Domestic equity markets extended their rally throughout calendar year 2017 as the U.S. economy continued to grow in what has become the third longest economic expansion in U.S. history. Continued job growth, a mildly expansionary tax plan and improved business and consumer sentiment, sug-gest further economic momentum in 2018. We expect economic growth, increased consumer consumption driven by stable job growth and wage gains, combined with manufacturing growth to continue to improve the prospects for many of our portfolio companies in 2018.
We also anticipate that bouts of nervousness regarding the long duration of the current economic expansion, combined with uncertainty regarding the expected impact of the recently passed tax cuts on economic growth and equity prices, to increase market volatility in 2018. We believe it is impor-tant to withstand periods of short-term market volatility by favoring the equi-ties of financially strong companies with stable or growing free cash flow that are not properly valued by the market, and are run by managements that have a demonstrated history of deploying cash to the benefit of shareholders. We also believe it is important, as value investors, to take advantage of market conditions and downward price movements to buy such companies at advan-tageous prices. We believe that market volatility is our friend because volatil-ity often creates market price deviations in individual stocks which may not be related to company valuations based on long-term business fundamentals (our valuations are based on a company’s normalized ability to generate and/or grow free cash flow). We tend to sell portfolio holdings when individ-ual company stock prices approach our intrinsic values during periods of upside volatility and seek to reemploy the cash when favorable fundamental valuation discounts occur during periods of downside volatility. By paying careful attention to only holding stocks at market prices which represent dis-counts to our assessment of intrinsic value is the methodology we employ in our attempts to mitigate the effects of short-term market declines.
Our Strategy
The Fund’s current portfolio consists of companies that we believe have sus-tainable competitive advantages, discernible balance sheet strength, manage-ment teams that emphasize decisions based on cost of capital calculations and deploy free cash flow to create shareholder value. We remain focused on individual companies, their operations and prospects for maintaining or grow-ing sustainable free cash flow. From our perspective (as long-term value investors) we believe that companies generating growing sustainable free cash flow are well positioned to compete more profitably during both favorable and turbulent economic environments. We continue to seek and invest in companies that we believe have an ability to not only deliver long-term value to their shareholders, but are also selling, according to our calculations, at market prices that are not fully recognizing that value. We seek to buy such companies at a significant discount to our determination of their intrinsic value. We believe that paying the right price is the key determinant of future returns (price, price, price). If you pay the wrong price for a great company, you may have a poor investment. In conclusion, we believe that the key ingredient to taking advantage of profiting from upside and downside volatili-ty is to assess a company’s value based on business fundamentals via an exhaustive analysis of company financial statements. In addition, patience is usually required to wait out temporary market hysteria and/or short-term company business disappointments, which can create the long-term valuation discounts. We will as always scan for opportunities during market dips which often create buying opportunities to either strategically add to existing posi-tions in the Fund’s portfolio, or initiate positions in companies where current market prices are out of sync with our assessment of long-term business funda-mentals. In addition, we also seek to reduce or sell positions during periods of upside volatility to keep our portfolio liquid and provide some protection against downside risk as valuation discounts shrink or disappear.
Portfolio Review
At December 31, 2017, the Olstein All Cap Value Fund portfolio consisted of 97 holdings with an average weighted market capitalization of $114.73 billion. During the six-month reporting period, the Fund initiated positions in twelve companies and strategically added to positions in nine companies. Over the same time period, the Fund eliminated its holdings in thirteen companies and strategically decreased its holdings in another ten companies.
Positions initiated during the reporting period include: Chevron Corporation, Delphi Technologies, DowDuPont Inc., Dunkin Brands Group, Eastman Chemical Company, Eaton Corporation, Henry Schein Inc., Kimberly-Clark Corporation, Omnicom Group Inc., Walgreens Boots Alliance Inc., Wells Fargo & Company, and Willis Towers Watson.
