Vitaliy Katsenelson on Where He’s Finding Value
- Joshua M Brown
- July 30th, 2011
This week my friend Charles Kirk conducted an amazing and wide-ranging interview with TRB fave value investing writer Vitaliy Katsenelson (ContrarianEdge). Vitaliy tells Charles the story of his childhood in Russia and his origin as one of today's most well-regarded value stockpickers.
Here they are discussing where Vitaliy is finding value in the market now:
Kirk: Without disclosing your entire book, can you take us through a few companies that match what you look for and that you think offer excellent upside potential?
Vitaliy: Computer Sciences and Xerox look very interesting. Both are not high growers (especially Xerox), but this is the case when an insanely low valuation (free cash-flow yield is greater than 13%), a stable and slightly growing top line, combined with management willing to buy a lot of stock, creates enormous shareholder value. Both companies generate huge free cash flows. Xerox announced they’ll start buying stock back in September, and Computer Sciences as soon as they file financials with the SEC (they were delayed in filing due to a $50 million accounting irregularity in one of their subsidiaries, but this is a company that has $16 billion in revenues).
Kirk: On a sector basis where is the most value to be found in this market?
Vitaliy: High-quality, noncyclical, or slightly cyclical large companies are the most attractive asset class. Think J&J, Medtronic, Microsoft, Cisco etc. Interestingly, these companies are labeled as value traps. I believe they should be called “growth traps” instead. The distinction is very important. Their stocks have gone nowhere in a decade or so, so they were a trap, but not because their earnings have stagnated or declined.
Earnings in most cases tripled for each company, but their valuations (i.e., P/Es) declined from unreasonably high levels in the late ’90s to current insanely low levels. Their earnings growth going forward will be lower than it was over the last decade – they are much larger companies today – but they’ll still have growth. Current valuation is factoring in declines, but that is an unlikely scenario.
I highly recommend you check out the whole interview at the link below...
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.