Beyond Earnings - Black Enterprise

Beyond Earnings

From all outward signs, what we can expect from the stock market in the months ahead may be disconcerting to investors. Case in point: The S&P 500’s 4% drop in November was the worst monthly showing since 2002. Prognosticators foresee a bear market, and experts say worries over credit markets and a rapid drop in the value of the dollar will be enough to keep investors chewing their nails in the near term.

Despite the overall climate, portfolio manager Silas Myers is going about his business unperturbed and ready to seize castoffs unduly punished by the market. Myers is CEO of the Santa Monica, California-based firm Mar Vista Investment Partners, which opened its doors in November, with some $100 million in assets under management. He’s a large-cap growth manager by trade and started his career at the New York City investment firm Utendahl Capital Management (No. 6 on the be asset managers list with $2.6 billion in assets under management).

Myers says his firm takes a “bottom-up” approach to picking stocks-Wall Street speak for a company-by-company selection of investment ideas. While peers often chase stocks based on how quickly companies are boosting earnings, Myers chooses not to lunge after profit and revenue momentum for their own sake, but instead measures how efficiently a corporation’s management is supervising the upswing.

Beyond earnings growth, what metrics are you looking at?
We’re focused on finding companies that grow shareholder value and not just earnings per share. An important yardstick we use in the process is measuring return on invested capital-a company’s earnings minus the average cost of capital, such as labor and equipment. While many management teams focus on putting up big earnings and revenue numbers, growth for its own sake has its drawbacks. We saw that around 2000, when tech and telecom companies spent money just to boost earnings.

How about the quality of a company’s operations?
We look for what we call “wide-moat businesses” that enjoy competitive advantages. Evidence of that can be a company’s ability to lift prices, the luxury of long-term contracts or product cycles, a significant installed base, or a substantial market share. The textbook example of this is Microsoft, which has its Windows and Microsoft Office software operating in 75% of the installed PC base.

How about an example of a brand with a wide moat that you like under current conditions?
FedEx (FDX) is one company that fits this criteria. The overnight delivery business is controlled primarily by two players-FedEx and UPS. The company name is so prevalent that it’s commonly used as a verb. The expense of purchasing a fleet of aircraft and setting up a distribution channel is prohibitive. Meanwhile, management has been spending money to modernize its airline fleet and distribution system to generate cost efficiencies. FedEx is also expanding its ground business, where the company’s return on capital is actually higher than in the air. In addition, the company is poised to pounce on a significant opportunity in China and India, where it’s built a presence over decades. [Trading