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These Are the Highest-Quality Stocks from Ken Heebner

February 16, 2012 | About:
Mara Kohn

Mara Kohn

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Capital Growth Management is the money management firm set up by Ken Heebner in 1990. The firm is based in Boston and is engaged in providing services to charitable organizations, pension and profit sharing plans, investment companies and high net worth individuals. In addition, the firm is a public equity market investor in the U.S.

Before co-founding Capital Management, Mr. Heebner worked for A & H Kroeger as senior economist, Scudder and Stevens & Clark as vce president and mutual funds manager. Mr. Heebner is also a chairman of CGM Capital Development Fund, CGM Advisor Targeted Equity Fund, CGM Mutual Fund and CGM Realty Fund.

In terms of investment strategy, Heebner is a very famous hedge fund manager who gained terrible returns until the 2008-2009 crash. In 2000, he surpassed the S&P 500 index by 63% points and in 2002 and 2004 he beat the market. In 2003, he managed to beat the S&P 500 again, this time by 38 percentage points. In 2005, he beat the market again by 20 percentage points. In 2006, he did not perform well but in 2007 he killed the S&P 500 by returning 80% in 2007.

Ken Heebner is considered a growth-oriented investor recognized for making bold and swift sector calls. He is highly independent and likes making large bets based on his convictions.

Here are his highest quality stocks:

Ralph Lauren Corp. (RL): Polo Ralph Lauren is one of the leading retailers of premium lifestyle merchandise in the United States. It operates through the recognized brands Ralph Lauren Purple Label, Ralph Lauren Collection, Black Label, Blue Label, RRL, RLX and American Living.

RL has been reacquiring licenses for some of its brands. The reacquisition of such licenses is a revenue growth driver and enables margin expansion. Most importantly, it enables the company to control its image. The company permanently tries to give incentives to its department stores to have space available for its merchandise.

Why did Ken Heebner turn to Ralph Lauren? The answer is simple. It has significant opportunities to expand in Europe and Asia through its full-price retail stores. Actually, it has obtained control of its Southeast Asian operations, which enable the company to reintroduce the brand over time. This presence should also bring higher returns. In addition, through its premium style stores the firm has been able to gain control of the price of the goods it sells.

In terms of quarter results, the beginning of 2012 represented earnings of $2.46 per share surpassing the Zacks Consensus Estimate of $2.24 and increased by 18% vis-à-vis the $2.09 reported in the prior-year period. This increase in earnings per share was driven by a strong performance. Moreover, Ralph Lauren has raised its revenue growth guidance for this new fiscal year in a 20% range. Therefore, the company has also lowered its prior expectation of contraction in operating margin to 50 basis points.

Most importantly, RL holds cash and investments of $979 million and has a very low debt-to-capitalization ratio. It stands at 8.2%. This solid cash position and strong debt-free balance sheet enables the company to pay out dividends, and carry out share repurchases and strategic acquisitions.

Potash Corporation of Saskatchewan Inc. (POT): POT is one of the largest fertilizer companies in the world. Potash does not only discover minerals, but it also transforms them into fertilizers. The customer base is made up of industrial companies, agricultural cooperatives, as well as retail customers.

Potash Corp. is carrying out deals to develop. Indeed, it is expanding operations in the New Brunswick plant. The project is expected to be finished by 2013.

Although management considers that it will find difficulties in launching projects in the future due to the rise in prices, Potash has a leg up on competitors. While the latter are in the planning stage, Potash has completed or is in advance position regarding projects.

Despite the poor forecasts in terms of the economic situation in the United States and the debt in Europe, there has been an increasing demand in a number of nutrients POT provides, especially potash.

Heebner turned to POT thanks to the results that it has been reporting in the last quarters. Potash is trading at $45.5 and has a market cap of $39 billion. Trailing 12-month P/E ratio is 13.4, and forward P/E ratio is 11. P/B, P/S, and P/CF ratios stand at 5.2, 4.6 and 12.5, respectively.

Operating margin is 46%, and net profit margin is 34%. Debt/equity ratio is 0.5. Most importantly, Potash supports dividend payout to shareholders. Indeed the current yield is 0.6% with a payout ratio of 7%.

Polaris Industries Inc. (PII): Polaris designs and manufactures off-road vehicles, including all-terrain vehicles and side-by-side vehicles for recreational and utility use, snowmobiles, and on-road vehicles, including motorcycles and low-emission vehicles, along with the related replacement parts, garments and accessories.

Polaris is recognized for its reputation, innovation and the incorporation of new product lines. All this is supported by the strong performance of the company, particularly in a difficult environment. Heebner included the firm in its portfolio because it has been performing really well reporting double-digit revenue growth thus outperforming other consumer industries. Furthermore, Polaris is considered a great executor. It has been able to increase gross margin in both 2009 and 2010 when volumes were contracting.

ROICs have been higher that capital cost, thus generating more economic profits. Polaris has good future expectations in terms of growth.

Public Storage (PSA): Public Storage is the largest self-storage REIT in the world: in the U.S. and seven countries in Western Europe. The company is very well known in self-storage.

Inflation and the increase of public storage rents could affect shareholders, as payments of dividends for preferred stock remain fixed. Diversification in geographic expansion restricts the extent to which economic downturns can affect the company’s overall profitability.

PSA has a flexible balance sheet and almost no debt. This allows the company to take advantage of opportunities and grow its asset base. Furthermore, the low debt level in its balance sheet is translated into little refinancing risk. In terms of quarter results, core FFO per share was $1.56 compared to $1.35 last year, a 16% increase. This growth was driven by an increase of 8.6% in net operating income adding $0.13 per share due to higher revenues of 5.8% and flat operating expenses.

Kohl's Corp (KSS): Kohl is a department store operator in the United States. Its products are targeted at middle-income and value-focused consumers. These products include apparel, shoes, accessories and housewares. Apart from national brand-merchandise, KSS also offers private-label and exclusive-label goods which account for 50% of the total sales.

Heebner decided to invest in KSS because it is permanently launching expansion initiatives. Indeed now, KSS is focused on expanding on new and existing markets. The purpose is to increase the sale of private-label and exclusive brands, which will surely bring more gross margins. Kohl particularly differs from other department stores across the industry for its off-the-mall format. Other department stores are mall-format, a style that consumers find less and less convenient.

Financially speaking, Kohl has been able to recover from the different missteps it has taken. Margins and inventory levels have been improving since 2003. Most importantly, Kohl's has introduced new exclusive brands to raise its offering.

Rating: 3.3/5 (10 votes)

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