Q1 With a banner year for stocks across all market caps in 2014, where are you finding opportunities today as a contrarian manager?
While it is definitely a challenge to find contrarian situations en masse, there are always pockets of opportunity regardless of the market environment. Contrarian investing requires the patience to wait for the market to inevitably present opportunities. Even in the best of markets, such as 2013, a window will appear. For example, the nascent economic recovery has not benefitted all companies equally and we see relatively weak consumer spending negatively impacting the consumer discretionary sector and, in particular, restaurants.
To that end, we have recently added Bob Evans Farms Inc (NASDAQ:BOBE) to the portfolio. We believe the company’s stock price is trading at a very favorable valuation because investors are focusing only on the restaurant business rather than the company as a whole. The company has little relative debt, owns the real estate associated with the restaurant locations and the packaged food unit is performing well. We believe the company deserves a higher multiple valuation and represents an ideal contrarian investment. Shareholder activists have also taken notice of Bob Evans Farms Inc (NASDAQ:BOBE) and are attempting to unlock value through capital restructuring and by separating the restaurant and packaged food operating units.
Q2: As a multi-cap Fund, the portfolio has had a large-cap bias for the past several years. Do large-cap companies still represent the best opportunity relative to mid-cap and small-cap stocks?
We are fundamental, bottom-up investors and evaluate potential portfolio additions based on their own merit rather than the market cap in which they fall. Our current large-cap bias results from companies that were added during the financial crisis. During that time we wanted to own attractively valued companies that could internally finance their operations and did not have to seek financing through banks or the capital markets. Today, our portfolio includes many smaller companies that would be classified in the mid-cap category. We continue to see considerable opportunities with smaller companies and expect that our portfolio will contain several new holdings in the mid-cap range as 2014 progresses.
Q3: With cash on corporate balance sheets at all time highs, would you please comment upon the M&A landscape? How may it potentially impact the Fund’s holdings?
We are pleased to see companies participate in M&A transactions as long as the rationale is consistent with the company’s mission. At Tocqueville, we carefully evaluate how companies utilize their capital and are essentially indifferent with respect to buybacks, dividend increases or M&A deals. Regardless of the method of capital deployment, the outcome should enhance shareholder value through a higher stock price.
We believe that M&A activity will rise in 2014 as companies continue to be challenged by the current economic environment to grow revenue organically. An M&A transaction may not only be accretive in the short run but from a long-term operating perspective may eliminate a competitor or give the acquiring company an entry point into a new market. Generally the Fund has a handful of companies that benefit from M&A transactions each year and we believe that trend will continue in 2014.
*The Fund has contractually agreed to “cap” its expense ratio at 1.25% (excluding Acquired Fund Fees and Expenses) until 3/01/15. In the absence of these fee waivers, total returns would be lower.