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Finding Winners Where No One Else Will Go


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

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.
No positions in stocks mentioned.
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