Bob Burnstine of Kovitz Investment Group has long followed a “high-conviction” strategy of buying shares of companies that appear to be trading at big discounts to his estimates of fair value.
He shared four stocks he believes are excellent values for long-term investors and revisited four others he listed two years ago.
When Burnstine previously spoke with MarketWatch in December 2016, he was president of Fairpointe Capital LLC of Chicago. He left Fairpointe in March 2017 and moved to Kovitz two months later.
Kovitz Investment Group, also of Chicago, manages about $4.5 billion, mainly for private clients, through various strategies including Burnstine’s KB Focused Equity Strategy, which is identical to the strategy he used at Fairpointe.
Potential bargain stocks
During an interview on March 29, Burnstine said he focuses on “purchasing securities at a significant discount to fair value, based on private transaction multiples, comparable public company valuations and historical financial valuation metrics,” along with a commitment to hold and add to investments through periods of market volatility.
Burnstine has been a value manager of equity portfolios for 25 years, including 10 years as a portfolio manager and analyst at Harris Associates, which manages the Oakmark Funds.
He acknowledged the continual concerns in the financial media and markets about a possible U.S. recession relatively soon.
“I don‘t know if we are going to have a recession or not, but coming out on the other side, these four companies will be even stronger. They are all coming 30% to 40% off their highs, some even 50%,” he said.
He said the companies are “very attractively valued” for investors who can commit for three to five years. All four have “solid” balance sheets with “strong capital allocation,” he said.
The price-to-earnings ratios that follow are based on consensus earnings estimates for the next 12 reported months among analysts polled by FactSet. The forward P/E ratio for the S&P 500 SPX, +1.16% was 16.5 at the close March 29. The 52-week and all-time-high prices are intraday prices adjusted for splits or spinoffs, if any.
Burnstine said what he thought each stock was worth, and these valuations are listed below as price targets. But it is important to understand that these aren’t the usual 12-month price targets set by sell-side analysts. These are Burnstine’s own targets looking ahead as many as five years.
Carnival
Forward P/E ratio: 11.2 Closing price on March 29: $50.72 52-week high: $67.69 Decline from 52-week high: 25% All-time high: $72.70 Decline from all-time high: 30% Burnstine’s price target: $70Carnival CCL, +2.90% has a cruise-industry market share of nearly 50% globally. Royal Caribbean Cruises is next, with a market share of about 25%.
Carnival’s shares are down significantly from their 52-week high because of recession concerns, but fuel prices have been another worry for investors, as the price of West Texas crude oil CL1, +2.64% rose 32% during the first quarter.
Burnstine likes to see executives having “skin in the game” by investing their own money in company shares, and Carnival CEO Arnold Donald bought 21,595 shares on Dec. 26, at prices below $47.
Burnstine called Donald “an outstanding CEO,” and said he was pleased to see that Carnival had bought back $5 billion worth of common shares over the past three and a half years, “which is about 8% to 10% of the company,” while also making important investments to bring new ships online.
Kovitz Investment Group
Bob Burnstine, portfolio manager with Kovitz Investment Group.
Rising fuel prices will, of course, reduce Carnival’s earnings, but the company still expects to earn between $4.35 to $4.55 a share in fiscal 2019, compared with EPS of $4.26 in fiscal 2018.
The shares are trading for 11.2 times the consensus forward earnings estimate. “If I can buy a company with great brands and the dominant market share in the industry, when it has historically traded for 16 to 17 times earnings, I am happy to do it,” Burnstine said.
Carnival’s stock has a dividend yield of 3.94%.
Burnstine cited the dividend as a major attraction for investors who are prepared to wait. He said his long-term investment time frame of two to five years is an important advantage to the market, which is fixated on one-year returns. He said: “Looking out a couple of years, [Carnival’s stock| may go [down] to $45,” because of rising fuel prices and/or a recession, but that he would then be looking at “a better opportunity” to buy additional shares.
Mohawk Industries
Forward P/E ratio: 11.4 Closing price on March 29: $126.15 52-week high: $247.13 Decline from 52-week high: 49% All-time high: $286.85 Decline from all-time high: 56% Burnstine’s price target: $180Mohawk Industries MHK, +1.37% calls itself “the world’s largest flooring company.”
“Everybody loved [Mohawk’s stock] a year ago at $250 and now they hate it at $125,” Burnstine said. Worries over a slowing U.S. economy and a weaker housing market have taken a 46% toll on the shares over the past year.
The company “was generally a great story” during the housing recovery that began after the financial crisis of 2008 through the middle of 2017, Burnstine said.
Mowhawk’s founder and CEO, Jeffrey Lorberbaum, owns 13% of the company, a stake worth about $2.2 billion.
Burnstine said “people have thrown the baby out with the bath water,” punishing Mohawk’s shares too much during what he admitted was a “perfect storm” of rising interest rates, slowing growth of new construction and home sales, and narrowing profit margins for the company.
“The 50% to 60% correction is what created the opportunity for me. It also is trading for 11 times earnings. Historically it has traded at an average of 16 times earnings and could even trade higher,” he said.
