Mr. Olstein's investment strategy is based on analyzing the company's financial strength and potential downside risk rather than looking at the numbers of the financial statement. He considers that the Fund´s objectives are better met by minimizing investment errors. This is his “defense first” approach. According to the approach, he does not turn to companies with the highest appreciation potential without regard for downside risk. Olstein tries to invest in companies that generate more cash flow than what is necessary to support the business, hold strong balance sheet fundamentals consistent with his approach and are trading below private market value. Robert Olstein sells a stock when the stock appreciates to his appraised value.
Here are some of his top holdings:
Intel Corporation (INTC): INTC is a semiconductor chip maker company. The Company develops advanced integrated digital technology products, primarily integrated circuits, for industries, such as computing and communications. The Company's reportable operating segments are PC Client Group (PCCG) and Data Center Group.
Although ARM Holdings (ARMH) dominates the smartphone and table semiconductor market, Intel is making efforts to change that trend. Indeed, it has announced several deals with Lenovo (LNVG), Motorola (MMI) and China Unicom (CHU) to provide processors for their mobile devices. In addition, Intel, jointly with other companies has reported that the flood in Thailand has affected their results. If earnings are worse than expected, the stock price will definitely drop. Based on this situation and the fact that the economic conditions may get worse, investors should wait for a recovery.
Nevertheless, INTC has a strong balance sheet and an interesting dividend rate that turn Intel into an attractive pick. Below there is important data about it:
- Current share price: $25.14
- The 52 week range is $19.16 to $25.78
- Earnings estimates for 2011: $2.37 per share
- Earnings estimates for 2012: $2.38 per share
- Annual dividend: 84 cents per share which yields 3.3%
Microsoft (MSFT): MSFT is the world's leading software company. It develops operating systems, business software and other applications for servers, PCs and intelligent devices. 80% of the profits come from Windows and business products like Office.
Financially speaking MSFT is stable. Shares increased up 67.8m or 22% in the last quarter, but management does not expect a strong result in Q1 2012. Nevertheless, investors might be interested to add a position after earnings are reported. What it is important to bear in mind in this sense is that Microsoft has not just conceded the mobile market. Microsoft has closed a deal with Nokia to deliver its first smartphone in the United States.
As regards MSFT activities, it is now willing to reestablish a new WinTel model in tablets, but also expand into ARMH-based devices as well. Clearly, MSFT is undervalued. I think Robert Olstein decided to invest in MSFT because it is trading at a discount at 9-10 forward P/E and 4.0 P/B compared to averages of 35.4 and 4.4 for its peers and earnings are projected to rise at a modest 6.0% annual rate from $2.69 in 2011 to $3.02 in 2013. The stock has remained in the range between the mid-$20s and mid-$30s since the 2000 crash, and continues to trade in that range.
Macy's Inc. (M): Macy's is a retail organization operating retail stores and Internet Websites under two brands (Macy's and Bloomingdale's) that sell a range of merchandise, including men's, women's and children's apparel and accessories, cosmetics, home furnishings and other consumer goods in 45 states, the District of Columbia, Guam and Puerto Rico. Between 2010 and 2011, the company opened several Bloomingdale´s and Macy´s in different regions, for instance, Dubai.
Macy's has regained its S&P status thanks to the strong debt reduction in the past two years. Macy's is now on the right track. The reduction of the debt level has enabled the company to engage in share repurchases and to lower interest expense. In addition, Macy's expect to increase store sales by nearly 5%. Macy's is an interesting pick. Apart from all this, it is outperforming its competitors, such as Kohl's, and J.C. Penny. Although the latter reported a 2 to 4% increase in sales, Macy´s is gaining more market share from it.
I feel these are reasons that make Macy's a good pick and the ones Robert Olstein turned to. Although earnings did not meet expectations, stock remains high.
Generally speaking, it would be wise for investors to wait till Macy´s grow even more and recover from the current economic situation, European debt concerns and renewal budget debates in the US. Investors who want to buy a long term position should start doing so now. By contrast, those who like investing with a short-term horizon should wait for the stock to drop to $27 or $28.
Xerox Corporation (XRX): Xerox Corporation provides a portfolio of document technology, services and software, and the diverse array of business process and information technology outsourcing support. It has three segments: Technology, Services and Others. Products are sold through a sales force and through a network of agents, dealers, resellers, and the Web.
In 2011, Xerox carried out several acquisitions. In October, it acquired Symcor's United States operations; in November, its Affiliated Computer Services, Inc. acquired The Breakaway Group. And in December, its Global Imaging Systems acquired the Merizon Group Incorporated. In January 2012, the Company acquired LaserNetworks.
Olstein saw an opportunity in Xerox because it is considered a cheap stock. It trades at 11x and 6.9x past and forward earnings. Its dividend yield is of 2.1% and beta is 1.6. In addition, net debt is at $8.4 billion, three-quarters of market value. Given the general situation that is affecting the market, Xerox´s valuation has severely depressed. From a takeover perspective, Xerox is attractive. Furthermore, it has become a specialist in the field of IT.
In terms of future expectations, Earnings per share are expected to grow by 14.9% to $1.08 this year, and by 8.3% and 16.2% more in the following two years. Taking into account a multiple of 11x and a conservative 2012 EPS of $1.13, the rough intrinsic value of the stock is $12.43. This involves a 52.5% rise. If such multiple falls to 8x and EPS stands at 14.5% in 2012, the stock would still be interesting. That is why analysts consider that Xerox is a “buy.”
Legg Mason Inc. (LM): LM is a holding company that operates through its subsidiaries to provide investment management and related services to institutional and individual clients, company-sponsored mutual funds and other pooled investment vehicles. Legg Mason operates its business through two divisions: Americas and International. Within each division, Legg Mason provides services through a number of asset managers.
Financially speaking, Legg Mason is in good health. The Zacks Consensus Estimate is 39 cents per share in the first quarter. In other words, a 31% increase from the year-ago quarter. It is considered that Legg Mason will certainly outperform its peers in the long run thanks to its product portfolio and leverage to the changing demographics in the market. Although asset outflows are a concern for the company, it has taken initiatives to restructure and reduce costs. These initiatives are expected to improve operating leverage and enable the company to continue with its share buybacks to inspire investors´ confidence.
As regards quarter results, Q4 2011 reported earnings of 77 cents per share, significantly surpassing Zacks Consensus Estimate of 45 cents. Earnings also exceed the prior-year figure. The company also saw an increase in revenue, an offset of operating expenses and a decline in total assets under management. Zacks Consensus Estimate on operating earnings decreased from 40 cents to 39 cents. As regards future expectations, estimates decreased to $1.90. For 2013, they remain stable at $2.60.
The company´s performance has been somewhat volatile with respect to earnings surprises. The average earnings surprise stood at 4.78%, thus surpassing the Zacks Consensus Estimate.
Legg Mason currently retains its Zacks No. 3 Rank and given the company’s business model and fundamentals, analysts place a “Neutral” recommendation on the stock.