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Holly LaFon
Holly LaFon
Articles (8990)  | Author's Website |

Yacktman Fund 2nd Quarter Shareholder Letter

Discussion of holdings and markets

In the second quarter of 2018, the AMG Yacktman Fund (Trades, Portfolio) produced strong results appreciating 3.89% compared to the S&P 500 Index return of 3.43%. The Fund also outperformed the Russell 1000® Value Index return of 1.18%.

Contributors

In our first quarter commentary, we advised shareholders to “stay tuned” on Fox (NASDAQ:FOXA), whose assets looked like they were about to become the prize in a bidding war between Comcast and the Walt Disney Company (Disney). In June, after AT&T prevailed over the Department of Justice and closed on its acquisition of Time Warner Cable (a decision being appealed by the Justice Department), Comcast and Disney battled to acquire key Fox assets with Disney’s new acquisition price increased by nearly 36% over its original offer. The Fund still retains a significant position in Fox, although we sold shares as its stock price rose. As a result of the sales, the Fund’s cash position increased in the first six months of 2018, mostly toward the end of the second quarter.

Microsoft (NASDAQ:MSFT) was also a leading contributor to Fund results. Microsoft’s strong performance was a result of exceptional growth in its cloud division. Both Microsoft and Cisco Systems Inc. (Cisco) were also beneficiaries of the rise in the technology sector, which has been the strongest S&P 500 sector this year. We reduced our position in Cisco due to its increased valuation and more modest expected returns going forward.

Sysco (NYSE:SYY) continued its strong performance after reporting excellent financial results. Interestingly, all three of the top contributors (Fox, Microsoft and Sysco) have been long-term holdings in the Fund and each of these positions required significant patience at times before unlocking substantial value.

Detractors

Samsung (XKRX:005930) was our biggest detractor in the second quarter though the company produced strong results and sells at one of the lowest multiples of earnings and cash flow we have ever seen for a large global company. We believe Samsung’s stock today is incredibly inexpensive, with net cash and investments representing about 40% of the value at the preferred shares’ price. Adjusting for excess cash and investments, the preferred stock trades at nearly three times expected 2018 earnings, which is hardly the valuation deserved by a company called “Maybe the #1 technology company in the world” by Larry Ellison, founder of Oracle Corp.

Below we show the dramatic valuation difference between Samsung and popular growth stocks like Amazon.com, Netflix and Tesla (which we will call ANT).

Samsung trades at a 98% discount to the ANT basket when looking at EV/EBIT, yet for the two-year period of 2016–2017, Samsung grew EBIT by more than 100% while EBIT for ANT over the same timeframe declined. Many of the big data trends like artificial intelligence, connected homes and autonomous driving that are reasons for optimism about future profits for highly valued technology companies should also benefit Samsung, which is the leader in memory semiconductor chips.

Bolloré (XPAR:BOL), a recent addition to the Fund, was a detractor during the second quarter. The company is a French conglomerate whose main businesses include port and logistics management and media, largely through an ownership stake in Vivendi. Vincent Bolloré, who is the Chairman and CEO, is a capable leader, considered by many to be one of France’s best capital allocators. As he heads for retirement in 2022 when the company celebrates its 200th anniversary, we believe he will continue to take steps to simplify the complex corporate structure, which we think could unlock substantial value in the shares.

J&J (NYSE:JNJ) declined in the second quarter after delivering strong returns in 2016 and 2017. It faces generic challenges to some of its major pharmaceuticals, but we believe J&J is well diversified and positioned to provide solid growth over time.

Why we avoid investing in high multiple stocks

This year, virtually all of the S&P 500 Index’s return was the result of strong returns from a handful of generally extremely highly-priced technology companies. Expensive technology stock valuations are justified by some because these companies seem like quasi-monopolies that will dominate the world. However, valuation matters, and furthermore, many of today’s most popular companies may not be nearly as well-positioned as people think.

In a look back at the last period of technology stock dominance in the paper, Yes. It’s a Bubble. So What?, Rob Arnott noted that “At the beginning of 2000, the 10 largest market-cap tech stocks in the United States, collectively representing a 25% share of the S&P 500 Index— Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun, Qualcomm, and HP— did not live up to the excessively optimistic expectations. Over the next 18 years, not a single one beat the market.”

Perhaps even more interesting than the underperformance of the 10 largest market cap tech stocks post-2000 is the fact that, outside of Microsoft, none of the top 10 in 2000 would even be considered especially dominant today. (Interestingly, The Fund ended up owning six of the tech stocks in the list above, but at much lower valuations.) It is tough to pick the winning companies that can sustain their leadership, especially in the technology sector, yet valuations today are implying that most of today’s leaders should continue to be tomorrow’s leaders.

Conclusion

Value investing has now lagged growth investing for several years, although we continue to confidently adhere to our value approach in the belief that it produces superior results over time and helps manage the level of risk an investor takes on. We have very high standards for investments we make, and always emphasize that the price you pay is one of the most significant determinants of return.

In the last few years as many have favored short-term business and price momentum while ignoring valuation and risk, we have been fortunate that good security selection and our focus on price and risk have allowed us to deliver solid results even though it has not been a great bargain hunting environment. As always, we will be patient, objective, and diligent while managing the AMG Yacktman Fund (Trades, Portfolio).

The views expressed represent the opinions of the Yacktman Asset Management (Trades, Portfolio) L.P., as of June 30, 2018, are not intended as a forecast or guarantee of future results, and are subject to change without notice.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website


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