Finding Winners Where No One Else Will Go

By Josh Lipton  DEC 03, 2009 3:30 PM

Inside a multi-cap value portfolio with stellar long-term results.

 


At Croft-Leominster, making money for clients is a family affair.

The Baltimore-based money management firm was founded in 1989 by Gordon Croft, a veteran T. Rowe Price (TROW) analyst and fund manager, and his son, Kent. Another son, Russell, joined the firm in 1998. The shop now has $650 million in assets under management.

Russell Croft, 35, tells us that much of what he learned as a professional investor didn’t come from studying for his MBA or working for other money managers. Instead, he says he owes a big debt to his dad.

“I’ve learned a ton from him, especially about how to invest like a contrarian,” he tells us. “He has taught me how to stick your nose in places where no one else wants to go. From him, I learned how to take a stand when others have given up on companies.”

Croft, along with his dad and older brother, runs the Croft Value Fund (CLVFX), a small fund that continues to make a big impact. They use a bottom-up approach to hunt for shunned stocks of different market capitalization across various industries selling at depressed prices.

The go-anywhere approach works.

Through December 2, the fund’s 10-year annualized return of 5.11% leads the S&P 500 by 5.70 percentage points and bests its Morningstar rivals by 5.87 percentage points, placing it in the top 5% of its category.

Morningstar awards the fund five stars, its highest rating. The no-load fund, with $140 million in assets, has an expense ratio of 1.46%, and requires a minimum investment of $2,000.

Recently, we chatted with the youngest Croft, who walked us through the team’s investment strategy and its top picks right now -- like Valmont Industries (VMI), Foster Wheeler (FWLT), and Freeport-McMoRan Copper & Gold (FCX).

Minyanville: Where do you find investment ideas?

Russell Croft: We are all generalists here and we’re very flexible in where we look for opportunities. We want to find good, long-term investments. So we get research from Wall Street, independent providers, and a network of deep thinkers we trade ideas with. That is where we get our idea flow. Then, of course, you have to start to cut all that data down.
 

Minyanville: How do you do that?

Croft: For us, it’s all about valuation. This is where we take our first slash at choosing companies. We look for contrarian ideas, the out-of-favor, beaten-down stuff. We look to the names that Wall Street has given up on. You can make good money when people run the other way.

Minyanville: What else do you look for?

Croft: We also look at names with catalysts, where we think a driver is being missed by the market. Thirdly, we like companies that are too cheap compared to their growth rates. Minyanville: When looking for bargains, how do you distinguish between trash and treasure? Sometimes a stock is cheap because it deserves to be.

Croft: Yes, that is one of the harder things to do. A lot of times the herd can be right. So it comes down to our own analysis.

A company could have a bad quarter but we know how hard it is for companies to manage, especially in this environment, quarter to quarter. Maybe a company misses by a couple pennies and the momentum guys bash the stock. That can be a good entry point for us.

So there is no cut-and-dry answer to your question. It comes down to us figuring out which companies are down for the wrong reasons. If it’s a contrarian name, we might be nibbling at first and then building more over time.

Minyanville: Is there an example of one where you have been nibbling?

Croft: Well, this is no longer a glaring contrarian pick, but we do like Lowe’s (LOW). The company has taken about three points of market share over the past couple years. The ma-and-pa stores are having trouble. Lowe's is taking advantage of it. You are getting a top-quality company at a depressed earnings level here. We think it will prove a good holding for the next three to five years.

Minyanville: You don’t limit yourself by market capitalization. What is the advantage of such a go-anywhere approach?

Croft: We want to comb everywhere for ideas. We don’t want to be shut out of any area. There are small-cap names that we like and that have performed well. If we couldn’t dip below $1 billion then we never could own them.

Minyanville: Such as?

Croft: Petrobank Energy and Resources (TSE: PBG) is a small Canadian energy company we like. It has done very well. We bought in at around $3 and now it’s at about $50. If we couldn’t look at small-caps then we could never have gotten in there.

Minyanville: Let’s talk about another pick you really like: Valmont Industries.

Croft: It’s a mini-conglomerate. About a third of their earnings come from high-end irrigation systems. We think that’s a great long-term business to be in. They also make utility towers. Here in the US, we need upgrades to our power grid. That’s about 25% of their earnings. Finally, they make highway structures and lighting. Government spending in those areas should help Valmont. It’s a $2 billion company that isn’t on the radar of a lot of people.
 

Minyanville: Another significant holding in the portfolio is Foster Wheeler.

Croft: Right, we think there is a glaring need for global improvement to energy infrastructure. The company is a worldwide leader in that area. It’s now trading at a reasonable 11.5 times 2010 earnings.

It is very hard to run this business quarter-to-quarter when you are dealing with $2 billion and $3 billion contracts. We want to see their backlog keep growing year-over-year, and it has come back a good amount.

Also, they have a very good management team. The CEO [Raymond Milchovich] was going to retire, but he instead signed a new contract. We like the fact that he is sticking around in these tough times. Minyanville: When did you get in there?

Croft: We were buying in March when it was in the teens. Now it is at $30, and we still think the stock is a good long-term holding.

Minyanville: Why is Freeport-McMoRan Copper & Gold a smart bet?

Croft: We like Freeport a lot. The supply-demand issues in copper are real. India, China, and the emerging markets will continue to grow. Freeport will benefit.

Minyanville: Do you also use these energy and copper names as a hedge against inflation? Is that part of the attraction?

Croft: Yes, that is a piece of the puzzle. We are very bottom-up here, looking at every company for its own merits. At the same time, in this reflationary environment, we want to have assets in the ground.

Minyanville: One of your favorite sectors right now is timber.

Croft: Yes, and there we like Weyerhaeuser (WY), which owns seven million acres of timber worldwide. The value of their timberland acreage is equal to the market cap. We also think the company will convert to a REIT when they can, and that will be a catalyst for the stock.

We own Plum Creek Timber (PCL) too, which is a REIT yielding 4.75%. If you think housing will come back over time, these names won’t move like Pulte Homes (PHA) or Lennar (LEN), but they will benefit.

Minyanville: How about the health-care sector? Are you finding opportunities there?
 

Croft: We are focused on Aetna (AET) and UnitedHealth Group (UNH). People think these companies will be in a lot of trouble with health-care reform. But Aetna, which trades at 9.5 times 2010 earnings and has tremendous cash flow, is being priced in for bad news to continue. Now, it won’t be a smooth ride in these stocks because headlines are driving them. But we think, if you buy Aetna now, it’s a good entry point.

Minyanville: The fund has a strong long-term track record and a solid, experienced management team, but it continues to fly under the radar in a lot of ways. Does that bother you? Being overlooked?

Croft: No, it does not. The fund had just $25 million a couple years ago. So we have enjoyed a lot of big growth. We are stock pickers here, doing our research and finding ideas. We would love to grow the fund over time and we think, with our track record and consistency, investors will be interested.

Minyanville: Thanks for your time, Russell.

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