Consuelo Mack interviewed Matthew McLennan of First Eagle Investment (Trades, Portfolio) Management, a firm that GuruFocus tracks as it has a reputation for producing excellent risk adjusted returns. McLennan said he expects what he calls a "nominal ice age." This is a combination of low GDP growth and low inflation. He believes the best way to invest now is conservatively. The firm has been adding to its gold allocation as a hedge, and it now constitutes 10% of the portfolio. The majority of the portfolio, however, is still in equities. The two largest positions by far are Microsoft (MSFT) and Oracle (ORCL).
In a world with high valuations and margins, McLennan likes to look for fundamentally solid companies that are down because of specific issues at the micro level of the business, or because its sector is down, with all the pain already priced in. He offers three very interesting specific investment ideas.
Danone's business is divided into four segments: fresh dairy (~53% of revenue), baby food (~20%), bottled water (~20%) and medical nutrition (~7%). The firm has a diverse portfolio with many well-known brands like Evian and Danone. The company also derives a large part of its revenues from emerging markets, and this segment is growing. Meanwhile margins have suffered because of specific problems at the company level. Danone is likely to be able to fix those problems over time. With margins that have the potential to recover, it is a more attractive investment than competitors with healthy margins that trade at similar multiples.
McLennan specifically talks about the attractiveness of companies that serve energy end markets, but have no exposure to commodities directly. I wholeheartedly agree this is an interesting domain and own several companies that qualify. The company McLennan likes best is Flowserve Corp., which develops and manufactures precision-engineered pumps, valves and seals that need to be extremely reliable. Its end market is mostly energy-related, but specifically refining, which is not as vulnerable as the upstream part of that market.
The closing idea he pitches is KDDI Corp., a provider of mobile communication services and broadband. It is Japanese, which McLennan deems an especially attractive region, but it trades as an ADR in the U.S. at $12 per share. Its cash flow is growing and it trades at a multiple far below that of other broadband providers in the world. McLennan can hardly stop talking about the benefit of diversifying outside of the U.S., so that certainly plays a role in this recommendation.
