David Winters Comments on Nestle SA
Negative sentiment regarding Nestlé's short-term revenue growth and profit margins contributed to a lackluster performance of their shares in 2013. Fear that a slow-down in emerging markets growth is permanent fails to acknowledge that there are billions of people around the world who want a better life and are now realizing they have an opportunity to more fully participate in consumer products that have long been available in the United States. Nestlé's dividend yield, as of year-end, in the strong currency of Swiss Francs, is greater than both the current yields of one-year U.S. Treasury Bills ("U.S. T-Bills") and the ten-year U.S. Treasury Note. Ironically, the majority of investors still favor lower-yielding fixed income investments that have almost no potential to appreciate. To combat these issues, Nestlé's management has moved quickly to fix up or sell underperforming and non-core businesses, ranging from its Jenny Craig diet business to its share of flavoring company Givaudan. With over 40% of its revenue coming from growing emerging markets and a strong portfolio of food brands that provides the company with pricing power, we believe Nestlé will be a consistent performer for the Fund. With sentiment on Nestlé so poor, we saw a rare opportunity to initiate a position in long-dated call options on Nestlé shares at what we believe to be a very reasonable price. These options give the Fund the right, but not the obligation, to purchase Nestlé shares at any time before December 2017 at share prices of 60 and 68 Swiss Francs per share, not far from the 66.15 Swiss Francs per share where they finished trading in 2013. If Nestlé shares have even modest price appreciation by 2017, the Fund stands to reap a handsome return on the call options. Although these options carry more risk than simply owning the underlying shares, we believe the risk/reward equation is firmly in our favor in this case. Rather than let the whims of market sentiment dictate what we buy and sell, we instead aim to use this volatility to put cash to work in opportunities such as these Nestlé call options.
From David Winters (Trades, Portfolio)' Wintergreen Fund (Trades, Portfolio)s 2013 message to shareholders.