Your Core Portfolio: Midcap Value Stocks

by Lawrence Meyers | August 1, 2013 1:45 pm

In continuing my quest to create a fully diversified portfolio that I can hold for the long term, I turn my attention to midcap value stocks, which make up about 4% of the portfolio.

This is a troublesome sector to find stocks in, with market cap hemming me in on both the top and bottom, and value restricting me from using many stocks — the market has soared due to quantitative easing, and while that’s pushed many people into dividend stocks, it also has spread a lot of coin into just about every sector.

I always anchor a sector with an ETF, and in this case the iShares Russell Mid-Cap Value ETF (IWS[1]) is a nice, broad ETF with which to do that. However, my goal with this portfolio is to outperform the given benchmark, so I turbocharge it with certain stocks I think will shine brighter over the long-term.

Leucadia National Corporation (LUK[2]) is often called a mini-Berkshire Hathaway (BRK.B[3]), as it’s a holding company filled with all kinds of interesting assets — plastics, timber, energy, real estate, timeshares, casinos, mortgages — and has been under the same management for 30 years. Because net income varies, I pay more attention to cash flow over time, and that’s what Leucadia has plenty of.

I like Tupperware (TUP[4]) for all the reasons listed here[5], not to mention over $250 million in free cash flow in the trailing 12 months, no capex to speak of, and a global brand name.

Hartford Financial Services Group (HIG[6]) is a solid insurance play with a beaten-down stock, the result of paying out some hefty asbestos claims and an exit from the life insurance business. This one is a bit of a risk, but I like the larger potential upside that comes with it and think it outweighs any long-term concerns.

Delphi Automotive (DLPH[7]) is the premium brand name in components and technology for automobiles and commercial vehicles on a global scale. It trades at 11 times next year’s earnings on long-term projected growth of 14%. It routinely generates $600 million to $700 million in FCF every year, has $1 billion in cash and very manageable debt of just over $2 billion.

Liberty Media Interactive (LINTA[8]) is a bit pricey to truly be considered a value stock, but I see it as a long-term value. You want to be in business with John Malone and his huge set of cash-flow-generating e-commerce businesses. I think the stock is worth closer to $30 than the $25 it’s at now. Even more undervalued is Barry Diller’s IAC/InterActiveCorp (IACI[9]), arguably worth as much as $90 per share and trading in the $50s.

And of course, I’m not leaving without my favorite value stock in the entire world[10] — EZCorp (EZPW[11]). The company is in the midst of a transformation, as it acquires more and more alternative finance companies around the world. Whether it’s a domestic online payday lender that it plans to move into the international market, or a Mexican payroll lender, EZ’s management is adding these cash-generating businesses to its core of pawnshops and payday lending stores. I believe it’s trading at 50% of what it’s worth.

As of this writing, Lawrence Meyers[12] was long EZPW. He is president of PDL Broker, Inc.[13], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[14] and blogs about public policy, journalistic integrity, popular culture, and world affairs[15]. Contact him at pdlcapital66@gmail.com[16] and follow his tweets @ichabodscranium.

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