Winters is considered a value investor. He follows the long-term strategy and prefers to invest in solid companies that he thinks will perform well in all market conditions.
Generally, the Fund invests in equity securities that the Fund believes are interesting as they are below the stock value. To identify such opportunities, the Fund analyzes the relationship of book value to market value, cash flow and earnings. If the Fund takes an active role in the company it invests in, it will try to gain control of management or have certain influence in it. The Fund also profits from arbitrage opportunities, which generally involve securities of companies under restructuring procedures or companies that are attractive in price vis-à-vis another company.
The Fund may also engage in other currency transactions such as currency futures contracts, currency swaps, options on currencies, or options on currency futures or in the sale of exchange-listed and OTC put and call options on securities and the purchase and sale of financial and other futures contracts and options on them.
Here are some of David Winters top yields:
Reynolds American Inc (RAI): RAI is engaged in the cigarette manufacturing industry. It operates through several segments. One of them, Conwood, the smokeless tobacco segment has provided important growth levels and has improved profitability without being engaged in any litigation like the cigarette industry has. RAI is committed to building and maintaining a portfolio of profitable brands. It carries out marketing programs to strengthen its image, customers´ loyalty and brand awareness. Moreover, it has launched a retail pricing strategy to apply discounts and defend brands shares of markets against competition. For example, Reynolds launched the Camel SNUS Pleasure Switch Challenge promotion. 63% of its portfolio is focused on the more profitable premium sector.
To stimulate demand, the company has launched new products. They include two new Camel SNUS styles, SNUS mint and Frost Large, all of which have encouraged results. The purpose is to attract adult consumers to these new products. Camel Crush and Camel Crush Bold offer adult smokers the option of choosing the way of enjoying their smoking experience.
There is no doubt David Winters felt attracted to this portfolio due to Reynolds permanent actions to improve its performance and remain a leader in the cigarette industry. Furthermore, quarter results have shown the company is worth picking up. In October 2011, quarterly cash dividend rose to $0.56 per share, a 5.7% increase, which led to an overall increase of 14.3% during the year. Most importantly, although it has not launched a repurchase program it plans to make significant capital investments in 2012. Reynolds has also reduced its SKUs by 85% and is increasing its economies of scale. Last but not least, operating margin grew 1.4% points, to 31.2%.
Philip Morris International, Inc. (PM): PM is the world's second-largest cigarette manufacturer, behind China National Tobacco. Furthermore, it operates one of the most important brands as to cigarette brands: Marlboro.
In the last period, PM has not been performing very well. Its shares significantly dropped after analysts reported downgrades. Citigroup decided to lower PM´s EPS estimates and set a price of $75 per share. Citigroup may have downgraded PM´s EPS estimate because PM´s 30% of revenue came from the European Union, where the euro has severely weakened against the dollar. Goldman Sachs also reduced PM´s ranking from a “buy” into a “neutral” maintaining an $80 price target.
Today, PM trades at $74, its dividend payout ratio stands at $3.08, the company has engaged in share repurchases and sales are still growing. Most importantly, PM is trading in developing countries with focus on its premium products and has seen significant improvements in the last period as regards revenues. Furthermore, operating margins sit at 40%, thus outperforming its peers.
Winters decided to invest in PM because despite any headwind the company may face, it has a strong balance sheet and cash flows. In addition, it is a solid company whose brands are well known across the 160 countries where it operates. Most importantly, it is now making endeavors to access other developing markets such as India and Vietnam.
As it has been mentioned above, the company has many advantages. Last but not least, it has entered into joint ventures in China, with National Tobacco to market Marlboro and with Swedish Match to market snus in the European Union. PM is still uniquely positioned to continue expanding.
Coca-Cola Co (KO): The beverage company is one of the most recognized firms across the world. Although it is present in almost all the countries, it is making great efforts to evolve in emerging markets.
The latest news revealed that Coke was marketing an orange juice used in two of its products that supposedly was sprayed with fungicide in Brazil, an illegal product in the United States. The FDA stopped the shipment of said juice from overseas but decided not to remove the products currently on sale because the level of fungicide has been reported as low.
