Bill Nygren on Buybacks, David Herro on Emerging Markets in Insights from Oakmark
Opportunities in domestic energy
Clyde McGregor, Oakmark Equity and Income
We look for companies that exploit technological developments effectively and have acreage positions that will enable them to derive value from these new technologies. We see our energy holdings as being companies that have an above-average ability to grow intrinsic value per share.
But energy stocks oftentimes act as proxies for the commodity price, rather than as discounting mechanisms for the values of the business. When a stock gets knocked way out of kilter relative to what we understand to be its intrinsic value per share, it's our job to jump on them and add to our positions.
There's a lot of big hats with no cattle in the energy industry – people who say a lot more than they actually do. We don't have the ability to see underground, to see precisely what resource potential Concho, Cimarex or whoever has available. We have to go by their audited reserve positions, but we model these assets very carefully and we pay incredible attention to transactions.
We think that this U.S. energy renaissance is going to be a long-term factor. The technology has evolved and I think it will continue to be a helpful force in economic development and will distinguish us from much of the rest of the world. I think that we own some companies that are benefiting and will continue to benefit from this technological development.
The benefits of buybacks
Bill Nygren, Oakmark Fund
One of the reasons we continue to be positive on stocks, is that we believe that acquisitions and share repurchases will continue to make EPS growth meaningfully exceed earnings growth.
Many consider this growth as unsustainable or even financial engineering. But lowering the share base and making acquisitions, while strengthening the balance sheet, to us demonstrates sustainability.
We continue to expect companies to return more capital to shareholders through both share repurchase and accelerated dividend growth, and to continue making acquisitions that don’t require share issuance.
Short-term investors today clearly prefer dividends, but if we are right that the shares are significantly undervalued today, as long-term holders we’ll be better served by seeing that cash used to increase our ownership percentage than if we were returned that capital through dividends today.
Why emerging markets miss on value
David Herro, Oakmark International
Our industry and geographic weights are really a function of where we're finding company-specific value. In late 1990s, when emerging market valuations were extremely attractive, we had well more than 20 percent invested in companies located in emerging markets. Now we have next to none.
A recent article in Barron’s suggested that, since the BRICs are trading in a 33% discount to the MSCI World, they're cheap and they deserve merit.
The problem is when you dig down into that number, the stocks that are really selling cheap tend to be the big state-owned or state-related enterprises, or the big mining companies, or the big financials. And these are companies that trade at six, seven, eight times earnings, that look cheap, but they're on peak earnings. Or if they're a bank, they haven't accounted for the loan losses. And the good-quality, midsized companies, the companies that don't have state involvement, trade at much, much higher multiples but are a much smaller part of the index.
So on the surface, emerging markets may look cheap. In practicality, in reality – in our view – they are not.
As of 3/31/13, Concho Resources (NYSE:CXO) represented 0.8% and Cimarex Energy (NYSE:XEC) 1.4% of the Oakmark Equity and Income Fund’s total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
The Oakmark Equity and Income Fund invests in medium- and lower-quality debt securities that have higher yield potential but present greater investment and credit risk than higher-quality securities. These risks may result in greater share price volatility. An economic downturn could severely disrupt the market in medium or lower grade debt securities and adversely affect the value of outstanding bonds and the ability of the issuers to repay principal and interest.
Because The Oakmark Select Fund is non-diversified, the performance of each holding will have a greater impact on the fund’s total return, and may make the fund’s returns more volatile than a more diversified fund.
The Oakmark and Oakmark International fund portfolio’s tends to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.
Investing in foreign securities presents risks that in some way may be greater than U.S. investments. Those risks include: currency fluctuation; different regulation, accounting standards, trading practices and levels of available information; generally higher transaction costs; and political risks.
EPS refers to Earnings Per Share and is calculated by dividing total earnings by the number of shares outstanding.
The MSCI World Index (Net) is a free float-adjusted, market capitalization-weighted index that is designed to measure the global equity market performance of developed markets. This benchmark calculates reinvested dividends net of withholding taxes using Luxembourg tax rates. This index is unmanaged and investors cannot invest directly in this index.