Ashton has an investment strategy which is based on value principles. He goes for stocks that are available at compelling prices and basis his decision on the business’ true value, cash flow generation, management quality, and the competitive advantages of the underlying businesses. In 2010, the Tilson Dividend Fund returned 20.64% versus the S&P 500’s 15.1%. In 2009, the fund returned 43.98% versus the S&P 500’s 26.5%.
Here are some of his quality stocks:
Medtronic Inc. (MDT): MDT is the largest medical equipment maker. Its main markets of leadership are medical equipment, core heart devices, spinal products, insulin pumps, and neuromodulators for chronic pain. MDT has the intention to be at the head of the large markets. In order to do so, it has taken steps into the right direction to acquire emerging technology to treat certain problems such atrial fibrillation, transcatheter heart valves, and treatment-resistant hypertension. Medtronic has always been successful in applying familiar technologies, for example, using the implantable electronic-stimulation technology in pacemakers to deal with fecal incontinence, chronic pain, and symptoms from advanced Parkinson’s disease, among other diseases.
Why did Zeke Ashton invest in MDT? MDT has a very attractive dividend yield. It stands at 2.6%. This means that the company easily generates income. Taking into account the Valuentum Dividend Cushion, MDT´s score is 2.8 in terms of dividends. This means that it has a nice “cushion”. This measure is a ratio that sums the net cash of a company and its expected future cash flows in a 5-year period. Such amount is then divided by future expected dividends. If the score is 1 then, the company is able to pay out dividends. MDT has surpassed said measure.
As regards shares, analysts consider that the company is undervalued with a low risk of capital loss.
Gap Inc. (GPS): Gap's presence worldwide has helped it become an important specialty retailer selling casual apparel for men, women, and children. It has many brand names such as Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. The firm can be found in the United States and in Canada, Western Europe, Japan, the Middle East, Southeast Asia, Eastern Europe, and other parts of the world.
Thanks to Customers' loyalty and good expense management, Gap is able to generate healthy profit
margins and strong cash flow. Gap’s balance sheet is in good condition, with no long-term debt and a healthy cash balance. Most importantly, the company is correctly using cash by repurchasing shares and paying out dividends. During third-quarter 2011, the company utilized a total of $645 million and $55 million, respectively. These elements were considered by Ashton at the time of investing.
The opening of new stores and the launching of e-commerce business in China, Italy and Australia, reflect the firm’s intention to boost international operations, explore the overseas market even more and generate 30% of total sales from overseas operations and online business by 2013. Gap intends to triple its store count in China from 15 to approximately 45 during the next 12 month period.
Now, the company is focused on closing and consolidating square footage at GAP and Old Navy. The purpose is to improve customer experience and enhance productivity. In addition, it plans to close some of Gap North America´s stores by 2013 and aggressively expand internationally.
Last but not least GAP has entered into a new $500.0 million revolving credit with a group of banks including BofA Merrill Lynch, Citigroup and JPMorgan. The company will also get a five-year term loan facility of $400.0 million.
P.F. Chang's China Bistro, Inc. (PFCB): The Asian niche is the preferred market for P.F. Chang to operate its restaurant concept. This concept is divided into two: The Bistro chain and the Pei Wei concept. The former consists of Chinese cuisine in a contemporary setting. The latter offers Asian cuisine, with counter service and takeout food. In Bistro, the average check is $20-$21 while in Pei Wei it is between $9 and $10.
The fast-growing Asian segment of the restaurant industry is P.F. Chang’s favorite market since it has become the market leader. Zeke Ashton invested in the company because P.F. Chang has very good partnership and management programs. For example, top restaurant personnel can have shares in the profitability of their restaurants and its company’s management team is considered the best in the industry.
Diamond Offshore Drilling, Inc. (DO): 46 rigs drilling around the world for natural gas and oil constitute some of DO’s assets. It is an offshore contract driller which contracts with some of the largest oil and gas companies to drill in places such as Brazil and Australia.
Some deepwater discoveries offshore pave the way for continuous demands for Diamond’s deepwater rigs for years. The company encourages a shareholder-friendly philosophy. The net asset value of Diamond’s fleet is believed to be about $9.3 billion, or $67 per share.
There are many elements that Zeke Ashton took into consideration to rate Diamond Offshore as a good buy. First DO has solid fundamentals with significant free cash flow potential and a clean balance sheet, which enhances the possibility of further share buybacks and special dividends in the following years. Secondly, Diamond has entered into several new agreements to contribute with total revenue of $1 billion and represent 14 years of contract drilling backlog. Furthermore the improving regulatory environment in the GoM region will enhance the company´s domestic fleet performance. Thirdly, Diamond is making efforts to improve its presence in emerging markets. Finally, the companies’ Brazilian backlog has experienced solid growth with Ocean Valor and the Ocean Baroness from Petrobras.
Cisco Systems Inc. (CSCO): Thanks to a growing demand of Internet traffic, demand for Cisco’s networking gear will steadily grow. This can also be helped by voice, video, and data networks converge toward IP. UCS servers are showing signs of success and enable Cisco to set its footprint in customers´ data centers and to deepen customer relationships.
Why is Cisco of interest for Zeke Ashton? Cisco is the largest player in networking. Although during the recession Cisco lost market share in the data center Ethernet switch market, it has been able to recover it in 2010. Furthermore, it gained space in the enterprise routing segment and now it accounts for 78.2% of the market. It also maintains its leading share in the WLAN segment. There is no doubt that CSCO is a leader even if it loses a share of the market to competitors.
Cisco has launched the Unified Computing System (UCS). It is a system that can transform data centers. The purpose of the system is to reduce ownership cost by making data centers more network-centric and by reducing the number of computers or servers required. The UCS should simplify the operation of data centers and improve its flexibility and scalability. To launch the system the company negotiated with Accenture, BMC, EMC, Intel, Microsoft, NetApp, Novell, Oracle, Red Hat and VMWare.
Cisco has been expanding into market adjacencies. The purpose of Cisco is to exploit opportunities in adjacent markets. The company has focused on three segments: smart connected communities, small business and smart grids. As regards the first segment, Cisco has partnered with Gale International to have access to the Korean market.
Cisco has been able to increase orders, particularly in Europe. Commercial was the biggest driver in the U.S., with Enterprise following close behind.
Finally, Cisco has decided to apply a restructuring policy to exonerate management from making public announcements and complying with several laws. Most importantly, Cisco’s current share price assumes inflationary growth and 8 points of margin deterioration over time. With nearly $5 per share in net cash and more than $1.60 per share in normalized free cash flow, downside risk is limited at current levels. CSCO has a good and strong balance sheet with around $35.3 billion in highly liquid short term investments and another $4.9 billion in cash. Total debt is negligible and the debt-to-total capital ratio is just 31.4%. Management returns value to customers through regular share repurchases.