Interview with Becker Capital Management's Mike McGarr

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Becker Capital Management

Q&As and Interviews

Interview with Becker Capital Management's Mike McGarr

Shauna O'Brien Jan 13, 2015



Insights from Mike McGarr


Mike McGarr: Of the three stocks you mention, only Microsoft (MSFT) would be considered close to fully-valued under our disciplines. The renewed emphasis on sound capital deployment, including dividends, by their new CEO, Satya Nadella, has certainly rewarded shareholders this year. Nevertheless, the valuation is now less compelling, and the company faces more challenging comparisons over the coming year. We have not been adding to our position of late.

Pfizer (PFE) and JP Morgan (JPM) remain core positions in the Becker Value Equity Fund, and we would not be averse to adding to those positions at current levels. Both are good examples of what we look for in our investments: companies with compelling valuations, robust balance sheets, strong records of return on invested capital and a disciplined approach to capital deployment.

MutualFunds.com: There are plenty of areas where value doesn’t appear as attractive when it comes to current valuations. Utilities, tobacco, and airline names are starting to bump above levels that normally raised red flags for value-focused managers. Do you think these sectors are getting pricey and where else would you say investors may want to exercise caution?

Mike McGarr: Utility shares are one area, as you suggest, where investors looking for a return in a yield-starved market have taken valuations to levels that are expensive given their limited growth prospects, capital spending needs, and regulatory challenges. We’re down to just one electric utility, Xcel Energy (XEL), and consider it more of a source of funds for new and more compelling portfolio ideas. That said, it has been a wonderful contributor to performance this year, and if interest rates remain restrained in 2015 we would expect to continue to own it.

We also own Southwest Airlines (LUV) in the fund and it has also provided very strong returns this year. Improved passenger traffic, capacity discipline and a tailwind from lower fuel costs keep us in the stock. If improved consumer confidence is any indication, business for Southwest could continue to be quite solid.

MutualFunds.com: Oil prices have been tumbling, making plenty of energy-related plays look much cheaper than we have seen in a while. Do you think oil prices have a ways to go on the downside, and are energy-related names value traps?

Mike McGarr: Oil prices could very well drift lower depending in large part on the actions of domestic shale oil producers and, of course, any moves by OPEC to address the current supply demand imbalance. Many of the stocks in this area appeared oversold in the recent market sell-off, and have since rebounded smartly. That said, some very attractive stocks in the energy industry remain. We recently lifted our position in Schlumberger (SLB) to capitalize on one of the premier oil services companies in the world. Regardless of where oil prices trend over the near term, the long-term prospects of a company like Schlumberger appear very bright. The focus on balance sheet integrity that we mentioned earlier is particularly relevant in the energy area right now, as those companies with compromised balance sheets could run into difficulty until oil prices find their footing.

MutualFunds.com: Is there a level on the 10-year that would worry you as far as competition to yield-centric names. As well, do you really believe the Federal Reserve is done with its generous liquidity programs?

Mike McGarr: We recently wrote in a piece to clients and other interested parties that although the Federal Reserve would like to be in a position to raise rates, it is unlikely that they would do so anytime soon given weak income growth, flagging overseas economies and a U.S. dollar that many already believe is making U.S. exporters less competitive. We even suggested that investors should not be surprised if quantitative easing resumed. In such an environment, dividend-paying shares could continue to provide decent returns. Barring some significant random event (and they’re always out there), investors should expect the current interest rate regime to persist past mid-2015. That said, with the recent cessation of further securities purchases by the Federal Reserve, the equity market is increasingly vulnerable to occasional shocks and pull-backs. The interest rate environment remains benign, just less so.

MutualFunds.com: Can you describe the process when you have multi-managers running one particular fund?

Mike McGarr: Becker Capital has relied on a team-driven investment approach since the founding of the firm more than 35 years ago. Star managers were never something to be sought and, as a result, egos were always held in check. We’ve been doing this long enough to understand how humbling the markets can be at times. For us, a rigorous team-oriented approach to security selection and portfolio management is not only second nature, but a more robust process in terms of thoughtful decisions, execution, and organizational depth. We meet regularly and as necessary according to market conditions. New ideas are subjected to rigorous group discussion, while existing portfolio holdings are regularly reviewed to ensure that our investment thesis remains intact. All major decisions are subject to a simple majority of the five-member team. This approach provides all of us with a strong sense of responsibility and accountability for all of the stocks held in the fund.

MutualFunds.com: What are the main themes investors should pay attention to as we head into 2015?

Mike McGarr: One of the things we’re paying particular attention to as we get closer to 2015 is profit margins. A number of strategists and observers have posited that margins could prove quite durable even at these historically high levels, and we believe there is some truth to that. Nevertheless, the profit margin cycle is one of the most persistent cycles in economic history, suggesting to us that margins in 2015 could experience some erosion. Even in the slow growth environment that we’ve been experiencing, companies have pushed their existing plant and people about as far as can be expected. At some point, the aging physical capital will need to be replaced and even expanded, necessitating a further pickup in hiring. Good news for Main Street, but not necessarily for Wall Street. At least initially, productivity and margins could come under pressure. Given high valuations for equities in general, markets could stall for a time.


The Bottom Line


DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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