Christopher Beck // Chief Investment Officer // Delaware Small Cap Value (DEVLX)

Comments & Outlook

The economy has weathered sig­nificant headwinds. Meanwhile, cor­porate profits have spurred higher stock prices. The market’s perfor­mance suggests corporations are making the right choices, whether that’s generating cash flow, buying back shares, or paying dividends.

Small-cap stocks aren’t necessarily insulated from the global economy’s woes, but they’re much more depen­dent on the domestic economy than most large-cap companies.

Recommended Strategies

Following the downturn, we’ve fa­vored industries that benefit from a modestly growing economy, such as technology and consumer services. We’ve been underweight more de­fensive sectors.

We look for companies that gener­ate ample free cash flow, which can then be used to compensate share­holders. We’re normally indifferent about how they achieve the latter end, though given present valua­tions, we favor share repurchases.

Companies must also have strong balance sheets with low debt levels, and operate in industries that don’t require intensive capital spending. Fi­nally, we’re leery of companies that pursue acquisition sprees because it can take at least two years to deter­mine whether management made a savvy buy.

What to Buy Now

Helix Energy Solutions Group (NYSE: HLX) provides services to deepwater drillers, such as instal­lation, inspection and mainte­nance in the Gulf of Mexico and other offshore areas. The compa­ny also has an ownership interest in some production facilities in the Gulf as well as an oil and gas division, so it’s managed to gen­erate strong free cash flow. Helix has transformed its balance sheet in recent years by selling assets and paying down and refinanc­ing debt. It’s currently trading at an attractive valuation, and its off­shore assets are worth more than its share price suggests.

Harris Teeter Supermarkets (NYSE: HTSI) is slowly expanding along the East Coast. It’s generated impressive same-store sales growth, and doesn’t have any exposure to multi-employer pension issues, which aren’t uncommon in the gro­cery industry. Its balance sheet is cur­rently in a net cash position, and its shares yield a modest 1.4 percent. The grocer has 206 stores at present and is only adding eight to 10 stores per year, so capital spending should remain under control.

David Ruff // Portfolio Manager // Forward Select EM Dividend (FSLRX)

Comments & Outlook

Among the emerging markets, Southeast Asia has the best overall fundamentals. In our portfolio, we have a heavy weighting toward Thailand as well as Indonesia.

Relative to the developed world, both countries have low debt-to- GDP ratios and are fiscally healthy. Their growing economies are sup­ported by income growth, credit availability, and low inflation.

Recommended Strategies

We screen for stocks whose dividend yields are unusually high relative to their local markets, which typically occurs when shares are under pressure. We try to deter­mine whether the company faces temporary or secular headwinds, and then identify a catalyst for an eventual turnaround, such as a new product or management team.

As shareholders, we want to get paid in three ways: dividends, dividend growth, and share price appreciation. Additionally, the company must also have a low pay­out ratio, so that it can sustain its dividend while retaining the neces­sary cash to reinvest in its business.

Our approach works best in the emerging markets because the lack of information leads to pricing ineffi­ciencies that we’re poised to exploit.

What to Buy Now

PT Tambang Batubara Bukit Asam (Indonesia: PTBA) is one of the few Indonesian names whose shares are down year to date, so it still offers an attractive opportu­nity. The thermal coal miner’s stock has suffered because coal prices fell following reports about high coal inventories in China. However, the majority of their production is sold domestically to state-owned power producer PLN. The com­pany has no long-term debt and its shares yield 8.2 percent. We expect earnings to grow 15 percent annu­ally over the next five years.

Thai telecom firm Jasmine Inter­national (Thailand: JAS/F) has the strongest prospects of the country’s three broadband WiFi providers, with contracts in place or pend­ing with both of Thailand’s leading telephone companies. Management has successfully navigated thorny issues, including a weak balance sheet. This year, free cash flow generation should finally be sufficient to produce a 2.5 percent yield. The company’s shares trade at a low double-digit earnings multiple, and we anticipate earnings growth of 50 percent year over year.