Exclusively for InvestorIdeas.com
September 07, 2006
In your hunt for market-beating stocks, wouldn’t it be nice to have a peek at the personal holdings of a successful money manager?
Thanks to the rules that make insiders report their trades, you can do just that.
The money manager is Susan Byrne, chief investment officer at Westwood Holdings Group (WHG). One of her biggest purchases recently for her own portfolio: $531,000 worth of her company’s stock.
As part of her job at her Dallas-based firm, Byrne manages the Westwood Equity AAA fund (WESWX). It’s a large-cap value fund which was up 8.46% for the year as of the end of August, or 2.93 percentage points better than the S&P 500. The fund also beat its category by about three percentage points over the past three years -- with annualized returns of about 16%, according to Morningstar.
Byrne and her team show other signs of success. Two new Westwood Holdings mutual funds for institutional investors are besting competitors so far this year by 5.2 percentage points and 2.3 percentage points, says Morningstar. They are the WHG SMidCap (WHGMX) and WHG Income Opportunity (WHGIX) funds -- up 9.6% and 6.7%, respectively.
Returns like these helped Westwood pull in assets at a healthy clip last quarter. Average assets advanced 29% to $5.4 billion. That asset growth drove a 30% increase in advisory fees to $4.3 million. Overall revenue grew by 26%.
Earnings per share, however, advanced only 5% to 18 cents because expenses grew at a rapid clip, too. But much of that expense growth came in the form of restricted stock – including a healthy dollop for Byrne.
That creates a non cash expense which erodes earnings. But it doesn’t impact operating cash flow -- perhaps a better measure of performance. Operating cash flow advanced an impressive 58% to $2.35 million in the second quarter.
This performance helps explain recent insider interest in the stock. But something else may be at work.
Compelling buy signal
In her funds, Byrne likes to invest in value names that produce healthy quarterly surprises not fully recognized by Wall Street. That investing strategy may also be a big part of the reason why Byrne was recently filling up on her own cooking.
Her company’s impressive 58% jump in quarterly cash flow announced at the end of July has moved Westwood stock up a scant 50 cents to around $19. After quarterly earnings were announced, Byrne bought $531,000 worth of Westwood stock, or 27,750 shares, at an average price of $19.14.
The purchases are a compelling buy signal for at least two reasons.
- First, Byrne has served as chairman and chief investment officer of Westwood Management since 1983. So she knows the company well.
Second, she already has a lot of exposure to the stock. She had 666,000 shares as of April. On top of that, she has an annual restricted stock grant of 50,000 shares a year for six years, starting this year. - As an investment manager, Byrne knows it’s wise to diversify. Yet despite this exposure, she plowed about a third of her salary and bonus into open market purchases of Westwood stock in August. That’s either conviction or carelessness. Given Byrne’s years of experience in the markets, I’d bet it’s the former.
Besides Byrne, a director bought $192,000 worth of stock for $19.20 in early August.
Under the radar
Westwood is not a high-profile name in money management like Fidelity or Vanguard. And you are not likely to hear it hyped on the financial shows any time soon.
The reason: Westwood is tiny with a market cap of just $120 million. Plus it has zero sell-side analyst coverage -- and it probably won’t have any soon. That’s because the company throws off a lot of cash and it has little in the way of capital needs. So it’s not a prime potential client for the investment bankers on the other side of the Chinese walls from the analysts at the Wall Street brokerages.
However, if you need outside confirmation that this asset manager makes sense as an investment, just look who is one of the biggest owners: Value ace Marty Whitman at Third Avenue Value. His firm owned 17% of the stock as of the end of June.
The risks
If the worry warts are right and we see a sharp downturn in the economy and the markets, asset management firms like Westwood may suffer as investors throw in the towel and pull money out of the market. Westwood finance chief William Hardcastle responds that the firm serves a lot of institutional investors like pension fund managers. They are more likely to maintain exposure to stocks even in a downturn. So assets may not see excessive shrinkage in a market tumble.
Next, while this looks like the proverbial “undiscovered gem” you always hear about, the problem with undiscovered gems is that they can remain undiscovered. So they don’t move up. Westwood’s game plan for promoting its stock is to continue to rack up good growth in assets and cash flow – and let the market notice. That’s fine as a strategy. But if you are an investor, just remember it may be a while before the market actually catches on. Your risk is that you get bored and sell the stock before you see decent gains.
The bottom line: Like the insiders, I think Westwood is a buy right here at around $19. But like the insiders, you need to buy for the long term with a good amount of patience. There’s nothing wrong with that – it’s the essence of investing. Byrne herself moved into energy stocks in her large cap value fund too early, in 2001. The bet finally paid off in the past two years. You may have a similar wait with this stock – but at least you will earn a nice 3.1% annual dividend in the meantime. As an added bonus, shareholders of record as of September 15 get a recently-approved special dividend of 85 cents a share, payable on October 2. You can chalk that up to the 58% growth in cash flow plus $21 million in cash on the balance sheet – or over $3.30 a share.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
