Olstein All Cap Value Fund has released its 2015 annual letter to shareholders. The Fund discussed the general global market environment and the crisis in Greece. The Fund went on to talk about its strategy compared to Wall Street and retail investors who tend to buy and sell stocks with little regard for those companies' fundamentals. After discussing the global market and its investment strategy, the fund mentioned investment in its portfolio and the investment thesis for these positions.
Olstein All Cap Value Fund Letter:
Dear fellow shareholders:
For the fiscal year ended June 30, Class C shares of the Olstein All Cap Value Fund appreciated 9.24%. During the same 12-month period, the Standard & Poor's 500® Index appreciated 7.42% and the Russell 3000® Index appreciated 7.29%. For the three-year period ended June 30, Class C shares of the Olstein All Cap Value Fund had an average annual return of 18.35% compared to annualized total returns of 17.31% for the Standard & Poor's 500® Index and 17.73% for the Russell 3000® Index.
Market outlook
The ongoing financial crisis in Greece, the slowdown in the Chinese economy and the expected negative impact of rising U.S. interest rates and a strengthening U.S. dollar caused an increase in market volatility during the first six months of 2015 fueling forecasters’ predictions of a market pullback. While there are always forecasters predicting the next market correction or downturn, we believe it is important for investors to weather market events and periods of short-term volatility by favoring the equities of financially strong companies with stable or growing free cash flow, run by managements that have a demonstrated history of deploying cash to the benefit of shareholders.
In the current market, an enormous amount of investor money is flowing into high revenue growth companies with little, if any, free cash flow (e.g. Internet, social media, etc.). The money flowing into these high revenue growth companies is coming from the liquidation of industrial stocks that, in our opinion, are temporarily affected by a strong dollar and a less than robust economy (especially overseas), creating what we believe are deep discount stock purchase opportunities with free cash flow yields as high as 10%. In the current environment, there is a strong case for investing in equity securities of companies whose real economic value is unrecognized by the market, obscured by recent market uncertainty or overshadowed by temporary problems. We believe investors can find viable opportunities by focusing on four primary, company-specific factors: (1) a commitment to maintain a strong financial position as evidenced by a solid balance sheet; (2) an ability to generate sustainable free cash flow; (3) management that intelligently deploys cash balances and free cash flow from operations to increase returns to shareholders, and (4) a stock price that is at a discount to intrinsic value because of short-term factors. We further believe that, by prioritizing these factors, we are investing in companies that are positioned to compete more advantageously as economic growth accelerates.
Our strategy
There are times when the combination of certain events, such as the Greek financial crisis and slowdown in the Chinese economy, tend to overwhelm equity markets and hit a value-oriented portfolio, such as the Fund’s, particularly hard causing a period of short-term underperformance. At the same time, however, from our perspective as long-term value investors, the negative reaction during periods of increased market volatility creates many favorable opportunities for the Fund to buy good companies at bargain prices.
Throughout the Fund’s history, Wall Street’s obsessive focus on short-term events and obsession with pouring money into “exciting in your face high growth companies” selling at prices and valuations that have already more than discounted the future growth (reducing the probability of future appreciation), often produced significant opportunities for the Fund to purchase stocks in under the radar with 8% to 10% free cash flow yielding companies being thrown out the window to raise money for the overvalued exciting companies. The Fund usually purchases what we believe are undervalued stocks selling at discounts to our calculation of intrinsic value, during periods of pessimism and underperformance by the company or industry that we deem to be temporary. Before purchasing, we conclude that the bargain prices are not warranted by our estimate of the company’s normalized ability to produce future free cash flow. Buying high growth companies at any price can reduce future returns. Although growth companies are exciting, the price you pay is critical. For example, the stock of the Coca-Cola Company (KO, Financial) is still not above its 1998 high stock price (when investors believed it was worth 95 times earnings based on assuming nonstop double digit growth forever). We believe we are currently in one of those periods with many investors buying and selling stocks with little regard for company fundamentals. We, on the other hand, continue to seek and invest in companies that we believe have an ability to deliver longterm value to their shareholders that, in many cases, is not currently recognized by the market. We remain focused on individual companies, their operations and prospects for maintaining or growing sustainable free cash flow. Patience is the most important virtue of a value investor. Forever is an overused word in our industry. Throughout our career, we have seen that whatever is working or not working over three- to six-month time periods, the word “forever” is usually attached. Rarely is “forever” true, but the word produces both overvalued and undervalued securities in most markets.
