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Sarah Ketterer Returns 24% in 2012 - Her Top Q4 Buys

Holly LaFon

Holly LaFon

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Sarah Ketterer is the CEO of Causeway Capital, which she co-founded in 2001. Causeway’s team manages $16.2 billion employing a quantitative, bottom-up approach with a macroeconomic overlay. Her International Value Fund has had strong performance recently, returning 8.20% since inception, and 24.23% over the last year.

In a Forbes appearance last week, Ketterer said she is looking for “more yield, more defensiveness without having to pay up for those expensive consumer staples stocks.” Both energy and health care she believes performed poorly last year but will outperform in 2013. Particularly, health care stocks that help state and federal governments save money as “Obamacare” allows more people to qualify for Medicaid will see growth. She is also looking within sectors that are approaching fair value for individual companies that have in some way slipped up temporarily, to the detriment of their share price.

Backing up to the fourth quarter of 2012, Causeway purchased five new stocks: St. Jude Medical Inc. (STJ), State Street Corp. (STT) and Citigroup (C).

New buy: St. Jude Medical Inc. (STJ)

Ketter bought 562,800 shares of St. Jude Medical stock in the fourth quarter for approximately $37 per share on average, the new holding accounting for 2.5% of her portfolio.

In five years, St. Jude Medical shares have moved up 5%, and their current market price at $41.08 is close to a one-year high, with a market cap of $12.66 billion.

St. Jude Medical’s business is to develop devices and services for use in cardiac, neurological and chronic pain treatment, with four dominant focus areas: cardiac rhythm management, atrial fibrillation, cardiovascular and neuromodulation.

The company’s revenue has risen each of the past 10 years, as EBITDA grew at a rate of 15.5% annually on average. Last year, St. Jude Medical began paying a dividend of $0.21 per share, which is increased to $0.23 per share in the February 2013.

Shares fell 23% in a little over a month after the company released its third quarter 2012 earnings results on Oct. 17, in which it reported a 4% year-over-year decrease in revenue to $1.33 billion, and net earnings of $176 million from $227 million the previous year, the decrease primarily due to organizational realignment charges.

In the fourth quarter, revenue decline was narrower, falling 2% year over year to $1.372 billion, and 1% on a currency neutral basis. Net earnings beat estimates, at $0.39 per share, flat over the previous year, including $113 million, or $0.36 per share in restructuring activity charges, and $46 million, or $0.15 per share income tax charge.

The company also announced in the third quarter commencing a $300 million stock repurchase program using its balance sheet cash and cash flow to offset dilution from its stock compensation programs in 2013.

State Street Corp. (STT)

Ketterer purchased 258,750 shares of State Street Corp. for approximately $44 per share on average, the new holding accounting for 1.5% of her portfolio.

State Street Corp. shares have declined 31% over the past five years, and have a current market price of $56.50 per share, which is close to a three-year high, and a market cap of $25.86 billion.

The company is a financial services provider focused on institutional investors, with $24.4 trillion in assets under custody and administration and business in 29 countries.

After falling approximately $3 billion from 2008 to 2009, State Street’s revenue has been growing for three consecutive years, as net income and free cash flow recovered and have grown for the last two years. The company has also pulled its return on equity up to 12.80% as of the third quarter of 2012, its highest point since 2008, and maintained a 1.2% return on equity from the year-ago quarter.

The dividend of State Street has been steadily increasing since it was cut to $0.04 in 2009 and 2010. It was increased 33% to $0.24 per share in March 2012, in the same announcement that the company approved a $1.8 billion stock repurchase program through March 31, 2013. In full-year 2012, it bought back 33.4 million shares of its stock for approximately $1.4 billion, leaving approximately $360 million of its purchase plan available for additional share repurchases.

The company’s fourth quarter results included EPS of $1.00, decreased from $1.36 in the previous quarter and increased from $0.76 year over year. Revenue was $2.45 billion, reflecting a 4% increase from the previous quarter and 6% increase year over year.

State Street Corp has a P/E of 14.4, P/B of 1.3 and P/S of 2.9, which is close to a three-year high.

New Buy: Citigroup (C)

Ketterer purchased 304,500 shares of Citigroup for approximately $37 per share in the fourth quarter, the new holding also spanning 1.5% of her portfolio.

The market price of Citigroup has increased 27.2% over the last year, with shares currently at $41.15 and a market cap of $124.64 billion.

Citigroup is a global bank with business in more than 160 countries, focused on consumer, corporation, government and institutional clients through Citicorp, its core franchise, and Citi Holdings.

Citigroup’s results for the third quarter, released Oct. 15, were marred by CVA/DVA losses on improvement in Citi’s credit spreads and a pre-tax loss on the sale of its interest in Morgan Stanley Smith Barney. Including these effects, net income was $468 million, or $0.15 per diluted share, on revenues of $14 billion. Excluding the effects, revenues would have been $19.4 billion, a 3% increase from the prior period and including a 5% increase in Citicorp revenue, and earnings would have been $1.06 per diluted share, a 26% increase from the prior-year period. The quarter’s sale of MSSB reduced Citi Holdings to 9% of the company’s balance sheet.

Fourth-quarter net income was $1.2 billion, or $0.38 per diluted share, on revenues of $18.2 billion, both increased from net income of $956 million, or $0.31 per diluted share, on revenues of $17.2 billion, in the year-ago quarter. The company’s CVA/DVA losses also decreased from the previous quarter to $485 million, primarily due to improved credit spreads, and results were impacted by $1 billion in repositioning charges, compared to $428 million in the year-ago quarter. Excluding the CVA/DVA, revenues would have been $18.7 billion, an 8% increase from the prior-year period, and exluding CVA/DVA and repositioning charges, earnings would have been $0.69 per diluted share, up 68% from the prior-year period.

The fourth quarter repositioning charges were announced Dec. 5, and involved actions geared toward reducing expenses and improving efficiency, while enhancing its emerging markets business. One component of the plan was the reduction of approximately 8,000 positions across its institutional clients group and global consumer banking, and 350 positions at Citi Holdings.

Citigroup currently has a P/E of 17.8, P/B of 0.7 and P/S of 1.9, with a quarterly dividend of $0.01.

Top Holdings

The top holdings in Sarah Ketterer’s portfolio are Ryanair Holdings PLC (RYAAY), UnitedHealth Group Inc. (UNH), Air Products & Chemicals Inc. (APD), Microsoft Corp. (MSFT) and Nasdaq OMX Group Inc. (NDAQ).

See her stock portfolio here. Also check out her undervalued stocks, top growth companies and high yield stocks.


Rating: 2.6/5 (9 votes)

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