Aflac shareholders haven’t had much to quack about the past year with the stock severely underperforming the S&P 500 index, but Bill Smead, portfolio manager for the Smead Value Investor Fund, expects that to change.
“They cleaned up their trouble with their European bond ownership and now they’ve got $100 billion dollars to invest, and furthermore the stock trades cheaply at just over six times next year’s earnings,” says Smead, who also won’t rule out the possibility of Aflac being acquired at some point in the near future.
The $55.8 million fund, which garners 4 stars from Morningstar, is up 15 percent over the past 12 months, putting it in the top 3 percent of large blend funds tracked by Morningstar. Over the past three years, the fund has returned an average of 26 percent annually, outpacing 88 percent of its Morningstar rivals.
Smead is also bullish on another unloved equity in H&R Block, which also trades at a low price-to-earnings ratio of 10 times forward earnings. It also provides a 4.7 percent dividend. The company had trouble with its subprime-lending business, which it eventually sold, but Snead says the company has moved on.
“It has a great balance sheet, with a reserve for the subprime lending business it no longer owns. People have been on edge wondering how that’s ever going to play out and the answer is that it’s not going to be any kind of big problem,” says Snead, who adds that the tax accounting company will also benefit from steadily decreasing unemployment .
“When unemployment drops from 10 percent to 8 percent, they pick up a lot of tax customers,” he said. “People that have been unemployed due to the housing bust are coming back into the workforce and they need their taxes prepared.”
Media giant Gannett is another one of Snead’s contrarian plays. While the newspaper business has not done well in the past few years, Snead says the company is learning how to make it profitable again.
“The newspapers are beginning to figure out that they don’t give their stuff away. For example, I stayed here at the Waldorf and they are offering USA Today for their guests. I thought that that’s a pretty good compliment for a major hotel to still be using USA Today,” says Snead, who also likes the fact that Gannett owns TV stations in an ad-crazy election year.
Finally, Snead likes Bank of America as indirect play on a housing market recovery.
“We couldn’t get too bullish on a particular homebuilder, so we had to use indirect plays on housing and one of them is to own the banks that own a lot of the houses themselves. Like it or not, Bank of America sure owns a lot of houses,” says Snead. “And we like it.”
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