The proportional mix of categories at any given time reflects Jones' views of which companies will do well in a particular market environment. Throughout 2008, the percentage of the portfolio invested in steady eddies increased as consistency of earnings and high free cash flows trumped high growth as desirable attributes. One steady eddie company, Pactiv Corp., fell less in a declining market because of the consistent demand for its products, which include plastic containers for prepackaged meals and plastic trash bags. It also benefited from lower prices for oil, a component of plastic resins. Jones pared back the position this year as the stock reached its pricing target as part of an overall reduction in materials sector stocks from 10% of assets at the beginning of the year to 6% by the end of the third quarter. Energy was another area of interest earlier in the year. Jones used price drops to revisit names the fund held in 2008, but sold in the summer of that year as the stocks hit all-time highs and valuations became excessive.
In the spring of 2009, she began picking up bargains in mispriced growth stocks, which were selling at what she considered unusually attractive prices. Fund holding NBTY Inc. falls into this category. The company, better known as Nature's Bounty, manufactures and sells nutritional supplements, diet aids, sports nutrition products and vitamins under brand names such as GNC, Ester-C and Rexall. Jones says the firm's acquisition of U.K.-based Julian Graves, a chain of 350 food and confectionary stores, has helped expand NBTY's geographic reach and improve its profits. It recently traded at about $40 a share, somewhat lower than the fund's $55 target selling price.
DeVry, another component of the mispriced growth group, operates for-profit educational institutions around the country that focus on post-high-school career training. Although its enrollment numbers dropped a few years ago after the tech bubble burst and the school's tech-oriented curriculum subsequently became less attractive to prospective students, DeVry's new push into health care training has successfully boosted enrollment, revenues and profits. Jones points out that the school's graduates have higher employment rates than either high school or community college grads, despite the recession. And government funding should remain steady as President Obama continues to push for broader access to higher education.
At the end of the third quarter, stocks in the mispriced growth category accounted for 52.8% of the fund. Steady eddies weighed in at 43.7% and turnarounds at 4%. Now, as the bull market matures, Jones is moving money back into steady eddies. Many of these companies have not participated in the market rally as much as others even though they've done nothing wrong. But because they have lagged this year, their valuations are still relatively attractive, she says.
Burger King is a recent steady eddie addition to the portfolio. Five years ago, the company began a rigorous campaign to renovate its restaurants, diversify its menus and revamp its marketing strategy, which is helping it improve same-store sales and profit margins. Although higher unemployment and increased frugality have dissuaded consumers from eating out, the low-cost menu has proved appealing in tough economic times. Long-term franchisee royalties provide a steady stream of revenues, which stabilizes cash flow. The stock, which recently traded in the midteens, has a pricing target in the low 30s. At its current price, Jones estimates it is selling at just 11 times 2010 earnings.
Republic Services, the holding with the largest public value, made its fund debut in September. Republic's acquisition of Allied Waste earlier this year has helped the company realize significant cost savings, which proved critical as lower construction held down waste production. Republic, the second largest waste management firm after Waste Management, has been able to increase prices despite revenue declines and has a steady stream of business from regional contracts for waste disposal in areas with high population growth such as Las Vegas, California and Florida.