Positions eliminated during the past six months include: Bed Bath & Beyond Inc., Big Lots Inc., Convergys Corporation, General Electric Company, Hill-Rom Holdings Inc., IPG Photonics, Mattel Inc., Scripps Networks Interactive, VF Corporation, VWR Corp., Walt Disney Company, Winnebago Industries, and Zoetis Inc. The Fund sold its holdings in Big Lots, General Electric, Hill-Rom Holdings, IPG Photonics, VF Corporation, Walt Disney, Winnebago Industries and Zoetis during the reporting period as the stock price of each of these companies reached our value. The Fund liq-uidated its position in Convergys, a company that provides, among other services, agent assisted call center services. Continued concentration of the company’s customer base resulted in volatile profit streams which, in our opinion, lowered its intrinsic value.
The Fund liquidated its position in Scripps Networks Interactive immediate-ly following the announcement of its acquisition by Discovery Communications on July 31, 2017. The Fund sold Scripps Network Interactive at an average price of approximately $84.84 per share which rep-resented a 24.20% increase over the $68.31 per share price one-month earli-er and an approximately 35% premium to its average cost Similarly, the Fund liquidated its holdings in VWR Corp following the announcement of its acquisition by Avantor. The Fund liquidated its holdings in VWR at an average price of $33.17 per share, which closely matches the agreed acquisi-tion price of $33.25 per share and represented an approximately 30% premi-um to our original purchase price.
Our Leaders
The holdings which contributed positively to performance for the six-month reporting period include: Winnebago Industries, Inc., Caterpillar Inc., Intel Corporation, Texas Instruments Incorporated and ServiceMaster Global Holdings, Inc. At the close of the reporting period on December 31, 2017, the Fund continued to hold Caterpillar, Intel, Texas Instruments and ServiceMaster Global in its portfolio. During the reporting period the Fund liquidated its holdings in Winnebago Industries as the price of the company’s stock reached our valuation, and final sales were made at an approximately 70% premium over our original purchase price.
Our Laggards
Laggards during the six-month reporting period include: Newell Brands, Mattel, Inc., Bed Bath & Beyond Inc., SeaWorld Entertainment, Inc., and Discovery Communications. At the close of the reporting period, the Fund continued to hold Newell Brands, Discovery Communications and SeaWorld Entertainment. During the reporting period, the Fund liquidated its hold-ings in Bed Bath & Beyond and Mattel. Despite having a strong retail con-cept and management team, and solid free cash flow, we questioned the durability of Bed Bath & Beyond’s business model in light of online competi-tion and decided to sell the Fund’s position in the company. The Fund’s holding in Mattel was liquidated when we determined that the company’s turnaround strategy would take longer than our original thesis anticipated.
Final Thoughts
Bouts of market volatility are an unsettling, but normal, feature of long-term investing. During such times our investment principles do not change – we believe that analysis of specific companies, their potential, prospects and val-ues based on business fundamentals, and not overall market sentiment, are the keys to making decisions that increase the chance for successful invest-ment outcomes. Since effectively timing the market’s ups and downs is near-ly impossible, we intend to stay focused on the long-term by identifying opportunities for meaningful capital appreciation presented by individual companies which are selling at significant discounts to our calculation of long-term intrinsic value due to short-term issues, which we believe are clouding long-term valuations. As always, we intend to exploit market drops to strategically add to existing positions in the portfolio or to initiate positions in companies that possess our essential value characteristics. We also reduce holdings or sell during periods of upside volatility when discounts no longer provide the risk/reward ratio that we require to help protect against future declines.
We value your trust and remind you that our money is invested alongside yours as we work hard to accomplish the Fund’s primary objective of long-term capital appreciation. We look forward to writing to you again at the close of our fiscal year.
Sincerely,
Robert A. Olstein Eric Heyman
Chairman and Chief Investment Officer Co-Portfolio Manager
The above represents opinion, and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. The references to securities are not buy or sell recommendations, but are intended to be descriptive examples of the Fund’s investment philosophy and are subject to change. Do not make investments based on the securities referenced. A full schedule of Fund holdings as of 12/31/17 is contained in this report, and is subject to change. This information should be preceded or accompanied by a current prospectus, which contains more complete information, including investment objectives, risks, charges and expenses of the Olstein Funds and should be read carefully before investing. A current prospectus may be obtained by calling (800) 799-2113 or visiting the Olstein Funds’ website at www.olsteinfunds.com.
