MONEY CALL-Amid global tumult, U.S. ‘value’ stocks seen safe

By Nick Olivari

NEW YORK, March 31 (Reuters) – At the height of the
Japanese nuclear crisis and the breakout of war in Libya in
mid-March, the Standard & Poor’s 500 (.GSPC: Quote, Profile, Research) went negative for
the year.

But U.S. value stock investors were buying. The reason?
They always look for stocks with solid assets, especially when
their prices fall.

In a year marked by frequent shocks, that strategy has
worked for a sector that had faded in popularity. The Standard
& Poor’s Value Index (.IVX: Quote, Profile, Research) is up nearly 7 percent in the first
quarter, compared with just below 5 percent for the Standard &
Poor’s Growth Index (.IGX: Quote, Profile, Research), according to Reuters data.

“Buying something at a discount is always better than
buying something on an aggressive growth assumption,” said Eric
Cinnamond, manager of the Aston River Road Independent Value
Fund (ARIVX.O: Quote, Profile, Research) for River Road Asset Management in Louisville.
“I’m more of a ‘Steady Eddie’ manager. My clients don’t want
excitement.”

The basic tenet of value investing is to overlook
short-term factors depressing a stock and to study the assets
— brand names, real estate, market positioning — that are
enduring sources of cash generation.

When outside shocks hit, the same holds true. It takes
nerve to accumulate value when things look hopeless and to
refrain from buying when the market gets too rich.

Warren Buffett, reknowned professor of the value school,
famously jumped in as a stock buyer at the depth of the global
financial crisis in 2008. Again this year, when Japan’s
radiation issues melted stock prices globally, he opened his
checkbook. Buffett’s Berkshire Hathaway (BRKa.N: Quote, Profile, Research) acquired
Lubrizol (LZ.N: Quote, Profile, Research) for $9 billion on March 14 while stocks were
falling. Berkshire is one of the components of the S&P Value
index, along with names like big brand names like Johnson &
Johnson (JNJ.N: Quote, Profile, Research) and Wells Fargo (WFC.N: Quote, Profile, Research).

Investors like Buffett don’t want to pay for overpriced
growth opportunities, but instead, take advantage of stocks
that the investing pack overlooks.

“Investors can misprice some companies so they fall into
the value basket, making them too cheap for what they are.”
says Lawrence Creatura, portfolio manager at Federated Clover
Investment Advisors in Rochester, New York. “And that drives
higher returns,”

A good market disruption helps create more of these
opportunities.

LOOKING FOR CONSISTENT CASH FLOWS

So far in this year of volatile movement, Cinnamond’s fund
(ARIVX.O: Quote, Profile, Research) is up 5.5 percent compared with the benchmark Russell
2000 small cap value indexes growth of (.VBY: Quote, Profile, Research) 3.499 percent.

Cinnamond’s said his focus on cash-generating businesses
has worked well in this sluggish economy. Looking at earnings
growth alone could provide a narrow view of how companies
perform.

“Cyclical growth is being confused with sustainable growth,”
he said. “I like companies that are more steady, have no
operating risk and consistent cash flows.”

Among Cinnamond’s top picks are Core Mark Holding Co Inc.
(CORE.O: Quote, Profile, Research), a market leader in distributing goods to convenience
stores, that that has managed 6.2 percent sales growth annually
over the last 10 years. Another of his favorites, southern
California grocery chain, Arden Group Inc. (ARDNA.O: Quote, Profile, Research), generates
3 to 4 percent growth in free cash flow.

“They have $17 a share in cash right now,” said Cinnamond.

STAYING CLOSE TO HOME

Taking it a step further, staying within the U.S.A. to buy
value stocks helps minimize external shocks and currency risks.

Buffett became a Buy America advocate this year. His annual
letter released late in February brimmed with references to the
strength of the American people, economy and spirit.
[ID:nN27180671].

“I will only buy U.S.-listed stocks,” said Brian Ferguson,
senior portfolio manager, U.S. large-cap value at The Boston
Company Asset Management LLC, who sees regulation and
accounting rules as more predictable in the home market.
Moreover, large-cap U.S. stocks derive 40 pct of earnings
abroad and that alone gives global diversity.

He sees the financial sector as ripe for gains. It makes up
28.54 percent of the benchmark Russell 1000 value (.VVY: Quote, Profile, Research) index,
especially since the Federal Reserve this month lifted some
dividend restrictions on banks given bailout funds.

Citigroup Inc. (C.N: Quote, Profile, Research), JPMorgan Chase & Co, (JPM.N: Quote, Profile, Research) and
Wells Fargo & Co (WFC.N: Quote, Profile, Research) all responded.

More important than the payouts is the Fed’s overview on
bank health, he said.

“Credit has been improving and is continuing to improve,
balance sheets are improving, capital ratios, all are
improving,” Ferguson said. Even after a big recovery, many of
the stocks om the sector are far below their historic highs.

THE VALUE TRAP

Of course, some companies are cheap for a reason and will
become even cheaper in the future. A trigger event is sometimes
required to unleash the value.

“The key to avoiding this ‘value trap’ is to exhibit
patience before investing,” said Federated Clover’s Creatura.
“It’s important to have a catalyst approaching in the near
term. Investors have to observe areas for the company’s
situation to improve before employing capital.”

Two examples from his own list: Teen retailer Hot Topic
Inc. (HOTT.O: Quote, Profile, Research), has appointed a new chief executive, lifting its
stock price 2.5 pct the day it was announced. Another, K-Swiss
Inc (KSWS.O: Quote, Profile, Research), recently allocated enough cash to reinvigorate
their sneaker line and should benefit from the back-to-school
retail market.

Creatura’s $200 million Federated Clover Small Value Fund
(VSFAX.O: Quote, Profile, Research) is up 3.56 percent year to date compared with the
Russell 2000 small cap value (.VBY: Quote, Profile, Research)’s 3.499 percent.
(Editing by Richard Satran and Bernadette Baum)

MONEY CALL-Amid global tumult, U.S. ‘value’ stocks seen safe