Another continuing restructuring story in the portfolio, AIG, is one of the fund’s more extreme value plays. The fund initiated that position about three years ago, well after the federal government stepped in and the balance sheet holes had been plugged. DeGulis is impressed by the insurer’s stock buyback program, which has reduced outstanding shares by 22% since 2011. Its life insurance arm “is well run and has inherent earning power, and its property and casualty business is returning to health.” He expects earnings per share of $5.60 for 2016, up from $3 per share three years ago. Two other insurance companies in the portfolio, Aon and Marsh & McLennan, are brokerage firms that also have large consulting operations. DeGulis likes their business diversity, strong cash flow and low leverage.

Technology holdings in the Sound Shore Fund include Oracle, which became part of the portfolio late in 2014 when the stock was selling at 12 times earnings. Many investors have been concerned that Oracle’s transition from on-site enterprise software to cloud-based software for its database management systems will have a negative impact on earnings. DeGulis believes that even though the company is likely to see revenue come in more slowly because of the provisions in the new cloud-based contracts, Oracle’s strong industry position and customer relationships will allow it to expand its market and increase sales.

In contrast to the values he’s finding in financials and technology, DeGulis believes that investor thirst for high-dividend-paying stocks has made so-called bond proxies such as utilities, consumer staples and health-care stocks look “fair to expensive. None of them is cheap relative to their history.” As a result, the fund has modest weightings in those sectors. And while energy stocks have declined over the last 12 to 18 months, concerns about low commodity prices are keeping the fund’s allocation to the sector to a modest 2.9%.
 

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