Interview: BB&T Asset Management
>> oracle, built by larry ellison into the world’s number three software maker, has a new chief financial officer. former microsoft deal maker, greg maffei named c.f.o. and co-president. some say the move signals oracle may step up its acquisition spree. we spoke with maffei by telephone and asked him if that was why ellison hired him.
>> he has a great deal team in place already, and charles phillips has been involved, has a lot of deal experience, as well as larry himself so while i might be a contributor, that’s not my primary function.
>> checking oracle shares at the close. little changed. however, down 9% so far this year. for the last five years, small cap stocks have well outperformed their large cap counterparts. that could change this year. the russell 2000 index, a broad measure of small cap stocks, is down 3.25% so far. over the same period of time, the russell 1000 index of large cap companies down just .9%. john kvantas is portfolio manager with bb&t asset management. he joins us from his firm in raleigh, north carolina, for a closer look at small caps. this is part of our markets at hid year series―midyear series. i want to get a sense from you of why the small caps have started to lag.
>> i think they’ve started lagging earlier this year and continued through first three or four months. i think it goes back to what you said about the valuation differential that has been in place. the small caps were a lot cheaper than the large and that differential has narrowed and large caps have outperformed but we think going forward the rest of the year, as long as the interest rate environment stays the way it is, 10-year going below 4%, we think the fed is more towards the end of their increases than the beginning, we think small caps should do pretty well in the second half of the year.
>> how well?
>> well, i don’t think as well as they had the past four or five years. valuation differentials isn’t that great but we think relative to the midcaps and large caps, that small caps should still do pretty good.
>> in terms of that valuation differential you’re talking about, are there particular pockets where you still see value, where perhaps the gains haven’t been overdone yet?
>> some of the areas we like right now, the energy sector, while it’s done well, we still think there’s a major supply-demand imbalance that will continue to occur so we think there’s opportunities in the energy sector. also, we think consumer-related stocks should do pretty well in the second half. especially those that sell to the higher income consumer. energy prices still probably will continue to increase, we’re hitting $60 a barrel on the oil. but we think the higher-end consumer will not be hurt as much by that and should continue buying and those are a couple of industry areas we like. the bb&t small company value fund, we do a lot of focus on bottoms-up type approach where we look at each company individually so the overall sector outlook isn’t as important to us as the research we do on each company.
>> let’s talk about some of those companies. i know one of your picks that you own in the fund and i want to know if you own it personally, as well, is stanley furniture. do you own it personally?
>> i do not own it personally. we own it in the fund, it’s one of our top picks. it goes back to the consumer-related sector idea of the higher end, higher income consumer doing well and that’s who they sell to. they initiated dividend in 2003, doubled it in 2004 and increased it in 2005. produced solid operating margin and we think the stock is worth $30 and it’s trading in the low 20’s right now.
>> what do you think is the biggest risk?
>> the risk is, i think, the interest rate environment. if interest rates do go up, this is a consumer-oriented company and they may have a headwind if that happens. >> forest oil, another one of your picks. you own it personally. what you do like about it? >> new alliance?
>> forest oil.
>> forest oil. forest oil, i do noten. it’s another one of our top picks in the portfolio. that goes to our energy theme. that’s a company with new management, dag a great job with cost discipline, have deleveraged the balance shot and have made a couple of smart acquisitions in the past few years. we think the stock can get up to $50 and is trading in the low 40’s right now.
>> john, thanks for joining us.
>> thank you.
>> john kvantas of bb&t asset management. taking a quick break, when we come back, “money & sports.” the nba on abc’s tv network, good news for the san antonio spurs last night but may be not for abbas. abc.
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“after the bell.” i’m ellen braitman. let’s recap the day on wall street. stocks fell, closing at their lows of the day. the benchmark indexes having their steepest weekly decline since april. today’s declines came as oil prices neared $60 a barrel. a government report out early in the day showed an unexpected drop in orders for business equipment. the dow losing 124 points, the s&p today down nine, the nasdaq down 17. and late in the day, we had news on mad cow disease. a second case here in the united states. it did play out for some food stocks. details from deborah kostroun.
