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While many analysts say the economy is still on the upswing, Silas Myers, senior vice president, analyst, and portfolio manager at Roxbury Capital Management L.L.C., thinks most of the economic expansion in corporate America has already occurred. Because of this, Myers says his firm primarily invests in companies that can grow shareholder value in the face of economic uncertainties, such as inflationary pressure caused by higher energy prices.
Roxbury Capital selects stocks by examining a company’s price- to-free-cash-flow, enterprise value, and earnings before interest depreciation and amortization. The goal, says Myers, is to ferret out “companies that have a business model that gives it a durable competitive advantage in their particular industry.”
Ultimately, Myers, who co-manages $700 million for institutions and high net-worth individuals, says Roxbury Capital’s team of analysts determines what they think is the true value of a stock. If their numbers are higher than the stock’s actual price, they pay attention. “When we can get a 20% to 25% discount on what our estimates are on the fair value of a stock, we tend to hold those stocks for three to five years, especially if the company has a good business model,” says Myers.
Using this formula, Myers and his colleagues selected four companies they think have unique products and services that are hard for competitors to replicate. Their first selection was The First American Corporation (NYSE: FAF), which provides title insurance services; specialty insurance; and mortgage, property, and credit information to its clients. Myers likes this company because it lowered operating costs by outsourcing more of its business processes. It has also digitized its title information and can now provide that data to customers at a reduced cost. “First American has solidified its position as a title insurance provider and has gained market share in this space,” says Myers. “To replicate this information is a very expensive, long-term process, so instead of developing the data themselves, some competitors are purchasing it from First American.”
Myers says a strong brand name gives Tiffany & Co. (NYSE: TIF) a significant competitive advantage. The retailer and distributor of fine jewelry, watches, china, crystal, and personal accessories has plans to expand to more locations in the U.S., Asia, and Europe. He also thinks Tiffany’s Japanese operations will pick up during the next three years: “We are looking at an opportunity for Tiffany to double its store base worldwide from 150 to 300 stores. Its revenues should grow between 10% and 12% annually.”
In the competitive cable space, Myers sees Comcast Corp. (NASDAQ: CMCSA) providing the best value to its customers. He says the company has gone further than its competitors in upgrading its networks to provide video, high-speed Internet, and phone services. Myers also notes that Comcast can offer customers more services than its competitors, such as video on demand and voice over IP, at reduced prices. And because its offered reduced prices at the outset, customers will not switch services as often, which will enable Comcast to eventually increase its prices and revenues.
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