Financially speaking, Coke´s stock has been weak, the same happened with Pepsico, Coke´s primary rival. From a shareholder standpoint, yields are up though. Coke is considered the favorite company among analysts carrying most of the recommendations. Most importantly its average price target is on the right track. Now, why did Winters choose it? First of all, it holds the best net margins vis-à-vis competitors. In 2011 only, it stood at 19.49% and its three segments were able to maintain it. Secondly, it is the company with the highest flexibility. It is the company that reported only 59.38 cents of liabilities for every dollar of assets. With more flexibility, Coke can borrow at low rates and buy back shares. Thirdly, Coke has still room to continue expanding. Although it is a well-recognized brand across the world, it still launches initiatives to continue improving.
McDonald's Corporation (MCD): MCD is the world's largest chain of hamburger fast food restaurants with a leading position in all the markets where it operates. Most importantly, it is permanently considering new expansion opportunities.
The company has recently invested large amounts of money to restore existing restaurants and launch new ones. MCD has carried out marketing campaigns, it has extended hours of work, has improved free Internet access and has introduced new products. Furthermore, premium products such as the Angus Third Pounder hamburger and the McCafe specialty coffee menu have been well received. In terms of prices, the company has increased the price by 1% at the beginning of 2011 but later on, it applied a further increase of 1.4%. There is no doubt it will continue increasing prices due to inflation. Management, indeed, forecasted that 2012 will start with a 3% pricing with the possibility of applying new increases during the year.
MCD is an interesting pick and Winters felt attracted to it because it is always producing stable cash flow even during hard times. The ability to produce stable cash flows can be attributed to long-term franchisee royalty and rent payments. Most importantly, McDonald´s has been paying dividends for the last 30 years, as well as repurchasing shares. In 2010 for instance it returned $5.1 billion to shareholders.
In terms of growth, the company has launched a Plan to Win program, which started in 2003 to boost growth. This plan aims at increasing restaurant visits, providing everyday value, improving menus and keeping MCD image through marketing campaigns. Management is also taking steps to change the refranchising strategy. 80% of MCD restaurants operate under a franchise. This strategy will boost EPS and ROE.
In terms of quarter results, store sales rose 5.0%. More specifically, the US accounted for an increase of 4.4%, Europe up 4.9%, and Asia/Pacific, Middle East and Africa (APMEA) up 3.4%. The improvement of sales has been benefitted by the changes in menu, products innovation, McCafe premium beverage and many other changes. Quarterly earnings per share stood at $0.08.
In terms of future expectations, MCD is expecting to continue with the investments in restaurants. The idea is to refresh the company´s image. Management also expects to open new restaurants in emerging markets, such as China.
Norfolk Southern Corporation (NSC): NSC is a railroad company operating in the
Eastern United States. Lately Norfolk has started to apply cost control measures to boost growth. Anyway, it remains cautious about fuel price increases and their impact on cost structure. Now, the company is replacing old locomotives with new ones. These new fuel-efficient locomotives will certainly reduce fleet age, will lower maintenance expenses and improve costs.
In the last five years NSC has reported a significant free cash flow and a strong operating ratio that have surpassed those of peers in the railroad industry. Most importantly, Norfolk pays a dividend ratio that is higher than the one paid in other companies. It now stands at 33%. In addition, Norfolk will definitely benefit from the strong pricing momentum supported by the growing market demand. Pricing improvements and productivity gains will offset inflation, improve margin and earnings growth.
Management is optimistic about the coal segment, especially due to the growth in the export of coal and the increasing demand of steel in markets such as Asia, Europe and South America. The 5% increase in global steel production will support strong demand. As regards agricultural products, the company will benefit from the growth in ethanol network and the shipment of grains. To support such growth in volume, management purchased new grain hoppers. In the automotive category, a projected gain of 14% in light vehicle production will boost automotive production to approximately 14 million vehicles in 2011.
David Winters decided to invest in Norfolk because it is one of the largest railroad companies that are permanently investing to boost sales and improve growth. Furthermore it holds a strong free cash flow and permanently reports high returns. Most importantly, it is committed to shareholders. It is constantly paying dividends and repurchasing shares. Indeed, in the last period, dividend ratio rose by 11 percent to $0.40 per share and then by another 3% to sit at $0.43. This involves an annual increase of 19%. Last but not least, Norfolk authorized the repurchase of 22 million shares till 2014. Most importantly, the company is planning to reduce its debt, which stands at $6,782 million.