>> the u.s. confirming its second case of mad cow disease after a u.k. lab found traces of the illness in an animal that was actually cleared by earlier government tests so there was a discrepancy, one of the reasons they sent it to the u.k. some say the finding may delay attempts to revive the $2.5 billion in beef exports and force a review of the screening methods. however, that animal never entered the food supply, according to the department of agriculture. if you look at some of the food stocks, one of the things that you did see, a glitch in many of those in the last hour of trading when much of that news was coming out. looking at the bloomberg home building index, sharply lower, even though new home sales actually rose to the second highest level on record in may. in fact, home sales rose 2.1%. however that, didn’t impact, have a good impact on homebuilders. they were sharply lower. there’s a lot of concern right now about many of the homebuilders because many of their suppliers having a difficult time because they are dealing with higher petroleum costs and companies like trex lowered their expectations this week saying they wouldn’t be meeting their sales mainly because of higher fuel costs. it does take petroleum to make building products. looking at weekly changes we saw in some of the s&p 500. material stocks, the worst performers on the week. material stocks, as we’re talking about not only alcoa -- alcoa said they were cutting 6,500 jobs mainly because of higher fuel costs. material stocks, the worst performers of the 24 industry groups in the s&p 500. and a subset of those materials, steel stocks sharply lower, hearing not only that prices in europe and also in the u.s. sharply lower but in many of the steel companies saying they would not be able to make many of their extensions for the quarter for the year. back to you in the studio, ellen.
>> thanks so much. another stock on the move today, shares of legg mason. the stock surging to an all-time high. it added a hedge fund and billions of doctors in -- dollars in mutual funds to it’s its asset management arsenal. legg mason purchasing hedge fund company permal group.
>> legg mason raises its profile with these two purchases, becoming the nation’s fifth biggest money manager. the company, which is based in baltimore, takes over the hedge fund group permal group which manages about $20 billion and puts itself in the fastest growing part of the asset management business. in a separate transaction, legg mason agrees to buy citigroup’s mutual fund unit, paying $21 million in stock and half a billion in cash, that part of the deal valued at $3.7 billion, marking the latest effort by citigroup’s charles prince to shuffle the businesses and sell less profitable parts of the company. one analyst said it’s significant legg mason is entering the booming world of hedge funds.
>> i think the market ‘s reaction says a lot. legg mason is up substantially today. this is a good deal from their end. they’re buying citigroup’s assets on the cheap. this is not going to have a lot of impact from citigroup’s angle in that it was such a small portion of net income but it is good in the sense that they’re going to be able to focus more on their core businesses.
>> david haas who raised legg mason to outperform says this is the biggest, most intox deal legg mason has done, virtually doubling their assets under management to $830 billion.
>> this is something they’ve been doing for decades and i think all the stars were in order for them to pull it off.
>> that’s the view of rick lake, co-chairman of lake partners, in the hedge fund business. banks, chers and―insurers and money management firms have been buying hedge funds to win more businesses from clients with at least a million to invest. this is considered a sweet spot.
>> speaking of sweet spots, we did an analysis and found something very interesting.
>> investors would have done best to invest in shares of legg mason rather than citigroup or even the well known legg mason value trust. the chart shows the 10-year return to legg mason shareholders, the top line in white, up 1,one 17 percent -- 1,117 percent, clearly outperforming the citi shares but what is particularly interesting, you would have been better off buying shares of legg mason the stock versus legg mason value trust run by the well known fund manager bill miller. the red line at the bottom, up 193% over the past decade. miller’s fund has outperformed the s&p every year since 1991 but as that chart shows, it has been trumpd by shares of the company, legg mason. taking a quick break, when we return, we’ll hear from the c.f.o. of oracle.
