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) 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) is often called a mini-Berkshire Hathaway (BRK.B), 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) for all the reasons listed here, 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) 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) 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) 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), 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 — EZCorp (EZPW). 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 was long EZPW. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets @ichabodscranium.
