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Three Golden Ideas Pillaged From Heebner's Stash

Posted: May 14, 2008 10:59 AM by Will Ashworth

Tickers in this Article: CFC, CAM, DECK, MIDD, NOV, WFT, FTI, CROX, NASDAQ:LOM

Rather than reinventing the wheel when it comes to investing, why not take your inspirational cues from the professionals? Mutual fund managers, especially those whose funds have little turnover, are a great place to harvest ideas for the next piece in your long-term portfolio.

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Let Heebner Do the Work
One of my favorite fund managers is Ken Heebner. He's been managing money since 1973, and usually outperforming the indexes. Generally he's regarded as a big risk-taker who places large bets on industries that he feels are heading for major growth or a precipitous fall. Successful moves from Heebner include betting on homebuilders in 2001 and shorting mortgage companies like Countrywide Financial (NYSE:CFC) in 2007.

The smallest of Heebner's four funds is CGM Capital Development (LOMCX). It's closed to new investors, and not for the faint of heart with an annual turnover of 232%, but that's not relevant here. The fund buys small and mid-cap companies. We're simply using his current holdings as possible ideas. By the end of the year, they'll no doubt look completely different. (For more on analyzing a fund manager, see Mutual Fund Management: Team Players Or All-Stars?.)

Three Long-Term Plays
Over the past five years, CGM Capital Development returned 24.25% on an annualized basis. That's a full 10% better than the S&P 500. The fund has only 19 stocks with 62% of the portfolio invested in the top 10; it's not exactly diversified, but there are plenty of candidates worth buying for your long-term portfolio. Let's examine the top three.

Cameron International (NYSE:CAM)
Currently the fund's No.1 holding, this Houston-based company which helps keep the oil and gas moving by providing flow and pressure control services to producers, refiners, and pipeline owners. While not a glamorous business, it's an essential one. With rising energy prices, it's imperative that the product gets to market. Cameron International has a history dating all the way back to 1833, and it's now a company with 10 divisions and $4.67 billion in revenue, sending $501 million to the bottom line. Its competitors include National Oilwell Varco (NYSE:NOV) with a trailing price to earnings (P/E) of 18, Weatherford International (NYSE:WFT) with a P/E of 29 and FMC Technologies (NYSE:FTI). Barron's recently noted Cameron is a bargain in the oil services business with a current P/E multiple of 19 compared to FMC Technologies 25 times earnings, if margins continue to improve, along with sales, it's easy to see why the company is at the head of the class.

Deckers Outdoor (Nasdaq:DECK)
While on holiday last October with my extended family, my niece dragged us all over San Diego looking for the latest and greatest trends in fashions, including the UGG made by Deckers. This sheepskin boot from Australia seems to be overtaking Crocs (Nasdaq:CROX) as the coolest foot fashion. Despite a Crocs subsidiary winning a $56 million copyright lawsuit earlier this week, the company has not had a good year, dropping almost 70% since January 2 to around $11.30. Personally, I don't get any of it, but I'm not the target audience.

Deckers' latest first quarter earnings report was solid with sales up 34.4% and earnings per share (EPS) up 17.8% to 86 cents from 73 cents. The UGG brand continued its strong run with sales of $54.8 million, up 84% year-over-year. A year ago, they were 41% of quarterly sales. Today, they account for over 56% of the total revenue. Impressively, sales up are 75% from a year ago in ecommerce sales which account for 16% of Deckers' overall sales, demonstrating a huge acceptance of the UGG brand by the American consumer. Due to the first quarter success, management raised guidance from a 25% projected increase in sales, up to 31% for 2008. Recently, it acquired TSUBO LLC, a small California-based footwear brand that could produce the next must-have product. Time will tell; however, analysts loved the purchase.

The Middleby Corporation (Nasdaq:MIDD)
Middleby makes commercial food service equipment. Go into any commercial kitchen and you'll see Middleby products cooking away. In 2007, it generated $500 million in sales and $93 million in operating income with sales increasing 24.1%. Four strategic acquisitions contributed to 18.4% of this growth with the remaining 5.7% coming organically. For the full year, EPS was $3.11, up 21% from the previous year. The first quarter results were mixed; acquisitions contributed heavily to the 52% increase in sales. Without them, sales were flat. However, operating income increased by 38.3% to $26 million from $18.8 million the previous year. All four of the acquisitions were accretive to first quarter earnings. That's what I call integration. Sure, the commercial market is a little slow right now but any company that wants to stick around needs equipment. Middleby provides it with pleasure. (For more on valuing acquisitions. check out Analyzing An Acquisition Announcement.)

Bottom Line
Ken Heebner is a great fund manager, but remember his reasons for holding a stock may have very little to do with the quality of a company. Before you buy any of the holdings, make sure you do your own fundamental analysis of the company's financials, etc. It's better safe than sorry.

To get started on your own analysis, check out Due Diligence In 10 Easy Steps.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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