Burnstine isn’t the only one who saw an inviting opportunity to scoop up Mohawk’s shares on the cheap — the company bought back 3% of its stock during the fourth quarter. “They are using their capital prudently,” he said.
Looking out two to three years, Burnstine believes the shares are worth $180, which would be a valuation of 16 times the consensus 2019 EPS estimate of $11.22.
Qurate Retail
Forward P/E ratio: 9.3 Closing price on March 29: $15.98 52-week high: $25.90 Decline from 52-week high: 38% All-time high: $31.62 Decline from all-time high: 49% Burnstine’s price target: $25 to $27Qurate Retail QRTEA, +1.88% is the former Liberty Interactive, which was renamed after it split off GCI Liberty in March 2018. The company owns QVC, the Home Shopping Network (which Liberty acquired in December 2017) and other video- and online-retail businesses.
Burnstine likes Qurate’s “very loyal customer base.” He applauded the company buying back 10% of its stock during 2018, effectively “retiring” the shares Liberty issued when it acquired HSN. From the end of 2006 through the end of 2018, Qurate and its predecessor companies “shrunk the ownership” by about 50% through buybacks, Burnstine said. He expects this activity to continue to boost earnings per share. “It is almost a going-private transaction in the public sphere,” he said.
The shares trade at a forward P/E of only 9.3, while “it has traditionally traded about 16 times” earnings, Burnstine said. His price target “over the next two to three years” for the stock is $25 to $27.
One reason for the stock’s weakness has been concern over profit margins, which are lower for computers and electronics than they are for other items, Burnstine said. But he believes over the long haul Qurate Retail’s margins “will be fine.”
A silver lining for the stock could be improved efficiency, because “Home Shopping Network was run much more inefficiently than QVC,” he added.
Molson Coors
Forward P/E ratio: 12.7 Closing price on March 29: $59.65 52-week high: $76.45 Decline from 52-week high: 22% All-time high: $112.19 Decline from all-time high: 47% Burnstine’s price target: $84Molson Coors’ TAP, +1.21% forward P/E ratio of 12.7 compares to a 17.7 for arch-rival Anheuser-Busch InBev SA BUD, -0.39% and 20.4 for Heineken NV HEINY, -0.44%
“My target is $84 a share, which would be 17 or 18 times P/E multiple, which is similar to BUD,” Burnstine said.
“Basically, this is also a margin-improvement story. Everybody is concerned that beer is a declining category,” Burnstine said. But he believes the industry’s problems are “more cyclical ... interest [in beer] ebbs and flows over time.”
Molson Coors completed its acquisition of MillerCoors in October 2016. The effort to improve efficiency is ongoing, and Molson Coors has completed about two-thirds of its planned reduction of $700 million in annual expenses by the end of 2019, according to Burnstine. The company has also announced a new effort to reduce annual expenses by another $400 million through the end of 2022.
“So the top line isn’t growing great, but the bottom line should grow significantly through all the cost cutting they are doing,” he said. Meanwhile, investors who buy in at these levels enjoy a dividend yield of 2.75% while they wait.
Revisiting four stocks from December 2016
Burnstine had discussed these four stocks during an interview in December 2016:
Fox
In December 2016, Burnstine said 21st Century Fox was trading at a lower valuation to earnings than its media peers. Of course, nobody could have predicted at that time that Fox would eventually sell the majority of its TV and movie production and distribution assets to Walt Disney Co. DIS, +1.33% in a $71 billion transaction that was completed March 20.
The remaining business of 21st Century Fox is now known as Fox Corp. FOXA, +0.38%
Through Feb. 27, the last day shares of the “old” Fox shares were traded, according to FactSet, the stock returned 80% since Burnstine recommended it on Dec. 27, 2016, compared with a 23% return for the S&P 500.
Hewlett Packard Enterprise
Shares of Hewlett Packard Enterprise HPE, +3.05% returned 17.5% form Dec. 27, 2016, through March 29, compared with a return of 31% for the S&P 500. But Burnstine said the stock’s return doesn’t include the numerous spin-offs that HPE has completed since his previous interview with MarketWatch.
Walmart
Shares of Walmart closed at $97.50 on March 29, for a total return (with dividends reinvested) of 48% from Dec. 27, 2016. Burnstine said he “trimmed” his position in the stock at $103 in November, but that it remains a top 10 holding in the portfolio he manages.
Discovery
Shares of Discovery DISCK, +2.99% are down 8% since Burnstine recommended the stock on Dec. 27, 2016. However, as you can see from the chart, the story is a bit more complicated than that:
FactSet
Burnstine said he trimmed his holdings of Discovery when the stock traded around $30 last year. “At $25 a share I like it a lot,” he said.
He said that when Discovery acquired Scripps Networks Interactive in March 2018, it paid “about four times revenue, a fair price,” and on the same basis, Discovery would be worth $35 to $40 a share.
With the continual transition of cable, satellite and streaming TV services, investors are concerned about “skinny bundles” offered by traditional pay TV providers, which may exclude Discovery’s channels.
Burnstine said it is even possible that Discovery may be acquired. Meanwhile, “it is a cash machine,” he said.
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