Market Monitor: Sandy Villere

NBR: 5/11

Guest: Sandy Villere, Portfolio Manager, Villere Balanced Fund

Topic: Market Monitor Likes Small Caps

Market Views

The last several years we have seen large cap defensive dividend companies such as JNJ, PG, KHC, do well as investors flocked to those 3% dividend yields since more attractive than the 2% 10-year treasury.

These stocks were all trading at p/e multiples in excess of 20-25x earnings.

This year with the 10-year yielding 3%, investors are fleeing these names with Johnson & Johnson down 12% YTD, P&G down 22%, Kraft/Heinz down 25%, Anhesur Busch down 13%, etc.

We avoided those companies and are focused on younger/smaller domestic companies; diamonds in the rough if you will.

We are advising our clients to play offense not defense and buy younger growth stocks as opposed to the larger defensive names.

Small stocks will do well in 2018 because:

  • Lower corporate taxes are better for domestic companies which tend to be small caps.  Rates for small were around 35% vs. large that average 24%; and rates have gone from 35% to 21%.
  • Reversion to the mean; large crushed small last year; up 19% vs. 13%, but small is riskier and has outperformed over the very long run by about 2%, which makes sense; more risk = more return.
  • Fed is going higher on rates to battle inflation and that should prop up the dollar which is good for small caps and bad for multi-nationals.

One other reason we like small caps is that they have the ability to be bought out by a larger company; Apple for example isn’t getting bought out anytime soon.  Last time I was on this program a few years ago I was pitching DST and Financial Engines.  Both stocks have been bought out; FNGN just last Monday.

 

Stock Picks

Cypress Semiconductor ($16.16) – (CY, $5.8 Billion Market Cap)

  • Cypress is a semi-conductor company that flies under the radar selling at 12x earnings vs. peers at 19x.
  • They have the leading position in the Internet of Things and is a great play on increasing volumes of Electric Vehicles.  Cypress is a play on increasing content on EV’s.  The BMW 7 series 2017 model as an example had $80 worth of Cypress chips and the 2018 model had $110 worth of chips.  Electric Vehicles have 3x the content of combustion engine cars.
  • 25% of their sales is the Internet of Things, which will grow at 40% in 2017, but plan is to grow around 20%.  IoT is simply everything being connected, so when your alarm goes off in the morning, your coffee maker starts, ac gets turned up, your car starts, etc.
  • Nintendo is their largest customer in IoT at 10% of revs.
  • Silicon Labs is considered a ‘pure play’ on IoT getting 60% of revenue from that, and trades at a 27 multiple vs. Cypress at 12x, so room to grow for sure as people realize what Cypress is doing.
  • Pays a 3% dividend yield while we wait.

3D Systems ($12.16) – DDD; $1.4 Billion Market Cap

  • Completely out of favor as it is in the final innings of their turn around.
  • They just beat on revenue and looks like a tremendous risk vs. reward.
  • This will be an incredible 2nd half 2018 story with new product launches; none of which are in consensus numbers.
  • To give you an idea of what their technology can do; one of their largest customers is Align Technology that makes Invisalign braces.  For those that don’t know how that works you get a series of retainers; each that makes your teeth slightly straighter.
  • 3D’s technology gives Align the ability to mass customize; in other words, make millions of things in mass that are all unique.
  • They have a new management team in place from HP and their future is bright.
  • 32% of their float is short and that is a lot of open buy orders also.

Howard Hughes Corp ($131.70) – HHC – $5.6 Billion Market Cap

  • Truly a preeminent developer and operator of master planned communities and commercial properties spanning from New York to Hawaii.
  • They essentially sell land to homebuilders, and then build commercial properties that those new homeowner’s use, and the values improve with added amenities.
  • They have 28,500 acres in the Woodlands north of Texas, 22,000 acres in Summerlin 9 miles from Vegas, Ward Village in Honolulu, and the new South Street Seaport in Manhattan will be incredible with retail, a 1.5 acre rooftop area for concerts, and a long-term lease with ESPN for 19,000 square feet that will become ESPN’s hub where they’ll host 8 daily shows and announce major sporting events “live from the Seaport.”
  • This company continues to do things the way we would which is to build value over the long-term, and we look forward to seeing them continue to improve Net Operating Income.
  • Management and the board own about 22% of the company, so our interests are aligned.

Disclosures: Sandy owns these stocks via the Villere Balanced Fund.

 

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