Generation Wave Growth Fund - GWGFX
The Generation Wave Growth Fund returned 5.84% for the quarter ending March 31, 2011, versus 5.92% for the S&P 500. For one year ended March 31, 2011, the Fund returned 13.72% versus 15.65% for the S&P 500.
Click here for the most recent performance for the Generation Wave Growth Fund.
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Funds may be lower or higher than the performance quoted. Performance data current to the most recent month end can be obtained by calling 866.264.8783.
Generation Wave Growth Fund (“Generation Wave”) results in 2010 reflect some sizeable portfolio turnover. Coming into the year there were significant investments in large banks such as Bank of America and Citicorp and positions that emphasized improving credit quality for individuals and leveraged companies in general. All of these positions were sold during the year and we realized profits overall. The top performers were the companies that buy defaulted loans and work out payment plans with individuals
We further sold off positions that had less to do with the boomer theme such as Japanese securities, lithium batteries, and Chinese computer gaming companies. We have also sought to help returns by eliminating investments in ETFs and closed-end funds that charge us fees. These past areas have been replaced with stocks trading in three basic areas: medical/healthcare (preferably stocks with dividends), financial stocks focusing on savings and investment and a stay-at-home focus for people looking to save more money and turn inward.
Three themes dominated the moves made in early 2011 for GenerationWave: 1) selling more of the remaining ETFs and closed-end funds, 2) exchanging some of the big pharma names into new drug companies that have greater room to boost dividends and rely less on patent-expiring drugs, and 3) identifying and adding more turn-around companies. The remaining ETFs and closed-end funds were in silver and junk bonds. Both have had a tremendous rally as investors bought precious metals on inflation fears and reached for yield with Treasuries at low levels. At this point we have 15,000 shares of the iShares Silver Trust left and both junk bond funds are completely sold. In our view, poor credits can offer good value at 50-70 cents on the dollar and reward investors with higher than average yield and capital appreciation. The same cannot be said when junk credits are trading at 105-115 cents on the dollar. That is the level of price change those securities have seen since 2009, and profits have been realized for several quarters with the final positions eliminated in 1Q. The iShares Silver Trust position was reduced, but we still hold 15,000 shares. Inflation fears justify keeping some of this position, and there are issues with realizing gains in investment companies like this ETF for the mutual fund. Within the mutual fund rule parameters, we will likely look to reduce this position further this year.
One of the largest drags on portfolio performance has been the large pharmaceutical companies such as BristolMyers Squibb, AstraZeneca, etc. These stocks have been owned for: 1) high yield, 2) cheap valuations, 3) strong cash flows, and 4) low leverage to enable them to maneuver through patent expirations. While we still strongly believe many of these stocks should produce solid returns going forward, the rapid gains in the market as a whole have been leaving them behind as the market worries about patent expiration.
We looked at the industry completely and did a full cash flow analysis and came away with the conclusion that the entire group was very cheap and some logical swaps existed. As a result, we cut back on Eli Lilly, Pfizer, Bristol Myers, and AstraZeneca and added new names like Roche, Abbott Labs, and Johnson & Johnson. In each case, the new additions were yielding about 4% vs. 4.0%-5.5% for the positions sold. More importantly, the new additions have been posting double-digit sales growth and have very minor exposure to patent expiration in the near term in terms of percentage of total sales. And finally, the new additions were only spending about 30% of free cash flow on dividends and thus have room to potentially grow their dividends faster than the reduced positions. Moreover, while the reduced positions had a higher current yield, they no longer had a meaningful edge in P/E ratios. They were trading for 9-11x forward EPS vs. 11-12x forward EPS for the companies with better growth potential. The total return potential looked more compelling to make these swaps and the new names were 8.1% of the portfolio at the end of 1Q. They have since risen to 10.7% of the total portfolio.
Turnaround names continue to be our primary focus. I have talked in the past about looking for companies trading near lows after some bad news that continue to have solid businesses with high barriers to entry to help protect them and help stage a recovery. These are the types of companies that have good prospects for getting acquired as we are currently seeing with our positions in NASDAQ OMX Group and NYSE Euronext. We believed that there would be a renewed focus on investing by the Boomer generation and thought the stock exchanges had businesses that would be very tough to duplicate and gather market share. We have also seen solid performance in our turnaround stocks that focused on people staying at home more. Comcast (cable TV), Myers Industries (flower pots), Kroger (grocery stores) and Lifetime Brands (kitchen wares) were all bought when they were hitting new lows and have recovered nicely.
A new name that we have added of late is Aegean Marine. This is a company that refuels cruise ships (Boomer connection), tankers, and cargo ships at sea. For years, this has been a very steady business that earned $25-$30 per ton reselling fuel. It has continually added new boats and now operates in seventeen ports up from five a few years ago and has become a dominant player in the industry.
In the summer of 2010 as oil prices began to rise, customers sought to hoard cash by not filling up their tanks completely and only bought enough fuel to get to the next port. Major ports such as Singapore and Amsterdam suddenly saw the volume of fuel sold drop noticeably, which crushed pricing. In addition, smaller operators still run some single-hulled tankers (all of Aegean Marine’s boats are double-hulled and very new). These single-hulls will be phased out worldwide by 2015 and many markets have already banned them. Therefore, in their dying days, the owners can only operate in a few ports and have to generate business at any price and did. The result was pricing on reselling fuel dropped to $13 per ton driven by oversupply in the normally huge markets for refueling.
Aegean Marine stock fell from the $35 to less than $8. The replacement value of its boats, cash on hand, and working capital should give it a fair value of $11, in our view. Moreover, the value of its boats should rise as the mom-n-pop competitors are forced out of business by the ban on single hulled boats. Mom-n-pops may also be forced out because they may not be able to afford to buy fuel when oil is above $100/barrel and extend 2-3 weeks of credit to customers. Their working capital build essentially drains them of cash. Aegean Marine has over $1 billion in liquidity to withstand this. I bought a large position in Aegean Marine at less than $9 for the Fund. .
What is happening is Aegean Marine moved several of its boats out of the crowded ports to new places. During those moves, it cost the company money and they weren’t selling fuel so volumes were lower. The less crowded ports did not see fuel spread collapse to the same degree and already spreads have been rising again and are $17/$18. Aegean Marine is at breakeven at about $17 and every $1 in spread should be worth about 20-25 cents in EPS. Just returning to the low-end of the normal spread would have it earning $2 per share and growing if they add volumes from new boats and with mom-n-pops potentially leaving the industry. Aegean Marine’s focus on many ports makes it easy for large-scale customers operating on many routes to deal with Aegean Marine over a collection of smaller players. Moreover, it signed an exclusive deal with Panama and expects to sign deals with two more ports. All of that should help it improve pricing as well.
Fund Holdings and sector allocations are subject to change at any time and are not recommendations to buy or sell any security. Please (click here) for the fund’s holdings.
Opinions expressed are those of the portfolio managers and are subject to change, are not guaranteed and should not be considered a recommendation to buy or sell any security.
The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. You cannot invest directly in an index.
Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g. depreciation) and interest expense to pretax income.
Earnings per share (EPS) is calculated by taking the total earnings divided by the number of shares outstanding.
Price/Earnings (P/E) Ratio is a common tool for comparing the prices of different common stocks and is calculated by dividing the current market price of a stock by the earnings per share.
EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. An approximate measure of a company's operating cash flow based on data from the company's income statement.
Book value is the net asset value of a company, calculated by subtracting total liabilities from total assets.
Earnings growth for a Fund holding does not guarantee a corresponding increase in the market value of the holding or the Fund. |