Most investors want to take advantage of the high-flying U.S.
equity market but remain worried about the daunting challenges the
country faces. Charles Akre, former manager of FBR Focus, struck
out in 2009 to launch Akre Focus. Concerned about the U.S.
government's huge debt burden and overextended household balance
sheets, Akre loaded up on lower-end consumer names with attractive
growth potential. He also established positions in financial firms
that would benefit from rising interest rates and mounting
inflation. He keeps a lot of cash on hand as both an insurance
policy and a store of dry powder to take advantage of any
opportunities that might arise.
Almost a quarter of your fund's assets are allocated to
cash. Why do you maintain such a high cash allocation?
In a recent
Wall Street Journal
op-ed, Charles Koch (chairman of Koch Industries and a prominent
conservative) spoke about the problems facing our country, noting
the amount of debt the federal government holds both on and off the
balance sheet. He observed that the Social Security, Medicare and
Medicaid systems are unfunded liabilities of over $100 trillion.
Decades ago, former Congressman Everett Dirksen (R-Ill.) said, "A
billion here, a billion there, pretty soon, you're talking real
money." Decades later Koch said, each man, woman and child in this
country owes $300,000 on that debt.
There's an unsustainable amount of debt piled on this country.
The U.S. needs to quit kicking the can down the road and begin to
deal with this problem. The best solution is for the U.S. to grow
out of its debt, but an unemployment rate of 9% or higher makes
that scenario unlikely. Consumer spending accounts for 70% of U.S.
gross domestic product. Elevated unemployment and decreased
borrowing capacity through home equity lines and credit cards
should cap economic growth for the foreseeable future.
The consumer is further constrained by a need to save for
retirement. The assets households had set aside suffered steep
losses in 2008 and 2009. Consumers also need to pay down personal
debt, which has only declined by about 5% over the past few years.
The consumer's ability to spend has been greatly reduced. Don't
expect the U.S. economy to grow its way out of debt.
The most likely solution to our expanding debt is to devalue the
U.S. dollar. This will make the dollars that the U.S. repays to its
creditors worth far less than when they were borrowed. A
1970s-style inflation and interest rate spiral is possible. The
odds of that outcome are better than even, though I'm not an
economist and I don't focus exclusively on this issue. Personally,
I don't expect a massive run-up in inflation.
Even starting to resolve these problems will cause discomfort in
all parts of U.S. society. Therefore it's wise to remain cautious.
Although we've had velvet revolutions in the past, we're now
witnessing violent uprisings in the Middle East and North Africa.
This turmoil continues to spread. No one knows how those
revolutions will be resolved, but the concerns about this upheaval
are reflected in higher prices of oil and gold.
We can see the impact of the Federal Reserve's quantitative
easing and asset inflation programs, which some claim are having a
direct effect on food and other commodity prices.
The U.S. is in a slow recovery. I'm an optimist, a quality
that's essential to being a successful investor. That being said,
it's best to remain cautious. That means holding ample cash so that
you can take advantage of the opportunities created when the market
takes the occasional spill. After all, the market is up nearly 100%
from its March 2009 lows.
Despite your concerns about U.S. consumer spending, you
seem to have a very consumer-oriented portfolio. What explains
this ostensible contradiction?
We hold shares of CarMax (KMX). New car sales are rising, but
used car sales have rebounded as the economy remains less than
robust. CarMax is the best in the business and controls about 3% of
the U.S. used car market, so they have plenty of room to ramp
We also hold shares of Dollar Tree (
), which operates a chain of dollar stores. The stock trades at 11
times earnings, and the company boasts a record of compounding free
cash flow in the upper teens. This is a business that performed
wonderfully in robust economic times and is well-suited for a time
when consumers are still trying to stretch their dollars.
We also own Ross Stores (ROST) and TJX Companies (TJX), two
retailers that specialize in off-price apparel. These stocks have
similar characteristics, with a valuation of 10 to 12 times free
cash flow and histories of compounding shareholders' capital by
nearly 20%. Ross Stores and TJX tend to do well when consumers are
These three companies have wonderful balance sheets. One of them
has no net debt and the other two have very modest amounts of debt.
And they're extremely well-positioned to attract cash-strapped
consumers who still requires clothes, house wares and other
We also hold TD Ameritrade (
) and optionsExpress Holdings (OXPS). These companies provide
online trading for consumers who prefer to manage their brokerage
accounts on the Internet instead of calling their cousin Dick down
at Merrill Lynch.
These companies don't have much to do with a constrained
consumer. The investment case is related to individual investors
returning to the market. The Federal Reserve's efforts to inflate
asset values have prompted investors to shift their assets into
equities from cash, U.S. Treasury notes and other safe havens.
TD Ameritrade is also an indirect play on interest rates. The
huge customer balances enable the firm to earn a spread on that
money. Rising rates can make a substantial contribution to the
company's income and revenue streams.
OptionsExpress is a specialty company that deals entirely with
options strategies. It's a terrific business whose stock sports a
The one holding that provides our portfolio with direct exposure
to the consumer discretionary segment is Penn National Gaming
(PENN). Visits to casinos are down for the third year in a row.
Play per visit is down. Competition within the space continues to
intensify. The outlook for Penn's organic growth isn't as robust as
it used to be.
Why do we own it? The CEO has been the best in the industry at
building shareholder value. The company has been very aggressive in
adding new casinos. Penn is building a new gaming location in
Kansas City and two new facilities in Ohio that will beef up its
existing presence in the state. The firm also has operations in
Texas, Florida and Maryland.
We're seeing a lot of heady predications that corporate
earnings will break another record this year. Do you subscribe to
First of all, many businesses - for instance, healthcare and
manufacturing - aren't directly consumer oriented. These will
continue to grow nicely. Businesses cut costs to the bone three
years ago and, by and large, have yet to rehire, so general and
administrative costs are much lower than they were at that time.
Add in solid growth and lots of sectors could post higher
Take the retailers that we own. They're growing square footage
and if all goes well they'll have some margin improvement off a
larger base. Some stores they opened last year will mature and grow
sales. As a result, our retail holdings could post a free cash flow
growth rate in the mid-teens.
If we focus on companies whose shares trade at very modest
multiples, we can limit risk without constraining potential
What's your best piece of advice for investors?
Don't be overwhelmed by a rising market and don't be driven by
the fear of missing out.
Make sure you have a margin of safety in your pool of assets.
Also make sure that you're prepared for a rainy day should it come
- not that I'm predicting one.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
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