractive return on equity investment. Should recession in Europe become severe would you reduce your holdings in US/Europe equity & move into emerging markets and if so which ones & why?

Thank you for your valuable time.
dew_nay
Dew_nay - 2 years ago
One of your largest holdings is Pepsi. Besides paying a decent dividend, what makes it a compelling case for a huge investment when the growth rate seems to be in the low single digit? With input cost not likely to pull back and a challenging environment to make it up by raising prices, do you see this trend reversing or how and why Pepsi may be able to overcome this?
mati
Mati - 2 years ago
Dear Mr Yacktman,

According to the last YAFFX report the second largest position is News Corp. I guess the scandal with the UK news created the opportunity can u please share the fundamentals that attract u to invest in this company?

As well if u can share your perspective on the publishing segment, they have 8.8 B in revenue from Publishing or 26% of total revenue. As an investor that buy position for the long term aren't u concern with this side of the business? Many thanks!!!

Henrik G
Henrik G - 2 years ago
Mr Yachtman, ever since I started managing money 10 years ago you have been an incredible inspiration to me. Apart from the very likable style of acquiring quality business with lowly valued share prices, what has really struck me is the endurance of your holdings. It is one thing to buy typical "for-the-long-run companies (such as PepsiCo or P&G), it is an entirely different thing to really hold them for a long time, as they tend to get out-of-favor while racier stocks grab more attention! My question: when you work your way to your forward, total free cash flow return (needing to be double digit), how do you decide which growth rate to add to today´s normalized free cash flow yield? Take Pepsi: on my numbers they have a normalized free cash flow of about $7bn, translating into a FCF yield of about 7% then. Boradly speaking, how do yoy think around the "g"-addition to that number (in general, not merely for Pepsi that is), as it is a very "slippery" number to deal with in my opinion. Thank you so much
charles.wilton
Charles.wilton premium member - 2 years ago


Would you please share with me how you calculate the forward expected return rate and how do you price for change with your tech stocks?
Sumflow
Sumflow - 2 years ago
What does he think of natural gas pipelines, and does he think congress owns partnerships?
dcmturin
Dcmturin premium member - 2 years ago
Do you consider the sheller p/e market valuation method as a valid, accurate measure of the market?
shb600
Shb600 premium member - 2 years ago
How exactly do you calculate forward rate of return? How do you calculate risk-adjusted forward rate of return?
tsharp
Tsharp premium member - 2 years ago


You added to your position in Avon. When evaluating Avon, what consideration do you give to if/when Avon cuts their dividend?

How concerned are you that it appears that Avon is funding some of its dividend by issuing debt?

Thanks.
graemew
Graemew - 2 years ago
Dear Mr Yachtman,

I have previously read some very interesting articles in which you discussed how you calculate the forward rate of return. However I would like to ask if you could go into a bit more detail, and then also indicate how you adjust for risk....and whether the risk adjustment is purely a subjective calculation. Thank you very much in advance, for taking the time to give this interview.
wvedder
Wvedder premium member - 2 years ago
Mr. Yacktman,

What do you think are the primary reasons why Wal-Mart's P/E ratio has declined so consistently over time (practically a straight line since 2000)?

Thank you very much.
mitsutaka
Mitsutaka - 2 years ago
Mr. Yacktman,

What is the level of required return you demand for the best business today?

When you normalize earnings, how do you treat and incorporate one or two years of loss a company experienced in the past?

Best regards,

quanttrader714
Quanttrader714 - 2 years ago
How do you quantify long term risk adjusted rate of return when evaluating a stock? Thanks!
Cornelius Chan
Cornelius Chan - 2 years ago
What are your most important (and most used) valuation ratios? Which ones do you use first, second and so on? A list of 10 ratios in order of use would be nice! Thank you.
makahadan
Makahadan - 2 years ago
Mr. Yacktman,

Congratulations on a phenomenal track record. I own YAFFX. Have you any thoughts

on how you can avoid the tendency of most successful fund managers to revert toward the mean

in their results the longer they manage a fund?
anders
Anders - 2 years ago
Mr Yacktman,

With current central bank measures to stimulate the economy, I believe there is a high probability of substantial inflation coming.

Under the heading "Businesses that Yacktman likes will have" the second row states:

"A high cash return on tangible assets"

What type of business can best adjust its price level due to inflation, while having minimum reflection on its tangible assets?

Best Regards,
russb52
Russb52 - 2 years ago
Since capital gains are taxed at a lower rate than dividends, why do your funds pay dividends? Why not reinvest them automatically like Berkshire Hathaway?
catherinec
Catherinec - 2 years ago
Mr. Yacktman,

Our son is 21, just returned to school and works part-time. He has a Roth Ira worth a little over $11,000. It is currently in a Morgan Stanley Smith Barney Bank Deposit Program which earned a giant .04 last quarter and charges a $35 quarterly fee. He wants to get it out asap! What would you recommend for him to invest in?

Thanks!
nodebtlowstress
Nodebtlowstress - 2 years ago
Mr. Yacktman,

Do you think stock options as a form of employee incentives are acceptable? If you do not feel they are appropriate, do you ever encourage senior management of stocks that you own to quit paying them. Stock options seem to have an inverse relationship to share re-purchases to me?
tgblake1
Tgblake1 - 2 years ago
(Question from T. Blake, Blake Brothers Capital) Don, thank you for leadership and guidance at the Yacktman Funds. My son is enjoying his college years at Texas A&M utilizing our investment returns from your funds. Keep up the good work!

Question - I understand that Pepsi is a core holding at Yacktman Funds. I've reviewed the numbers, key metrics and reports and concluded that management's ability to attain significant cost savings in the months and years ahead is job #1 for Pepsi management. You must be very supportive of CEO Indra Nooyi and her team. Would you give her an "A" grade today? Give me the name of one company from prior decades that Pepsi reminds you of today. And why? Thank you.

ValuedWealth
ValuedWealth - 2 years ago


Don,

There has been so much written analyzing Apple and its stock. Many seem to believe it is still massively undervalued. How do you view Apple and what is your opinion of the stock price?

Please leave your comment:


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