The Bourbon Street Bull: A Stronger Dollar Could Push Money Back Into Value Stocks

New Orleans-based Sandy Villere, portfolio manager of the Villere Balanced Fund, likes to cut against the grain. His $430 million balanced fund takes contrarian bets on value by searching for out-of-favor businesses on Wall Street with strong fundamental earnings and a stable outlook.
Villere prefers firms with unappreciated earnings growth, low debt and durability. The balanced fund also likes to hold roughly 60%-to-70% of its assets in stocks. The result: a 7.55% annualized return since the fund’s 1999 inception that trumps the S&P 500 Index’s near 5% gain, and similar performance from the Lipper Balanced Fund Index.
In this search for value, the Villere Balanced Fund has spent recent quarters picking among mid-cap stocks in the United States such as Luminex LMNX +%, Howard Hughes Corporation, DST Systems, LKQ LKQ -1.02% and Everbank. But it’s been an unfriendly market for these value bets, as investors pile into large cap stocks, particularly Facebook FB +0.63%, Amazon.com AMZN +1.45%, Netflix NFLX -0.04% and Google GOOGL +0.11% (FANG). In 2015, the Villere Balanced Fund posted a negative total return of 8.24%, cutting into the fund’s 5-year outperformance relative to its balanced fund benchmark.
Investors like Pershing Square’s Bill Ackman have complained about blind index investor money flowing into large caps at the expense of stocks outside the S&P 500. Joel Greenblatt’s strategy of going long value stocks and shorting expensive ones at Gotham Funds dramatically underperformed in 2015, but performance is beginning to turn. Villere says he feels these pressures, which remind him of an overvalued market in the late 1990s.
“There is no doubt that money is flowing into FANG,” Villere says. “If you own some small and mid-caps off the beaten path that’s not where the money is going,” he adds.
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Villere believes money can flow out of large caps just as quickly as it piled in over the course of 2015, and he believes a stronger dollar may drive money flows. Small and mid-cap businesses, after all, generally have a greater portion of their earnings coming from the U.S., insulating them from bubbling macroeconomic fears and sharp currency swings. Beginning in late February, Villere says he sees signs of money moving back into value stocks.
In a recent interview, Villere explained some of his favorite holdings and offered up a few words of caution.
Green Light: Taser International
Taser is best known for its stun guns, a somewhat controversial non-lethal policing tool. But Villere is more excited about the company’s body camera business. Taser sells body cameras to some of the largest police forces around the country and operates Evidence.com, a storage business for policing footage that has contracts with 22 of the largest police forces nationwide, including New York City, Chicago, San Francisco and Baltimore. With the stock trading nearly 50% off its mid-2015 highs, Villere says Taser is trading at its cheapest valuation in five-to-seven years.
Green Light: LKQ Corporation
Cheap gas prices means more driving, more car crashes and more business for automotive repair giant LKQ, says Villere. The company buys and refurbishes automotive parts, and is often a first call for insurers on the hook for car repairs. In January, LKQ’s shares were weighed by falling aluminum prices, leading to concerns about it scrap business, but as metals prices have recovered so too have shares in the Chicago-based company. With an 18% earnings growth rate and trading at 18 times earnings, Villere says LQK is undervalued relative to its accelerating growth.
Green Light: Financial Engines
The robo-advising pioneer recently bought The Mutual Fund Store to expand its 401(k) plan offerings. Villere sees 25% growth, making the stock a bargain after tumbling 36% over 12 months.
Yellow Light: Citigroup C -1.80%
Interest rate increases should bolster bank income, but the Fed might not be as hike-happy as it would like in 2016, thanks to a slowing global economy–and Citi’s worldwide footprint makes it vulnerable to dollar strength.
Red Light: Sanchez Energy
A big oil rebound would send leveraged energy plays higher, but stable prices or further drops will sink companies drowning in debt. Sanchez is one such, with a debt load of more than 100% of assets. In recent weeks, Villere has moved into gas-oriented drillers like Gulfport Energy that are deleveraging through equity capital raises.

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