Portfolio review
The Fund’s current portfolio consists of companies that we believe have a sustainable competitive advantage, discernible balance sheet strength, a management team that emphasizes decisions based on cost of capital calculations and deploys free cash flow to create shareholder value and are selling at discounts to our estimate of intrinsic value. We believe companies with these characteristics are poised to eliminate the valuation gaps created by the recent events as the economic growth accelerates.
At June 30, 2015, the Olstein All Cap Value Fund portfolio consisted of 103 holdings with an average weighted market capitalization of $57.57 billion. During the fiscal year, the Fund initiated positions in 30 companies and strategically added to positions in 27 companies. Over the same time period, the Fund eliminated its holdings in 32 companies and strategically decreased its holdings in another 12 companies.
Positions initiated during the last 12 months include: Alaska Air Group (ALK, Financial), Brady Corporation (BRC, Financial), Citizens Financial Group (CFG, Financial), Discovery Communications Inc. (DISCK, Financial), Dorman Products (DORM, Financial), Dover Corp. (DOV, Financial), DSW Inc. (DSW, Financial), First Niagara Financial Group (FNFG, Financial), HCA Holdings Inc. (HCA, Financial), Janus Capital Group (JNS, Financial), JetBlue Airways (JBLU), Johnson Controls Inc. (JCI), Joy Global Inc. (JOY), Keysight Technologies (KEYS), Mastercard Inc. (MA), MSC Industrial Direct Co. (MSM), NVIDIA Corporation (NVDA), Oshkosh Truck Corp. (OSK), Owens-Illinois (OI), Packaging Corp. of America (PKG), Patterson Companies, Inc. (PDCO), Pentair Ltd. (PNR), the Travelers Companies (TRV), Twenty-First Century Fox (FOXA), United Parcel Service (UPS), Universal Health Services Inc. (UHS), Vasco Data Security (VDSI), Viacom Inc. (VIA), Visa Inc. (V) and Wendy’s Co. (WEN).
Positions eliminated during the past twelve months include: 3M Co. (MMM), ABB Ltd. (ABB), American Express Company (AXP), Ann Inc. (ANN), Avery Dennison (AVY), Baxter International (BAX), CR Bard Inc. (BCR), CareFusion Corp. (CFN), Charles River Laboratories Inc. (CRL), Cintas Corp. (CTAS), Coca-Cola, Deere & Co. (DE), Dentsply International Inc. (XRAY), DuPont (DD), Ethan Allen Interiors Inc. (ETH), Hormel Foods Corp. (HRL), International Game Technology (IGT), Jones Lang LaSalle Inc. (JLL), McDonald's Corp. (MCD), Newell Rubbermaid Inc. (NWL), NOW Inc. (DNOW), PetSmart Inc. (PETM), Quest Diagnostics (DGX), Ross Stores Inc. (ROST), Sysco Corp. (SYY), Teleflex Inc. (TFX), TJX Companies Inc. (TJX), TRW Automotive Holdings Corp. (TRW), URS Corp. (URS), VF Corp. (VFC), Walt Disney Company (DIS) and Whole Foods Market Inc. (WFM). As previously discussed in shareholder letters for the third and fourth quarters of 2014, the Fund eliminated its positions in CareFusion Corp., International Game Technology, PetSmart, Inc., TRW Automotive Holdings and URS Corp. on very favorable terms as these companies were targeted by strategic acquirers during the reporting period.
Our leaders
The stocks which contributed positively to performance for the 12-month reporting period include: Sealed Air Corp. (SEE), Universal Health Services, UnitedHealth Group (UNH), Zoetis Inc. (ZTS) and Ross Stores. At the close of the fiscal year, the Fund continued to hold Sealed Air, Universal Health Services, UnitedHealth Group and Zoetis Inc. The Fund sold its position in Ross Stores, which it held for a couple of years as the price of the company’s stock reached our valuation level during the fourth quarter of 2014.
Our laggards
Laggards during the 12-month reporting period include: National Oilwell Varco (NOV), Fossil Group (FOSL), Now Inc., Vishay Intertechnology (VSH) and Wesco International (WCC). As of the close of the reporting period, the Fund continued to hold National Oilwell Varco, Fossil Group, Vishay Intertechnology and Wesco International in its portfolio. The Fund acquired the equity of NOW as a result of a spinoff from National Oilwell Varco in early June 2014 and held the company’s stock despite falling oil prices during the second half of 2014. The Fund liquidated its position in NOW in February as oil prices continued to fall and the outlook for oil remained uncertain.
