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By Michael Breen | 07-13-2009 02:25 PM

Not Afraid of Debt

Skyline Asset Management's Mike Maloney says that, despite the market's crisis panic, not all debt is bad debt for the stocks they own.

Mike Breen: Greetings, this is Mike Breen from Morningstar, and I am here with Mike Maloney from Skyline Asset Management, a Chicago-based value shop. Welcome, Mike.

Mike Maloney: Hi, Mike.

Breen: How are you?

Maloney: Good.

Breen: Your shop tends to own firms that have a hair more debt than the benchmark but have good interest coverage, cash flows etc. And that didn't seem to matter in 2008. You guys took some hits, but now ironically those same firms are back. How do you deal with something like that and do lessons learned without over-shooting the mark and trying to win in the last war.

Maloney: Sure. We definitely look at companies that we believe have strong financial characteristics, but we're not afraid of debt. We look at companies and if we think the business model supports it, if the margins support it and there's good interest coverage as you mentioned, we'll invest in companies like that. And oftentimes, we'll buy companies that might take on debt in terms of an acquisition and again if we see the opportunity is there to grow the earnings, but at the same time maintain a good financial structure, we'll take advantage of the opportunity.

I think in 2008 there was so much panic. In 2008 any amount of debt was considered bad, and any company that had any level of debt was considered to be at risk in terms of liability. And we really didn't believe that. We knew that we were going to go through some tough times in a difficult economic environment, but the companies that we owned we felt had strong business models, good market positions, and good coverage, and so, when we got through the panic late in 2008 and into 2009, investors stepped back and stopped focusing just on the amount of debt on balance sheets and a company's ability to handle that debt. I think they responded very positively to our stocks, and we saw a lot of the stocks rebound nicely.

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