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Number Cruncher

Sarbit seeks firms with a strong competitive advantage Add to ...

What are we looking for? 

This is our last look this week at what the fund pros are buying. A check of their top holdings is a good source of stock ideas. It's also a way to gain some insight into the fund as a potential investment. Let's look at IA Clarington Sarbit U.S. Equity ( iaclarington.com).

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Veteran manager Larry Sarbit of Sarbit Advisory Services Inc. has been managing the $220-million U.S. equity fund since June, 2009. Because IA Clarington Sarbit U.S. Equity was formed from the merger of his Sarbit U.S. Equity Trust and two IA Clarington funds, the track record started from zero again. His new U.S. stock fund posted a 36.6-per-cent gain in 2010 compared with 9.4 per cent for the S&P 500 composite total return index in Canadian dollars.

Mr. Sarbit, well-known for carrying large cash balances in funds he ran over the past decade, now is only 15 per cent in cash. "A decade ago, I was 85 per cent in cash and even as high as 90 per cent," he recalled, referring to the dot-com bubble era. "Companies were priced for perfection."

The value-oriented investor, who runs a portfolio of about 20 mainly U.S. stocks, has been finding bargains since the global market meltdown in 2008. He looks for firms that have a strong competitive advantage, can generate lots of free cash flow, don't require great amounts of capital on an ongoing basis and have a recurring revenue stream.

What did we find?

An eclectic mix of U.S. stocks, except for Calgary-based Suncor Energy Inc. Seven of the 10 companies garnered double-digit returns over the past year.

Mr. Sarbit is still a big fan of Iron Mountain Inc., the world's largest document-storage company whose stock posted a single-digit return. Its revenues keep growing because corporations and governments want to store more paper and electronic material, partly because of heightened compliance and litigation issues in recent years, he said. It's a business that doesn't need a lot capital other than having secure storage facilities, and will also benefit from an economic turnaround, he said. "The stock is reasonably cheap, trading at around 12 times current free cash flow. They are buying back stock and have started to pay dividends."

Shares of Iconix Brand Group Inc., which owns a portfolio of brand names and licenses them to retailers and manufacturers, have had a nice run, and there is more upside, he said. The company has not only acquired and refreshed older apparel brands such as London Fog, Joe Boxer and Danskin, but has also created its own Material Girl brand of clothing and accessories (in collaboration with Madonna) that is sold only in Macy's stores, he said. The key is that Iconix gets royalties from licensing brands, and avoids the high cost of manufacturing and distributing apparel, he said. "It has essentially re-invented the apparel business."

The stock of telecom giant Verizon Communications Inc., which has risen about 30 per cent over the past year, is "not as cheap as it was before," but its business model is compelling as cellphones and other mobile devices are no longer a luxury, but a necessity, Mr. Sarbit suggested. Verizon gets a recurring stream of revenue from its clients so the company generates a lot of cash, he said. "It's in a predicable business that will grow" from new offerings such as Apple Inc.'s iPhone, he added.

 

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