Cash is a nice thing to have when the stock market turns rocky and buying opportunities arise – and the turbulence since mid-September was rough enough to attract the attention of fund managers at Southeastern Asset Management.
Mason Hawkins and Staley Cates, the famed value managers based in Memphis, had taken a cautious approach to stocks earlier this year by holding extraordinarily high levels of cash – 26 per cent in their large-cap Partners Fund, at the end of the second quarter.
But they have been quick to snap up a few casualties in the recent market mayhem, reducing their effective cash (which ignores options) to just 14 per cent.
If you are looking for signs that the downturn in September and October was more of a blip than the start of a protracted downturn, this is it.
The Southeastern managers outlined some of their portfolio adjustments in their third quarter update, released just days ago.
Sure enough, the share purchases were made before the market turned particularly turbulent last week. But if they found some buying opportunities after the S&P 500 fell nearly 2 per cent in September, then the 5 per cent dip in October was likely seen as an additional gift, in terms of new bargains, given that just about everything fell. We'll know more in about three months, when Southeastern releases its fourth-quarter update.
In the meantime, they report that they have added three new stocks to their portfolio: McDonald's Corp., Scripps Networks Interactive Inc. and Vivendi SA, along with a fourth, undisclosed name.
McDonald's had been declining long before the market downturns of the past month. After it hit a high of $103.53 (U.S.) in May, it slid to $94.81 by the end of September, marking a decline of more than 8 per cent; after last week's dip, it fell as low as $90, or roughly where it was more than three years ago.
Clearly, though, Mr. Hawkins and Mr. Cates believe the dip has been driven by short-term concerns: "Food quality issues at McDonald's China supplier, minimum wage pressure in the U.S., Russian challenges, European macro concerns, and improvements at competing chains pressured the stock and enabled us to own the company's valuable real estate and dominant breakfast business at a discount," the Southeastern managers said.
For Scripps, which owns HGTV and part of the Food Network, the attraction was the fact that the company's market capitalization had grown to the point where the stock was big enough for inclusion into the large-cap Partners Fund. Still, the share price had suffered, falling nearly 9 per cent between July and the end of September – and sliding again in October.
In the case of Vivendi, the French record label and pay-TV operator, the key appears to be a simple case of value after the stock slipped 18 per cent from February to July (and is now just 3 per cent above that July low). "Southeastern has invested in Vivendi successfully twice before, and the company's focus, asset quality, and management team has grown even stronger," the managers said.
These purchases illustrate what makes Southeastern fascinating to watch: They're long-term value managers who take a very patient attitude toward the market – so when they see buying opportunities, the rest of us should take note.
David Berman