Jennifer Radman is portfolio manager at Caldwell Investment Management. Her focus is on U.S. equities.
The valuation on ANN is compelling both on an absolute level and relative to peers. We see no structural issues to warrant the discount. The balance sheet is in a net cash position and CapX spend is minimal in a no-growth scenario. Cash generation is strong. The company is executing on several initiatives to improve margins, and headwinds related to shipping costs will phase out later this year. Expansion into Canada is still in the early stages and has thus far exceeded expectations. We expect the company to be able to have some strong quarters related to merchandising, which should get the shares moving higher and close the valuation gap.
FedEx is implementing a $1.7-billion (U.S.) cost-cutting initiative. One-third of the savings is from new, more efficient aircraft, one-third is from voluntary retirement and the remaining third is from general expenses. Cost benefits start in 2015 and would increase operating earnings by 50 per cent. We like the fact that earnings can grow without having to grow revenue, and also that FedEx remains profitable even in recessions.
CSX had a very good quarter recently, where top-line growth accelerated, margins expanded, and there were some positive points on coal, which has been a challenge. What we like about CSX is the intermodal opportunity, where they're stepping in to some of the trucking area and offering long haul services. This area has shown good volume and pricing growth and speaking with management recently, they indicate this opportunity is in the early innings. Crude-to-rail is also an opportunity but it's hard to quantify what demand will be, especially since somebody has to step up and make long term commitments. While valuations have moved up, along with the rest of the market, we think there's further upside on valuations and we should see continued earnings growth.
Past Picks: April 18, 2013
Total return: +16.22 per cent
Total return: +19.83 per cent
Total return: +17.24 per cent
Total return average: +17.76 per cent
The markets have been very strong and we find ourselves in a position where many of our stocks are at 52-week highs. We see the market as a whole as fairly valued at this point, with pockets that are overvalued (yield-related plays, like REITs and utilities, in our view) and pockets that are undervalued (more economically-driven names). We think investors will have to be more focused to get the results they want, and think our style of owning a more concentrated portfolio (less than 30 stocks) and focusing on company-specific fundamentals/catalysts is well positioned going forward.