Philip Morris, Anheuser-Busch InBev and Nestle are stocks to hold for a decade or more, says Steven Roge, a portfolio manager at R.W. Roge & Co.
Roge, who helps manage the Roge Partners Fund, researches mutual funds, limited partnerships and companies based on several characteristics, such as improving profitability, competent management and consumers' loyalty to brand-name products.
Bohemia, N.Y.-based R.W. Roge & Co. has about $200-million (U.S.) in assets under management. The Roge Partners Fund, which invests in value and growth stocks and alternative assets, is small, with about $12.5-million in assets. The fund has risen 8.4 per cent this year, beating 72 per cent of world-stock funds followed by Morningstar. By comparison, the benchmark S&P 500 is up 6.1 per cent.
"The overwhelming theme of the fund is that we look for great allocators of capital, whether it be a mutual fund manager generating returns or a CEO of a company that does a great job of adding value," Roge says.
The values of the companies Roge targets can be rich compared to the broader stock market. But their intangible assets are worth the price, he says. In doing so, Roge avoids companies with razor-thin margins.
"The great thing about the strategy is that it doesn't depend on macro themes," Roge says. "With great brand recognition, [companies in the fund]have the ability to pass on the costs to their customers."
Roge divides his stock holdings in two baskets. The smaller basket includes companies that he calls "valuation anomalies."
"For whatever reason, it may be a temporary setback in earnings or a macro theme that's temporarily weighing down the company," Roge says. "Maybe they don't have the best brands or widest competitive moat, but in those cases we believe we're buying $1 for 60 cents. For these companies with mediocre businesses that are extraordinarily cheap, we'll hold them for six months."
The other basket, which gets a bigger focus, includes what Roge calls great companies run by great management with great brands. Among those, the turnover is relatively modest - Roge says they can be held for a decade.
Renowned value fund manager Bruce Berkowitz of Fairholme Capital used to sit on the board of directors of one of Roge's picks. Berkowitz resigned from the board only so he could buy more shares of the company. Read on to see this pick as well as others with the type of brand loyalty that Roge is betting on.
Philip Morris International
Company Profile: Philip Morris is the maker of cigarettes and other tobacco products created in a 2008 spinoff from Altria.
Key Brands: Marlboro, Parliament, Virginia Slims and L&M
Closing Price: $57.18 (Oct. 12)
Dividend Yield: 4.5 per cent
Roge's Take: "The stock continues to be undervalued because people don't want to invest in tobacco companies, whether for moral or litigation reasons. It has a brand that has been extremely dominant for many years. In the case of the international brand, they're growing in emerging markets so that gives you a backdoor emerging markets play. The product is addictive, so you tend to keep the customers that you originally court."
"The firm itself is highly profitable. Return on invested capital, which is something we find very important, has averaged over 30 per cent per year for the past several years. For every dollar they invest in their own company, they earn about 35 cents back. Most companies in the S&P 500 have a return on invested capital of about 8 per cent or 9 per cent."
"The valuation is also reasonable for such a high margin business, even if price-to-sales is at a premium. And the dividend yield also helps."
Financial Metrics: Philip Morris has a price-to-earnings (P/E) ratio of 15.2 over the trailing 12 months, slightly below the P/E ratios of its industry (16.3) and the S&P 500 (18.1). The stock has a forward P/E ratio of 13.6, in line with the S&P 500 based on 2011 earnings estimates.
Company Profile: Anheuser-Busch InBev is the world's biggest beer company.
Key Brands: Budweiser, Michelob, Rolling Rock, Beck's, Stella Artois, Hoegaarden and Labatt's
Closing Price: $62.29 (Oct. 12)
Dividend Yield: Anheuser-Busch InBev doesn't have a regular quarterly dividend established. The company paid a special dividend to shareholders in April.
Roge's Take: "I became interested in Anheuser-Busch in its former life, prior to being bought out by InBev. I was attracted to the tremendous brand loyalty among its customers. But the firm wasn't being run for its shareholders but instead run as a family business. Subsequently, there was a lot of fat to be trimmed. The management team over at InBev has a history of turning around franchises, cutting costs and operating companies for the shareholders by focusing on return on invested capital and free cash flow.