Companies that fit the bill include luxury goods purveyors LVMH Moët Hennessy and Hermès International. “Humans are tribal and status-seeking, and people are always looking for ways to filter the appearance of value to the tribe. One of the best, most enduring ways to do this is to buy brands with global appeal.” Such brands retain their pricing power regardless of economic conditions, he says. Other leading consumer brands in the fund, including L’Oréal and the Estée Lauder Companies, hold similar appeal. “Personal care is one of the few industries accounting for a growing share of global GDP,” Yacktman says. “These stocks are recession-resistant.”
LVMH Moët, Hermès and L’Oréal are based outside the U.S., and among the foreign stocks representing about 17% of assets in the portfolio. Among the fund’s domestic companies, most of them earn more than half their revenues overseas. “We have found that the most superior risk-adjusted returns come from businesses possessing enduring pricing power and long-term volume growth opportunities,” Yacktman says, “and oftentimes, those attributes are to be found amongst businesses that are deeply entrenched in the global economy.”
Fund holding and tech giant Google is getting what he considers some unjustified backlash from investors concerned about the firm’s antitrust and regulatory challenges. He points out that the company’s global advertising revenues remain strong, and regulations could well throw up barriers to competitor entry into the space that would work to Google’s advantage.
In the financial category, the fund likes Charles Schwab, whose dominance in the marketplace makes it “the Amazon of the financial world, and an asset-gathering machine,” Yacktman says. Ratings service Moody’s also makes the cut as a company with staying power under a variety of economic scenarios. “Debt issuance has historically grown at least as fast as GDP, and capital market bond issuance has grown even faster as it has taken share from banking loans, Yacktman says. “Over the long term, we believe this growth is likely to continue.”
On the other hand, he avoids “hot” areas of the market, and initial public offerings fit that description right now. Like their forebears of the dot-com era, the vast majority of companies pursuing IPOs have yet to show profits. Since oil prices have fallen far behind the rate of inflation for many years, that scratches off energy stocks from Yacktman’s consideration as well.
Even companies with strong cash flows can be value traps if they aren’t prepared for change. Yacktman cites Pitney Bowes as an example. “Here’s a steady-eddy business with profitable economics that’s traded cheaply for over a decade, but is in a secular decline and produced awful returns for investors. Others that come to mind, such as IBM, GameStop, Hewlett-Packard, have all looked statistically cheap to free cash flows all the way down.”