Andrew J. Knuth founded Westport Asset Management (Trades, Portfolio) in 1983 with a focus on investing in small-cap companies for institutional clients.
According to Westport’s website, the firm follows what it calls “second generation value investing.” With this strategy, the firm locates opportunities that are believed to be undervalued, identifies catalysts close to the valuation gap, which then produces investments that have attractive valuations and improving financial results.
The following chart shows the Westport Fund’s historical performance compared to the S&P 500.
Westport’s portfolio consists of 53 stocks with a total value of $979 million. Read on for the fourth quarter changes.
New buy
Westport’s only new purchase of the quarter was 116,217 shares in Express (EXPR, Financial) at an average price of $14.41 per share.
Express is an apparel and accessories retailer that offers both men and women’s merchandise. As of February 2014, it operated 632 stores across the U.S., Canada and Puerto Rico. Its stores are primarily located in shopping malls and other lifestyle centers.
The stock has decline 19% over the past year and may be slightly overvalued according to the Peter Lynch chart.
Express’ operating margin for FY 2014 was 9.66% — higher than the retail apparel industry median of 3.2%. Over the past five years, the margin has grown 6.72%.
The current P/E ratio is 16, while the P/S ratio is 0.56.
Sold out
Westport sold out of four holdings during the quarter. The largest impact on the portfolio was the sale of all 140,000 shares in Laboratory Corp of America (LH, Financial) for an average price of $102.63 per share.
Laboratory Corp is a clinical laboratory company with a network of 54 primary laboratories and more than 1,700 patient service centers. The company offers a broad range of clinical tests used by medical professionals for routine testing, patient diagnosis, and monitoring and treatment of disease.
The stock has been up 28% over the past year and currently trades at $116.04. Laboratory Corp’s business predictability is rated as 4 out of 5 stars. The DCF model estimates a fair value price of $94.60, giving a -23% margin of safety.
Diluted EPS has been increasing steadily each year, recording at $6.25 in FY 2013.
The current P/E ratio is 19.4, while the P/S ratio is 1.7.
Westport also sold out of 100,000 shares of Praxair (PX, Financial) for an average price of $126.62 per share. The sale had a -1.3% impact on the portfolio.
Praxair was the first company in the U.S. to produce oxygen from air using a cryogenic process and continues to be a major technological innovator in the industrial gases industry. The surface technologies segment provides wear-resistant and high-temperature corrosion-resistant metallic and ceramic coatings and powders.
The stock has declined 3% over the past year and may be overvalued when comparing the price to the Peter Lynch earnings line.
The DCF model also estimates the stock is overvalued, giving a margin of safety of -27%.
Based on preliminary data for FY 2014, the operating margin is 21.25%. The margin has largely remained steady over time.
Westport also sold out of its holdings in Copart (CPRT, Financial) and Darden Restaurants (DRI, Financial), impacting the portfolio by -0.53% and -0.29%, respectively.
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