David Rainey likes to take the long view. He's held more or less the same job since 1998, even though the firms and managements around him have changed.
His longest stretch was working at the side of the longtime and highly successful manager of the FBR Focus (FBRVX) fund, Charles Akre, who left in 2009 to launch his own offering, managed in a similar style.
Rainey, then an analyst, was promoted to manager after Akre's departure--and then he followed in Akre's footsteps yet again after FBR sold the $1.1 billion FBR Focus and nine other funds to Novato, Calif.-based Hennessy Advisors last October. Rainey and co-managers Brian McCauley and Ira Rothberg formed their own investment advisory firm, Broad Run Investment Management, in Arlington, Va.-and continue to manage the fund as subadvisors.
In other words: He's still got the same job.
Rainey plays the long game with the fund's investments, too. Some names have been in the portfolio as long as he can remember. "Our average stock is in the fund for six years," he said.
The long view has done well for Rainey and his co-managers. For the three years ended Aug. 1, the $1.1 billion Hennessy Focus returned 22.2% a year annualized, in the top 6% of the mid-cap growth category. Over the last five years, Hennessy Focus is up an annualized 15.5%, besting 99% of rivals.
PATIENCE & FOCUS
By running a concentrated portfolio of just 20 to 30 names, Rainey and his co-managers are able to get to know their portfolio well. They spend years researching and watching a stock before it makes its way in. "No new name starts off as an 8% position," Rainey said. "It starts out as a 1%, and as our understanding of a name increases, so does our confidence."
They favor companies with a strong competitive advantage that they believe will increase the stock price by a factor of three to five in the next decade. They have tended to steer clear of banking names due to what they see as a lack of clarity in the financial sector, and they've been light on tech because of increasingly shorter product cycles that can make those businesses difficult to evaluate. Instead, they like unglamorous businesses that perform well year in and year out-no matter what the broader economy brings.
The tricky part is that they don't like to pay too much for a winner, preferring to wait for stocks to fall on temporary hard times before building up a position.
CELL PHONE TOWERS
American Tower (AMT), at 9.2% of assets, has been a holding since 1998. The cell phone tower owner and operator has been successful in finding new locations to build towers as mobile demand has grown. "Tower growth, average rents per customer and the number of tenants per tower have gone up," Rainey explained.
In recent years, American Tower has extended its reach into Africa, as well as Argentina, Brazil, Chile, India and Mexico. "Even though growth rates in the United States slowed down in the last three to five years, the growth rates in the international markets are going up," he said.
Rainey believes American Tower can generate free cash flow growth of around 15% for the next five to 10 years. American Tower converted to a REIT in 2012, a move that helped the company save money on its real estate taxes-a significant expense for a tower owner. The company's growth rate should be 50% to 100% higher within the REIT structure, Rainey said.
The market seems to agree: Over the three years ending Aug. 1, American Tower grew at an annualized 16.5%; and for the five years ended the same date, it's up 11.9%. Recent results aren't quite as stellar--the stock's total return is down 7.1% since the start of the year, primarily due to currency headwinds.
Yet Rainey said the managers have no plans to sell shares. As long as the company continues to perform, it will stay just where it is.
CASTING A WIDE NET
Another REIT conversion is Penn National (PENN), a gaming company that got its start in the horse racing business in Wyomissing, Pa. The company's CEO, Peter Carlino, "always approached gaming as a real estate developer as opposed to a real gaming executive," Rainey said. As a result, Carlino has been much more conservative, Rainey believes.
Penn National's business model is to operate in locales with limited gaming, where it's difficult for a casino owner to break in. In fact, Penn National often leads referenda to limit the amount of gaming in a particular location. "They are looking to create regional gaming destinations," Rainey said. "You won't see Penn National on the Las Vegas Strip or in Atlantic City."
Instead, Penn National likes low-key spots like Sioux City, Iowa, and Joliet, Ill. For the three years ended Aug. 1, Penn stock returned an annualized 23.5%. However, after Penn reported an earnings loss of 16 cents in the second quarter and a 4.6% revenue decrease, mainly due to adverse weather in the Midwest, shares pulled back from their late April high.
O'Reilly Automotive (ORLY), an auto parts retailer, is another company that can withstand market shocks. The stock became a market darling during the recession as consumers held on to cars longer and spent more on their repair. Rainey insists that O'Reilly is an all-weather play, however. For one, the economy isn't exactly smoking. Secondly, there are still plenty of car owners who enjoy getting under the hood of their cars on the weekend.
Much of O'Reilly's recent growth--a 37% earnings increase in the second quarter alone--comes from a rise in same-store sales. But the company is also expanding its footprint. O'Reilly's acquisition of CSK Auto in 2008 allowed the firm to spread out in California; there are now more than 4,000 stores and the company plans an additional 190 by year-end. (Hennessy had also owned CSK at the time of the sale to O'Reilly.)
The key to O'Reilly's success, Rainey said, is that the firm knows its customer. "If you're in the suburbs of Boston, there might be more BMWs than a wealthy suburb of Tulsa," he said. "O'Reilly tailors [its] inventory to the local market."
Further, the retailer's vast regional warehouse system means that new inventory hits stores daily. "If you are out ... of something, that's a lost opportunity," he said. "They've created a distribution model that's second to none."
At $128 a share as of Aug. 1, the stock trades at what Rainey believes is a fair valuation, no longer the deep discount it was a few years back. The stock returned an annualized 37.48% over the last three years.
Despite his disdain for banking, the fund does have a few financial names. "We look for firms with a unique market niche and no large off-balance sheet financing," Rainey explained.
One name is Encore Capital Group (ECPG), a debt collection agency. Though not the largest player in the space, Rainey believes the firm can withstand greater regulation from the Consumer Financial Protection Bureau, which has recently turned its attention to debt collection.
Encore's $39.50 share price is at the high end of its 52-week range, though its forward P/E ratio is still less than 9. By comparison, the larger Portfolio Recovery Associates (PRAA) has a forward P/E of about 14--and Encore's stock returned 21.6% in the three years ended Aug. 1.