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Red boxes with the goods at a discount (Natalia Lukiyanova/Getty Images/iStockphoto)
Red boxes with the goods at a discount (Natalia Lukiyanova/Getty Images/iStockphoto)

Strategy Lab

Value investors haven't (quite) given up the search for bargains Add to ...

Norman Rothery is the value investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

We are fast approaching the fifth anniversary of the market lows of 2009 and the subsequent start of a great bull run. After years of gains, most investors hope the party is just getting started.

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But some sticks-in-the-mud are starting to head for the exits. These frugal folk buy stocks in much the same way as they buy groceries. They load up on tinned tuna when it’s on sale and hold off when prices are high. Such is the glamorous world of value investors, but they’re richer for it.

These days more than a few famous value investors are selling stocks and allowing cash to pile up in their portfolios.

The portfolio managers at Tweedy Browne are a case in point. They run funds for U.S. investors and their flagship Global Value Fund boasts a stellar long-term track record. It’s up 9.87 per cent a year on average over the 20 years ending Dec. 31, 2013. By way of comparison, the MSCI EAFE Index sports annual gains of only 5.55 per cent over the same period. The smart managers at Tweedy Browne bested the index by a whopping 4.32 percentage points annually.

However, they aren’t particularly bullish on stocks these days because the fund ended 2013 with 17.2 per cent of its assets in cash and equivalents. The large cash level indicates that they’ve been having a hard time finding bargain stocks despite being able to scour the world for deals.

Before highlighting the only new stock they’ve purchased recently, it’s worth mentioning Tweedy Browne’s deep roots in the value investing community. The company began life in 1920 as a broker dealing in closely held and inactively traded securities. It attracted Benjamin Graham as an early client when he was managing money and writing Security Analysis. Later on, a young Warren Buffett used its services during his hedge fund days.

Today the firm focuses on money management and has produced several interesting research reports on the markets. The most famous is called What Has Worked in Investing. It’s a digest of more than 50 studies examining the returns generated by different value strategies.

While some of the material is a little dated, it’s worth a trip to the company’s website to download a copy.

Tweedy Browne’s managers might be cautious but that doesn’t mean they’ve given up on searching for bargains. They recently added Antofagasta PLC to their portfolio.

The copper miner is headquartered in London, and trades on the LSE (ticker ANTO), but its main operations are located in Chile. Most of its revenues come from copper sales, but it also produces secondary by-products such as gold, molybdenum, and silver. In addition, the firm runs a rail network in the Antofagasta region along with water and sewage services.

Tweedy Browne likes the company’s strong balance sheet, which contains a large dollop of cash. It also generates copious amounts of free cash flow.

As a copper producer, the fate of the company is tied to the metal’s price, which has fallen in recent years. But they believe mine closures should eventually lead to higher prices. The timing of such a scenario is uncertain at best, but it ought to favour low-cost producers like Antofagasta.

The fund bought the stock near its 52-week lows when it provided an ordinary dividend yield of 1.6 per cent. As it happens, it still yields roughly the same amount today. But its shares have moved off their lows on news of better-than-expected production results in the fourth quarter.

Before you plunge into the stock, keep in mind that Tweedy Browne runs a highly diversified fund and Antofagasta has yet to become one of its largest 20 holdings. As a result, the stock represents an interesting idea, but you shouldn’t bet the house on it.

 

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