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By Dan Culloton | 06-27-2013 11:00 AM

Osterweis' REIT Pick, Plus the Case for Valeant and Oracle

Valuations are not compelling for the market as a whole, but selectively there are some real bargains, says manager John Osterweis. He makes the case for three portfolio holdings, including REIT Newcastle.

Dan Culloton: Recognizing, of course, that while you're macro aware, that you're a bottom-up stock picker, you look at the portfolio, and reflecting on what you just said, it doesn't hold a lot of cash, probably the least amount of cash that's held in recent memory. But yet the portfolio is still very selective. So it's not like you're finding a wide range of opportunities out there. It's still a very focused portfolio. You don't seem to add or subtract a lot of holdings between quarters. So is it safe to assume that, while you think valuations are OK, there not a lot of screaming bargains out there?

John Osterweis: I think, in general, valuations are OK; on a gross basis they are not compelling for the market as a whole, but selectively there are some real bargains. When we find them, we move them into the portfolio.

Culloton: One of those was a REIT, Newcastle. Perhaps you could talk a bit about what attracted you to that area. REITs has been an area that's been actually, up until recently, very popular. What made this particular REIT a value choice?

Osterweis: What was interesting about Newcastle is they were essentially in two businesses. One, holding residential mortgages and holding mortgage servicing rights. The other side was some CMOs that they owned, and underneath that, an exposure to senior living. They split the company into two; one side, which now uses a different name, has the mortgages and mortgage servicing rights. The other side has the CMOs and senior living.

To just look at this CMO/senior living side, which is called Newcastle, the company is going to be gradually liquidating the CMOs and building up their presence in senior living, and through their process, we think, can start to move their dividend up from around where it is today, roughly $0.50 a share, to maybe as high as $0.80 over the next few years. We think if they do that, the stock, instead of trading at a 10% yield, might trade at a significantly lower yield. Between the rising dividend and the stock trading at a lower yield, the stock could be quite interesting.

Culloton: I'd like to ask also about a stock that's been in the portfolio for a long time that has done very, very well; that's Valeant Pharmaceuticals. It recently made another big acquisition of Bausch & Lomb, and has run up in price. You still think it's an attractive holding at this point. Why?

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