Brian Peery // Co-Portfolio Manager // Hennessy Cornerstone Large Growth (HFLGX)

Comments & Outlook

Despite the apparent positive trend in economic data, including housing starts, employment numbers, and even corporate earnings, we’re concerned that the rate of economic growth is slowing.

We’re carefully monitoring the market and are poised to capitalize on what appear to be reasonable valuations. We expect the market’s current selloff to reverse course later this year, so long-term investors can use the market’s down days to establish positions at great prices.

Recommended Strategies

We focus on the long-term growth of capital. Our methodology requires a low price-to-cash flow ratio, which helps uncover relative bargains with high returns on total capital. Total capital is a useful metric for determining how well a company is exploiting its limited resources to maximize growth.

What to Buy Now

The TJX Companies (NYSE: TJX) reported that May sales grew 10 percent year over year, with customer traffic up significantly at every division across the US, Canada and Europe. These strong sales numbers compelled management to adjust their earnings expectations toward the higher end of their projected range. The company should benefit from a slowing global economy, as cost-conscious consumers flock to its 2,900 retail stores.

Microsoft Corp (NSDQ: MSFT) is launching Windows 8, Server 2012 and the 15th iteration of the Office suite later this year. As consumers upgrade to these new products, that should provide some positive momentum for the stock, despite what amounts to a weak consumer PC market at present. The stock also offers a great value, especially when compared to some of the other names in the tech sector. In fact, it trades at a price-to-cash flow ratio of around 8. The company has done a great job of managing its resources, with a return on capital of over 38 percent.

Chevron Corp (NYSE: CVX) trades at a price-to-earnings ratio of 7.5 and yields 3.7 percent, which makes it far more attractive than 10-year US Treasuries. Long-term investors also have the opportunity to buy the stock at a time when oil prices are near recent lows.

Matthew Norris // Portfolio Manager // Ivy Value (IYVAX)

Comments & Outlook

Europe is China’s biggest export market, so the turmoil in the eurozone is hurting the Middle Kingdom.

A slowdown in China will remove some of the inflationary pressure from commodities. For example, a further drop in the price of oil could put $100 billion back in the pockets of US consumers over the course of a year.

Recommended Strategies

I employ a classic value strategy, where I calculate the intrinsic value of a company and only purchase shares when they trade at a 30 percent discount to my valuation.

As part of this process, I examine whether management is using a company’s free cash flow in a manner that accretes value to shareholders. It’s important to talk to management and see whether they’ve performed the extensive analysis necessary to determine the best way to deploy their free cash flow.

When a stock trades at a discount to fair value, that can signify a troubled company. Generally, such firms are beaten down either as the result of the macro environment or company-specific issues. I favor firms that are dealing with company-specific issues because it’s easier to envision a catalyst for an eventual turnaround.

What to Buy Now

Big-box retailer Target Corp (NYSE: TGT) currently faces a company- specific issue as the result of last year’s CAD1.8 billion purchase of 189 leasehold interests from ailing Canadian discount chain Zellers. The company plans to convert most of these sites into Targets by the beginning of 2013, but the elevated capital costs associated with this plan have depressed earnings in the interim. However, earnings should get a dramatic boost over the next three years once these Canadian stores start producing revenue.

RenaissanceRe Holdings (NYSE: RNR) is a reinsurer with a couple of intriguing niches. They specialize in offering reinsurance for extremely low frequency, high severity disasters. Only a couple of other reinsurers write this kind of business because it requires a balance sheet with tremendous strength. RenaissanceRe also runs money for other institutions in this highly profitable line in exchange for an annual fee.