A Contrarian Manager's Top 4 Picks
Croft Value fund hasn't fallen into the same traps that have plagued many other value funds this year -- investing too heavily in financials and missing the party in energy. If anything, the fund has had the opposite problem: Its exposure to energy and related companies has led it to stumble since July. But it hasn't fallen far. Over the past year through August 26 the fund (symbol CLVFX) lost 6% -- which is a good showing compared with the 12% drop of Standard & Poor's 500-stock index.
And the fund's managers -- Russell Croft, his brother, Kent, and his father, Gordon -- aren't burnt out on energy. They're still bullish on the top holding Petrobank Energy and Resources, even though the stock is down 28% year-to-date. The company explores for and produces oil and natural gas in Western Canada and Colombia, but Russell Croft says the market is missing part of the story. He thinks the price of the stock, which is listed on the Toronto stock exchange but trades on the U.S. Pink Sheets (PBEGF.PK), doesn't reflect the company's high-quality oil fields in the Bakken formation -- an area that covers part of Saskatchewan, northern Montana and northern North Dakota and produces valuable light sweet crude. "We think the Bakken field alone is worth $30 a share," he says.
Croft also says the company isn't getting credit for its new proprietary oil-extraction technology. Petrobank's THAI technology (the acronym stands for "toe to heel air extraction") pushes out usable oil from oil sands, which are a dense form of heavy oil mixed with sand and clay. It's less polluting than existing technologies for this type of extraction, he says. The company just put the first THAI well to work in the second quarter of 2008. The stock closed at $43.86 on August 27.
Croft also likes companies that are one step removed from energy. Number two holding Foster Wheeler (FWLT) provides engineering and construction services to oil companies, though Croft says the stock tends to get battered from time to time because its projects come in fits and starts.
But the long-term trends are evident. "There's a dire need for energy infrastructure across the globe," he says. Croft thinks Foster Wheeler will increase earnings at a 20% clip for the next several years. At $50.11, the stock is 40% off its 52-week high, and it trades for 12 times estimated 2009 profits of $4.26 per share.
Compared with oil, Croft says natural gas is ridiculously cheap. He points out that gas is less than half as expensive as oil, based on how much energy each produces. Ultra Petroleum (UPL) owns natural-gas interests in 125,000 acres in Wyoming. He likes the company because its costs to discover new gas deposits are about half the industry average. And because company management is highly conservative in how it values gas reserves, Ultra Petroleum could surprise investors with better-than-expected results. At its August 27 close of $69.80, the stock trades for 18 times estimated 2009 profits of $3.88 per share.
Ten years ago, Cisco (CSCO) would have looked awfully out of place in a value fund's portfolio. But given that the stock trades for 15 times estimated fiscal 2009 profits of $1.67 per share, Croft says it fits right in. "It offers growth at a discounted price," he says.
Croft says that video content is sapping up available Internet bandwidth like a dry sponge, and Cisco is the best way to play this demand. The bandwidth needed to carry high-definition video to your computer is 2,700 times that of displaying a static Web page, he notes. "We are big believers in the broadband build-out."
He also likes that chief executive John Chambers is a jet-setter -- constantly traveling to promote the company abroad, particularly in emerging markets. "He's making sure Cisco's in the right places for growth," Croft says. The stock closed August 27 at $24.37.