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Winters: Great Time to Shop for Undervalued Securities

Jason Stipp

Jason Stipp: I am Jason Stipp for Morningstar. With the market still prone to fits of volatility in 2010, we're checking in with noted stock picker David Winters of the five-star global stock Wintergreen Fund. We are here to learn a little bit more about his process and where he is finding opportunity in today's market.

David, thanks for joining me.

David Winters: Great to be here.

Stipp: David, you are a well known stock picker who looks for what you call the trifecta in companies that you invest for your portfolio; that's strong companies with good management at a good price.

I'd like to start, first of all, with the good price piece of that trifecta. With the U.S. markets down in 2010 year-to-date and the global markets down even further, how has this affected the opportunity set that you are seeing out there? Are you seeing more opportunity to put money to work this year in the market?

Winters: I think that prices all over the globe have come down. And so, it's actually a great time to go shopping for undervalued securities. The irony, of course, is that most people are petrified and they are sitting in cash or on the sidelines. And so, I think almost every country in the world offers deals today because people are sellers of stocks instead of buyers.

Stipp: And the opportunities that you're finding, are there any patterns? Are you finding that any themes are developing as you are doing your bottom up stock picking process, anything that's sort of coming forth of a particular area of opportunity across the world?

Winters: Well, the thing that stuns us, really, is that because people are fleeing equities in droves that you can buy, again, almost anywhere in the world, really good quality companies at very reasonable prices. So I think the pattern is that if you have the guts – and we think eventually there's going to be some glory, hopefully, lots of glory – to own quality companies at very attractive prices in all kinds of sectors, whatever sector you want to be in.

Stipp: So, on the point of quality companies, that's the second – the second question I really wanted to ask you on the good business piece of your investing philosophy. There was a lot of talk at the Morningstar Conference, a lot of concern actually about some of the headwinds that are out there, so the sovereign debt issues and the debt issues in developed world and the notion of the austerity measures that some countries may have to undertake as well as the whole idea of a slower growth environment that we may be facing.

When you are thinking about some of these possible headwinds, how do they factor into your analysis of a company and its prospects? And then, in short, I think what I want to ask you is what does it mean to be a good business in the kind of environment that we're facing today?

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Winters: Well, what's happened is that there were companies that were good businesses that are no longer good businesses. And so, you have to be very intellectually honest with yourself about what's going on. For example, the newspaper business was a great business for many years. If you had a monopoly newspaper, you had huge pricing power and lots of free cash flow. And the Internet has forever changed the newspaper business.

And so, years ago we owned a lot of newspapers because that made sense. Today we don't own any newspapers. And so, I think what you have to do as an investor is reevaluate what's going on in the economics of the business. And if it's changed, it doesn't make sense to own it anymore. And so, you got to have an open mind.

I think the characteristics you want are a business that has good improving economics, the ability to generate free cash flow. We have focused increasingly on multicurrency diversification. Example of all these characteristics would be Nestle that earns its money everywhere and has organic growth, is well run and is really quite a good business.

Stipp: On the notion of the third piece of your trifecta that the good management is run by good people, I think it's often said that sometimes it will shine the brightest in the darkest of times. And certainly, over the last two years, we've had our share of dark times in the markets.

Do you have any examples of some management that has really impressed you of the companies you own, some great stewardship of companies in bringing a company through with difficult time and preparing it, setting it up for a recovery to really capitalize on an improving environment?

Winters: What pops into my mind is Richemont, which is a Swiss luxury goods company. And they were intertwined with BAT. They spun off the BAT and they've become a pure play luxury goods company. And they've continued to expand the business primarily in the Far East. And so, I think that they have a very good balance sheet and they've used this period of time to prepare the company for better times ahead. And one of the things that we've seen over and over again in our travels, especially in the Far East was that human adornment goes back to the beginning of time. And so, we think that women will like jewelry, men will like watches, and that Richemont has done a very good job to prepare for the future, and we think we'll make a lot of money in the shares.

Stipp: On the flip side, David, are there any red flags of management that would turn you off from a company even if the business looks like it's a good business. Is there just management that it's difficult to get comfortable with?

Winters: Yeah, I think that's right. And I think it's also right if management is not willing to accept that the world changes and that they need to change with the times if they can. We've certainly had indications over the years and tried to keep track of characteristics that make us shy away from a company, but it's not perfect. We're very interested in how are people compensated. We want to be – compensation has to be tied to keeping them motivated. And we're very concerned when we see compensation that it's the old phrase "Heads I win, tails I win bigger."

And so, we really like to see management's compensation tied to the idea that we have, which is to be long-term owners of businesses not traders, which has what's become so dominant in people's activities, but we don't believe is the way is the path to true wealth.