Reuters Insider - More upside for Visa, Delta Air Lines
28/01/2015 11:00
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Description: Mark Dawson, CIO of Rainier Investment Management,
looks for large cap names that have better growth
prospects than their peers and sees upside for the
credit card company and the air carrier
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Transcript (May be auto-generated)
Today on Investment Strategies, I'm joined by Mark Dawson, CIO and Portfolio
Manager at Rainier Investment Management. Nice to see you here. Nice to see you.
Let's start with your broad mindset about large cap stocks. Your fund has names
that have higher than average growth and higher than average multiples. So what
are you looking for when you're looking at equities to add to the portfolio? Is
there some inherent risk at perhaps looking at pricier stocks if that growth
falters? There can be, but what we're looking for is consistency of returns. And
often looking for consistency of returns, there is some premium involved either
on a one-year basis but we're looking for stocks that we think can deliver
superior returns over longer periods of time. And sometimes we do sell on a
slight premium. How long is long when you say longer periods of time? I would
say our outlook for our stocks, it looks out three to five years. And we have
formal estimates that go out three years but we really look at the five-year
potential return of our investments. Alright. Let's get to some names. Visa's
one that you hold. It's done better than a lot of names in the financial space.
Supreme Court coming out with a ruling on debit card swipe fees that actually
favors both Visa and MasterCard. So first on that ruling, is that already built
into the stock price because the stocks had a pretty good run? Yeah. I think it
is built in. There's a lot of close attention that has been paid to legislation.
What I would say about Visa and also MasterCard to some degree is that their
business is so good that it attracts regulation which is a two-edged sword. Both
companies have business models that are extremely well-positioned on a multiyear
basis. We've been investors in Visa since the IPO about seven years ago, so this
has been a wonderful investment for us. And every year we assess whether it can
continue to be the kind of investment that it has been. We have had a couple of
setbacks along the way. But they have shown the ability to absorb the Durbin
Amendment which did cut their fees in the debit card arena and we think they'll
be able to be resilient on a go-forward basis. But this is really a long term
holding in terms of our view of it. A lot of people have looked at Visa and
said, hey we want to do something like you do, and they have been unable to do
it.
And so we really see this as a company that is well-positioned not only for the
US economy but also for international exposure. Alright. Let's switch gears a
little bit and talk about Delta. The company recently reporting a loss although
it had a good outlook for 2015 results – obviously lower fuel prices helping
out airlines in the short term. But what's the long term story for a name like
Delta? You know for years, investors were kind of conditioned to think that
airlines were more trading stocks than long term investments. So what's changed
fundamentally that makes you excited about a name like this? You know so many
things have changed. And lower fuel prices while clearly a benefit are not the
reason for investing in Delta. That is one among many reasons. This has
literally gone from being a poor area for investment to a very attractive area
for investment. It was very unusual for us over a number of years to invest in
the airlines. We didn't like the returns on equity, their profit levels. We
didn't like their balance sheets. All of that has changed fairly dramatically in
the last five years. It is not confined to Delta. It is more of an industry
situation where they have consolidated down to a more limited number of players,
have better pricing and are just better managed companies. Ten years ago, there
was a senior airline executive who said this is a stupid business run by stupid
people. That's a little blunt. That is no longer the case. The days of stupid
people and some of the classic mistakes that airlines fell into really have
passed in our view. And we have seen dramatically improved balance sheets,
significantly improved returns on margins, and even rising dividends. So in the
case of Delta, certainly there is a lot of benefit that comes particularly of
oil prices now staying low, but this is a reconsolidated industry that is
exercising much more financial discipline than it has historically and it has
become investable from our point of view, whereas for a long, long time it was
not. So any risks to a name like this would really be external factors such as,
I hate to even mention terrorism, but if there were any unrests in the world
where people don't feel comfortable traveling, there's not really any internal
risks to this name, you don't think? No, I can't say there are no internal
risks. The traditional thing that undid the airline industry is they would bring
on too much capacity. Too much capacity opens up seats, open seats leads to
discounting, discounting leads to lower— and so it's one thing that leads to
another. I would say that risk is reduced but cannot be eliminated. So I can't
say that there aren't internal risks. They remain a possibility. But certainly,
external risks do grab investors' attention. We actually established our
position in Delta back in October when an external factor, a disease, Ebola was
one among many factors weighing on the market in general and transportation
stocks in particular. We saw that as an opportunity to take our position, so it
is a combination of both external and internal risks. Alright. Mark Dawson, good
to talk to you. Thanks very much. Enjoyed it. Thank you. I'm Rhonda Schaffler.
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