Mairs and Power is a boutique firm that applies a conservative growth investment strategy and has been doing so over the past 70 years. It runs a Growth Fund and Balanced Fund, which are both built around a core of quality growth stocks. In practice, it looks a lot like the Warren Buffett approach, with the firm holding investments for long periods of time to minimize tax impact and trading costs. Guru Bill Frels (Trades, Portfolio) chairs the investment committee and is profiled on GuruFocus. The Mairs and Power Growth Fund just reported its third quarter results and there are a couple of interesting tidbits in its letter to shareholders. The firm is positive about the U.S. economy, although the comments about the dollar and euro relationship are already questionable, with the the dollar sliding on strong job news on Friday.
Four years have elapsed since the last correction in 2011 and the market’s run coming out of the recession is now more than six years old. Many investors naturally have been asking if the third quarter signaled the end of the bull market. We don’t think so. Despite near term headwinds, we continue to believe that stock performance longterm is built on business results. We see the U.S. economy continuing to outpace other major economies around the globe, which should be good for stocks of U.S. companies. In addition, while earnings for the S&P 500 are down this year, the expectation is for moderate earnings growth to resume next year. Recent economic data supports our view. Consumer confidence is near peak levels and in better shape than the headlines suggest. Gross Domestic Product (GDP) growth was revised upward in the second quarter, reflecting stronger than expected consumer spending. The dollar/Euro relationship has been stable since March, and if that stability continues, we see that particular headwind faced by exporters ending early next year.
The most interesting part of quarterly letters of the famous value guru’s are of course the stock picks and what we can learn from their rationalizations. In this letter, the case for C.H. Robinson (CHRW, Financial) is made, and this is actually a company I like a lot. It has a terrific business model as an asset light logistics provider focused on the U.S. trucking market, but also operating in air and ocean forwarding business, in addition to a few other smaller businesses like rail. Examine the company's return on equity or return on invested capital, through GuruFocus' 15-years of financial data, and you will be amazed at the returns this “boring” business model is generating. Mairs and Power looks at it this way:
"C.H. Robinson (CHRW, Financial) was a top performer in the quarter and a stock that illustrates our investment approach, where we seek out good companies with a sustainable competitive advantage over the long term. The company is well positioned in both consumer and industrial markets and should benefit as the industrial sector picks up. As the “just-in-time” movement of materials and finished goods grows more complicated, manufacturers and retailers are increasingly outsourcing their purchasing and distribution logistics to external companies. C.H. Robinson is an asset-light third party logistics provider focused on technology. The recent west coast longshoreman’s strike gave the company an opportunity to demonstrate the value of its technology investment to its customers. C.H. Robinson is able to keep customers informed on the movement of goods and, if it anticipates a delay, can suggest alternative routing and transportation options to keep its customers’ materials flowing. We look for the company’s valuation to move back toward its historic range as the industrial sector recovers, and we see evidence that the re-acceleration is on the horizon."
It is also interesting to note the company pays a quarterly dividend and engages in buybacks when it is opportunistic to do so. The firm is levered a bit to the economy. If the environment is not great, the company suffers with it. For that reason, it only keeps a very modest amount of debt on its balance sheet; $1 billion compared to its $10 billion market cap. Otherwise, the capital structure is pretty efficient with only a little bit of cash. Management has done an admirable job over the years, achieving in excess of 14% EPS growth over the past 10 years. Directors own a fair amount of stock. In total, reporting insiders own about $700 million worth.
Mairs and Power emphasizes the investment is undervalued compared to the historical range it traded at. If I examine the company’s historical trading range on a price and revenue basis that checks out. If the industrial sector comes back and the company is able to squeeze out better net margins and thus higher profits, it is likely to go higher. Even if the industrial sector does not come back immediately, this is not a bad long-term holding with its solid asset light business model, shareholder friendly management and focus on value creation.
