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Top Value Manager Chuck Akre’s Stocks Trading at 52-Week Lows

Holly LaFon

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In last year’s choppy economy, Chuck Akre was one of the few to outpace the market, his Akre Focus fund (AKREX) returning 11.1% compared to 2.1% for the S&P 500. A bottom-up value investor, Akre invests according to a strategy trademarked the “three-legged school,” which involves researching for companies with three primary characteristics:

  1. Enduring high returns on capital and pricing power in excess of input costs

    (Business Model)
  2. Managers who operate in the best interest of all shareholders

    (People Model)
  3. Extensive reinvestment opportunities and reinvestment discipline

    (Reinvestment Model)
If a company meets the criteria, he waits for a reasonable valuation to purchase it, according to his website.

Akre has a talent for acquiring stocks at their low points. Currently, he owns just 2 stocks out of 37 that are trading at close to their 52-week lows: Annaly Capital Management Inc. (NLY) and Monro Muffler/Brake Inc. (MNRO).

Annaly Capital Management (NLY)

With 1,535,925 shares held, Annaly Capital Management occupies 2% of Akre’s portfolio. He has held the stock since the fourth quarter of 2008 when it traded for $14 per share on average; he most recently reduced 4,300 shares in the third quarter for $17 each on average.

On Monday the stock trades for $14.68, close to its three-year low, according to GuruFocus analysis. It has declined more than 9% over the past year.

Annaly Capital Management is the largest real estate investment trust (REIT) on the New York Stock Exchange whose primary objective is to generate net income to return to shareholders through its investment securities and dividends from subsidiaries.

Annaly’s stock stumbled pronouncedly in November when it released its third-quarter results. Annaly reported GAAP net income of $224.8 million, or $0.22 per share, compared to a net loss of $921.8 million, or $0.98 per share, a year previously.

Excluding several factors, including unrealized gains or losses on interest rate swaps and Agency interest-only mortgage-backed securities and net loss on extinguishment of convertible senior notes, net income fell to $449.8 million, or $0.45 per share, from $622.9 million, or $0.65 per share, a year previously.

The company also shrank its dividend to $0.50 per share from $0.60 per share a year previously. Its dividend yield, at 13.59%, is close to a two-year low.

Annaly CEO, Wellington Denahan-Norris, commented on the company’s results. “The active involvement of policymakers in the mortgage market, particularly the Federal Reserve’s latest, open-ended, large scale asset purchase program, has introduced unique challenges for all investors. These policy decisions will have consequences in a wide range of markets, not just Agency mortgage-backed securities. We continue to pursue a conservative stance in these conditions, as we assess relative value opportunities across asset classes, on both sides of our balance sheet and throughout our business.”

Annaly’s revenue per share over the last five years has declined at an annual rate of 22.3% and EBITDA at 16.5%. Free cash flow concurrently grew at a rate of 94.7% and book value at 5.7%. Its share price, at $14.64, is currently below its book value per share of $17.53. See its 10-year financials here.

The company has a P/E of 10.3, P/B of 0.89 and P/S of 8.34.

NLY data by GuruFocus.com

Monro Muffler/Brake Inc. (MNRO)

Akre bought 400,000 shares of Monro Muffler/Brake Inc. in the third quarter for $35.20 each on average. It occupies 1.1% of his portfolio.

Monro is an automotive undercar repair and tire services provider, operating 853 stores in 19 states.

The company trades for $31.89 per share, close to its two-year low. Its stock has gradually declined since the start of the year, and is up 136.5% over the past five years.

In its second quarter ended Sept. 29, 2012, it revealed a 1.9% year-over-year sales increase to $176.5 million, and 23.6% decline in net income to $11.6 million. Sales at comparable stores declined 4.6%, while the total sales increase was due to sales at new stores and recently acquired stores. The company opened 18 new locations and closed one during the quarter.

"Our second quarter performance continues to reflect the ongoing challenges facing consumers in the current economic environment. With high gas and food prices compounded by high unemployment, cautious consumers continue to defer and trade down from higher cost automotive maintenance and repair purchases,” John Van Heel, Monro’s president and CEO said in a statement.

Over the last five years, Monro has increased revenue per share at a rate of 11.1%, EBITDA 17.8%, free cash flow 28.8% and book value 10.9% annually. Its current share price of $32.01 is almost three times book value of $11.24. See its 10-year financials here.

The company’s P/E is 21.85; its P/B ratio at 2.86 is close to a three-year low; and its P/S ratio at 1.45 is close to a two-year low.

MNRO data by GuruFocus.com

Due to current visibility, business and economy trends, acquisitions and fiscal 2013 being 52 instead of 53 weeks, the company revised downward its expectations. It now anticipates sales to decline 3.5% to 2%, and earnings per share to be in a range of $1.36 to $1.50, instead of $1.50 to $1.65.

Chuck Akre's other new buys during the third quarter were Verisk Analytics (VRSK), Hartford Financial Services Group (HIGPRA) and Colfax Corp. (CFX). See his portfolio here.

Rating: 3.5/5 (10 votes)

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