NEW YORK - Charles Norton, manager of the Vice Fund(VICEX Quote), says tobacco stocks are among the best buys because demand has stayed strong despite the recession.
The mutual fund has risen 7.5% this year, trailing the S&P 500 by 5.5 percentage points. Over the past three years, the Vice Fund has returned an annual average of 3.4%, better than 91% of its rivals.
Welcome to TheStreet.com’s Fund Manager Five Spot, where America’s top mutual fund managers give their best stock picks in five fast and furious questions.
Are you bullish or bearish?
Norton: At current levels, we’re pretty cautious near-term, simply because melt-ups like the market has experienced over the past three to four weeks are unsustainable and, in our opinion, an economic improvement and everything else going right in the world are now adequately reflected in the price. But at the Vice Fund, we’re primarily focused on the tobacco, beverage, gaming and aerospace/defense sectors, and within that universe, we’re finding ample opportunities. Our target sectors are less dependent on economic growth than others and, in general, offer earnings stability, dividend security, high visibility and reasonable valuations in an otherwise uncertain market environment.
What is your top stock pick?
Norton: Our top pick, and the largest holding in our portfolio, is Philip Morris International(PM Quote). First, the trends within international tobacco are extremely favorable, with pricing power strong and major competitors concentrating on revenue as opposed to battling over market share. Philip Morris, specifically, has improved its focus on innovation around the Marlboro brand with various line extensions and new packaging. It’s the industry price leader. It has broad, geographic exposure and robust, relatively low-risk earnings growth in an otherwise uncertain market. And the company is also cutting costs and aggressively buying back stock. Plus, its dividend yield is over 4.5%, and dividends could edge up.
What is your top “beneath the radar” stock pick?
Norton: We like Melco Crown(MPEL Quote), a pure-play on Macau. Macau gaming revenue growth actually went positive in July, the first year-over-year increase since November. Macro data for the remainder of 2009 could look good if the Chinese economy continues to roll. The company opened City of Dreams in June, and after a slow start, operating trends there improved a lot in July, and Melco Crown’s market share jumped to 17.8%. We are believers in the long-term prospects for Macau, and right now Melco Crown is the only way to participate in that without U.S. gaming exposure, where the trends have stabilized for now but at low levels.
What is your favorite sector?
Norton: Our favorite sector is tobacco, and specifically international tobacco. Global cigarette demand is proving to be exceptionally resilient. The global economic slowdown has had a limited visible impact on tobacco consumption, with no broad-based trend toward consumer down-trading. Part of the resiliency is the affordability of cigarettes, even premium brands, which are cheap relative to other consumer goods like toothpaste or fast food. Operationally, international tobacco companies are firing on all cylinders, with currency fluctuations the primary risk. With the rebound in many emerging-market currencies, though, the forex impact has been somewhat alleviated. Pricing power remains very strong with a number of price increases in key international markets and pricing the key driver of revenue and profitability. Industry competition is rational and increasingly profit-focused, and regulatory, legislation and excise-tax risk is benign with the exception of the disruptive tax hikes in the Ukraine.
What sector or stock would you avoid?
Norton: We’re cautious on commercial aerospace. The whole OEM backlog was built as airlines around the world, especially in the emerging markets, needed more capacity to meet growing air-travel demand. Now that traffic is declining, airlines are cutting capacity, parking planes and deferring or canceling orders for new aircraft that are no longer needed. There’s still a large supply/demand imbalance in aerospace that will only be corrected as airlines continue to cut capacity and the OEMs slash production rates to meet tepid demand. We think there’s still more turbulence ahead within the aerospace sector.
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