The financial sector has long-term growth potential stronger than the pressure on its net interest margins, says Oakmark Fund’s Bill Nygren. Two videos with text are embedded below.
Computer generated transcript below.
the bear case for the banks, i see you also own jpmorgan and wells fargo. the bear case for the banks is the net interest margin is going to continue to be compressed. actually might even te klein sequentially. how do you feel about that? is this something that overtime you believe these companies have offsets or is this going to be the one issue, the big headwind they have a hard time seeing multiple expansion as a result? i think clearly as long as interest rates stay as low as they are now, that’s going to put pressure on nims for the whole banking industry. the other side of that is since the financial crisis four years ago, a lot of the competition that banks had have gone away. that’s allowing them to earn higher margins on a lot of their products. we’re not trying to argue that these are fantastic businesses. what we’re saying is the best banks sell at maybe three-quarters of book value. a lot of others sell at about half of book value.on’t need tremendously good results out of the banks to make them go up from these levels. what are you buying in financials? i mean industrials. well, one of our favorite names is t.e. connecttivity. you were talking earlier about the auto parts companies. a lot of t.e.’s business is going into emerging market auto demand. again, this is a stock that’s kind of representative of a lot of what we like in the market today. investors are afraid of the cyclical risk. because of that it’s available at about ten times earnings. without a lot of top line growth, management is taking the excess cash that they’re generating and investing in add-on acquisitions to grow their top line. and also significant share repurchase. this company’s got a couple percent dividend yield. its share base goes down by 2% to 5% a year. you’ve also got some top line growth. we think you combine those three, you get a pretty nice annual rate of return.
Finding value for the long haul, with Bill Nygren, Oakmark Fund.
Video and computer transcript below:
it’s been tough to make money in facebook shares. if you listened to mike murphy last week you could have made a 500% return overnight on mark zuckerberg’s big interview. take a listen. i think zuckerberg, if he just comes out and does a decent jov here i think the stock rallies above 20 on the news. we’re long the weekly call options here. long 1950 call options for our fund. with everybody having thrown the kitchen sink at facebook, i think it can rally here. shares of facebook have rallied about 15% since that call. mike, what’s the trade now? well, if that night, michelle, on fast money we discussed with the panel there that i was — i thought zuckerberg did such a great job in that conference that we actually added to our position the next day. we booked profits on the weekly calls on the 1950s, rolled out to the 21s in a double position. now we’re long the stock the common. the weeklies expired on friday. facebook’s something where i think the move here is to still trade the stock. we saw an opportunity with zuckerberg coming out. we thought all the negatives had been priced in. it worked out for us this time thank god. worked out well. but we’re still in this for a trade. fundamentally we don’t want to be in the name long term yet. for a trade we’re still long facebook right now, think it can move back above 23. downtown josh brown, you agree with that call? i don’t like it. it was a great trade. obvious the stock was overly hated. it wouldn’t be a tough low hurdle for zuckerberg to hop over. now what? i don’t think this is a great earnings story. technically the stock looks terrible. you just had a chart up. i’m not sure why anybody would play with it. let it get a little better. let fundamental momentum kick in. i’d rather pay up at a future point in time than speculate here. it could be back in the teens. joe terranova, you’re not hitting the like button either, are you? quite candidly, i have no clue where facebook is going. it’s become so complicated, unpredictable. no interest. you don’t want to say in a real highfalutin way the governance structure — no. initially when the ipo came out i didn’t like it at that point. i think as it’s fallen it’s gotten more and more complicated to understand what the fundamental story for the company is. i’ll take a pass. i like fundamentical. that’s a word. let’s reinvent it. stocks sitting at a four-year high. anywhere you can go to find value? bill nygren is a top performing portfolio manager who’s oakmark fund is beating the overall market. up over 20% this year. he joins us now with his best picks for the long run. bill, good to see you. thanks, michelle. nice to be here. general question first. we had jeremy siegel on earlier. we had a long discussion about whether or not the market is overvalued, undervalued, fairly valued. what do you think about the market right now? we think the market’s undervalued somewhat. obviously we’re long-term value investors at ekemark. the more the market goes up the more the valuation gap is closing. the less undervalued it looks. but relative to other options of -earning zero on cash or a percent to 2% in bonds, we think equities look very attraive relative to the other choices. you were buying financials. aig in particular. why? well, again, back to our basic philosophy, at oakmark we’re trying to buy stocks that we think are going to be worth meaningfully more five years from now than they are today. almost by definition that has us buying things that are undervalued, unloved today. i don’t think you can get much more unloved than the financials. a company like aig was extremely complex to look at as recently as a year ago. but today it’s become a pretty simple pnc insurer. you no longer have to make estimates about how levered portfolios of junked securities are going to come out to make a business value guess for aig. stlls about half of book value. most of their excess cash flow is going to share repurchase. priced about eight times our estimate for next year’s earnings. the bear case for the banks, i see you also own jpmorgan and wells fargo. the bear case for the banks is the net interest margin is going to continue to be compressed. actually might even te klein sequentially. how do you feel about that? is this something that overtime you believe these companies have offsets or is this going to be the one issue, the big headwind they have a hard time seeing multiple expansion as a result? i think clearly as long as interest rates stay as low as they are now, that’s going to put pressure on nims for the whole banking industry. the other side of that is since the financial crisis four years ago, a lot of the competition that banks had have gone away. that’s allowing them to earn higher margins on a lot of their products. we’re not trying to argue that these are fantastic businesses. what we’re saying is the best banks sell at maybe three-quarters of book value. a lot of others sell at about half of book value.on’t need tremendously good results out of the banks to make them go up from these levels. what are you buying in financials? i mean industrials. well, one of our favorite names is t.e. connecttivity. you were talking earlier about the auto parts companies. a lot of t.e.’s business is going into emerging market auto demand. again, this is a stock that’s kind of representative of a lot of what we like in the market today. investors are afraid of the cyclical risk. because of that it’s available at about ten times earnings. without a lot of top line growth, management is taking the excess cash that they’re generating and investing in add-on acquisitions to grow their top line. and also significant share repurchase. this company’s got a couple percent dividend yield. its share base goes down by 2% to 5% a year. you’ve also got some top line growth. we think you combine those three, you get a pretty nice annual rate of return. even if the p.e. multiple doesn’t change. all right. bill, i’m just curious, how — how has your process changed given the fact that macro seems to have been so dominant over the last few years? i know you’ve been a stock picker for a long time. you tend to be a little more valuation and bottoms up oriented. have you adjusted your process at all when you’re looking for stocks? no, we haven’t. our process has always been from a bottom up basis to try and make our best estimate of what a business will be worth five years from now. i think there’s some flawed gic in some of the investment firms that have made macro so much more important now than it was five years ago. you hear a lot of people say macro’s so important now that we’re going to have to make our — our view the dominant reason for our stock selections. then they go on to tell you that europe’s a little bit weak. they don’t think the u.s. growth is going to be quite as stropg as it used to be. they do that because everything is so correlated. everything moves together except for treasuries. if you get the macro call right, in theory, everything else goes along with it, right? right. but that if, both letters should be in big capital letters. you have to get it right and you have to be anti-consensus. or else your macro forecast isn’t going to do you any good. you don’t hear macro people today say, you know, my call is europe’s going to get better and the united states is going to come back to historical growth levels. the consensus view seems to be the one that everybody’s incorporating in their portfolio. and rarely doou get paid for putting on a consensus bet. very good point. bill, always good to see you. thank you so much. thanks for having me.
