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Sarbit renews a love affair with U.S. stocks

A fund manager who is renowned for keeping a cash hoard sees new opportunities south of the border

INVESTMENT FUNDS REPORTER

After sitting on large amounts of cash for much of the past decade, money manager Larry Sarbit is on a cross-border shopping spree.

His fund, IA Clarington Sarbit U.S. Equity, is now 80 per cent invested in 21 U.S. stocks. And he hasn't finished buying. "I am buying two or three [stocks] right now - we're pretty close to being fully invested," said the founder of Winnipeg-based Sarbit Advisory Services Inc., which oversees $304-million in assets.

Mr. Sarbit has attracted attention in the past for his willingness to hold large amounts of cash during periods when he thinks the market is overvalued, unlike most fund managers who insist on staying fully invested or nearly so. He had more than 90 per cent of his fund's assets in cash in 2002 and 2003 following the implosion of the dot-com bubble, and over 60 per cent in late 2008 just before he sold his investment firm to IA Clarington Investments Inc.

He began to move out of cash in the middle of last year when he noticed that most investors were still shunning U.S. stocks because the country had been at the epicentre of the 2008 financial crisis.

"Clients were asking advisers whether there was any U.S content in a fund they were going to buy," he recalled. "That was how negative it was. If it had U.S. content, forget about it. ... It just struck me that everyone was paralyzed when it came to buying U.S. stocks."

He began to buy U.S. equities, and his purchases turned out to be fruitful. IA Clarington Sarbit U.S. Equity, which hedges its U.S. dollar exposure, posted a 32.6-per-cent gain for the year ended March 31 versus 10.7 per cent for the S&P 500 composite total return index in Canadian dollars.

Mr. Sarbit says in retrospect he should have begun to buy U.S. stocks sooner. "I did get frightened about the general economy [after the market collapse in 2008]," he acknowledged. "I should have been buying the hell out of the market, but we corrected that in 2010."

Bargains were still plentiful last year, he said. "We were finding companies with double-digit free cash flow yields. We bought Coca-Cola at 11 times earnings."

Mr. Sarbit also owns Iconix Brand Group Inc., which controls a portfolio of brand name apparel brands such as London Fog, Danskin and Joe Boxer, and licenses them to retailers and manufacturers. He bought the stock at around $14 a share, and it closed Tuesday at $21.17. "It is still trading at below 10 times free cash flow."

The manager looks for companies with a competitive advantage that can generate lots of free cash, have a recurring revenue stream and don't require constant infusions of capital. Over time, Mr. Sarbit's funds have beaten or came close to outpacing the benchmark U.S. index after fees.

At Investors Group Inc., where he ran the U.S. Large Cap Value Fund from 1987 to March, 1998, his fund posted an average annualized 19-per-cent return after fees versus 20.1 per cent for the S&P 500. When he was employed by AIC Ltd., his AIC American Focused Fund garnered an annualized return of 6.8 per cent from 1999 to 2005 versus a 5.1-per-cent loss for the index.

"[Mr. Sarbit's] track record has been quite good," even though there are gaps in performance when he ran his own investment firm from 2005 to the end of 2008, said Dan Hallett of HighView Financial Group. "If you look at the record of active management in the U.S. market, that is probably the one [market] where active managers as a group are least successful even when you measure before fees."

But it is surprising that Mr. Sarbit wasn't more aggressive in taking advantage of low stock prices when the market was bottoming in 2009, Mr. Hallett said. "There were no shortage of managers who recognized the value."

Mr. Sarbit says the U.S. market is now far cheaper than a decade ago when he was mostly in cash. Back then, it was trading at about 25 to 45 times trailing earnings compared to about 17 currently, he said. "We are not finding the huge abundance [of cheap stocks] like last year, but we are still seeing bargains. ... Sooner or later they will get recognized."

****

LARRY SARBIT'S STOCK PICKS

Coinstar Inc.

(CSTR-Nasdaq)

Now $46.81 (U.S.)

Shares in the U.S.-based operator of coin-counting machines and DVD rental kiosks were punished in January after the company reduced earning estimates, but it's only because of "growing pains" from the rapid growth of the firm's Redbox DVD service, Mr. Sarbit said. Coinstar, which has relationships with Wal-Mart Stores Inc. as well as grocery and drugstore chains, expects to double the number of Redbox DVD machines to 60,000 in the United States. "We bought the stock around $41 a share, but we think it is worth $55 or more."

CVS Caremark Corp.

(CVS-NYSE)

Now $35.80

The U.S. drugstore giant will benefit from a rising number of prescriptions as the population ages, Mr. Sarbit said. It will also get a boost from higher margins as generic pharmaceutical companies compete to supply drugs coming off patent, he added. CVS say it aims to increase earnings at 10 to 15 per cent every year over the next five years, boost dividends by 25 per cent annually over that same time and buy back $4-billion (U.S.) in stock every year. CVS stock, which trades at 10 to 11 times free cash flow, could hit $50 a share or more, Mr. Sarbit said.

CBIZ Inc.

(CBX-NYSE)

Now $7.05

The seventh-largest U.S.-based accounting firm is consolidating smaller players in the industry. The firm, whose main clients are private small to mid-sized companies, throws off a lot of cash because it is not in a capital-intensive industry. "It has a 14-per-cent free-cash-flow yield," Mr. Sarbit said. CBIZ, which has been buying back a whack of its stock, could potentially reach $14 a share.

© 2007 The Globe and Mail. All rights reserved.

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