Kent Croft
Kent Croft, who manages the Croft Value Fund, is watching his often-contrarian buys posting some healthy returns this year. The $64 million fund may be small, but its returns are outsized. Average annual returns for the past three years average 12.8 percent, and Morningstar gives it five stars. He's long on energy stocks, eyeing financials, and predicts telecom has a good run ahead for the next several years. Excerpts of a chat with U.S. News:
Describe the fund's style.
It's first and foremost a value fund, but we look at value a little differently. We look at [stocks] in three ways. One is from a contrarian standpoint. When everybody gives up on something, it piques our interest. Secondly, we look at future catalysts. That leads us to companies with a base of assets that's not being recognized in the share price. It could be timberland, energy, or other resource plays. Or it could be content, as with media companies. Then, there's what we call growth at a discounted price. Cisco [Systems] is in the portfolio right now, and we never thought it would be. We're flexible. We don't have market-cap constraints. The whole fund is built around accepting unique ideas.
Domestic U.S. natural gas stocks make up a hefty bit of the portfolio. Why?
Energy is a necessary part of any long-term portfolio. Natural gas has some very attractive characteristics. One is we're not finding the stuff domestically. Production is flat to declining. We're in a spinning-our-wheels environment. The resources are getting harder to find and therefore more valuable over time. Secondly, there's a very wide discrepancy compared to oil on a Btu basis. At $125-a-barrel oil and $11 gas, you're getting close to a 50 percent discount on a heating equivalent basis [for natural gas]. Something will give there over time.
Looking forward, gas will be a global commodity. A lot has to do with [liquefied natural gas] not being readily available like it was. The Far East is absorbing it. China is building regasification plants as fast as it can. All that LNG floating around is finding a home in China or Europe. Lastly, we haven't had any real new power generation built since early this decade. And a lot of the new stuff coming on is gas fired.
What names do you like?
We're looking for companies with good, low-cost production or exploration potential and long-lived assets. Southwest Energy fits all three of those. It's the largest operator in the Fayetteville Shale, which is prolific. In an era of flat-to-declining production growth, they've had five years of 12 percent-plus production growth. That rate is just going to increase. Williams Cos. is there. It has a vast pipeline network, so it's a more diversified and less risky play. They have significant resources in the Rockies, where they're getting low-cost production with more access to the market through their pipelines. It's trading around 37, and we think its assets alone are worth 48. The third is Ultra Petroleum in the Pinedale field in the Rockies. Again, they just keep increasing production.
I see some finance names here, too, like AIG, which has had a rough time.
Well, you can't kiss all the pretty girls. We've had it for a couple years. It's tough now because it's hard to know what you're getting into and things aren't as easy to analyze. At some point, when things start to turn, many of these companies are going to do very well. Nobody knows when that's going to be. But I like to think if I own AIG today—and unfortunately I could have said this three months ago, too—and look out three years from now, you've got a pretty good company. The balance sheet should be fine, though they'll take their hits. They've got a lot of assets. We're holding on. [AIG shares are off more than one third this year.]
Insurers make an appearance, too. Are they safer than the rest of the financial sector?
We've done better because we haven't had much exposure to those big blowups in the financial area. We're buying more Prudential Financial. They have good growth areas that people forget, like in Southeast Asia, and their reserves seem in pretty good shape. That looks incredibly cheap right now. Invesco is another money manager that looks very cheap from an assets-under-management perspective. Also, on an earnings basis they have a base of assets that look cheap, plus new products like these PowerShares [exchange-traded funds]. Money management is a pretty good long-term business.
Cisco's on the list.
Telecom is an area where we see some pretty powerful three-to-five-year trends. We've owned Cisco, Amdocs, and Corning. We think earnings growth is really going to start to pick up given underinvestment in capacity in broadband over the past six years. We had too much fiber for a while and might still have a bit too much. But we're catching up very quickly and need more capacity for high-def and video. The bandwidth usage is just unbelievable. Cisco's at the heart of all that globally. It's different for a value investor maybe, but the valuations are very compelling. It's being impacted by the economy right now, but even after a couple of bad quarters, its stock has held up. It's been a hell of a lot better than owning a bank or something.
How about one of those contrarian picks?
One everybody hates right now is Weyerhaeuser, the timber company. We like it for the timber assets to be realized over time. If you take those assets and add in their other businesses, we think it's worth $100 [a share]. [It trades in the mid-60s now.] They haven't done anything for the last year or two. These companies lend themselves to very long-term investors. If I had any money to put in the grandkid's name, I'd put some in timber.
Got any advice for retail investors?
The retail [investor] herd has historically been one of the biggest counterindicators of performance. The important thing is steeling yourself to resist cocktail party talk about the hottest stock. It's the hardest thing to do, but it can be one of the most rewarding.
Reader Comments Read all comments (1)
Mr. Vong of MD 3:20PM May 28, 2008