Steady and Sure

Another example is the Bank of New York Mellon Corporation [NYSE: BK]. What we like about them, as well as State Street Bank [NYSE: STT], is that neither company has a lot of lending. Their primary business is providing custody services and asset management to pension plans, 401(k)s, and the like. With Bank of New York’s merger with Mellon Bank [now Bank of New York Mellon Corporation], the U.S. custody business, which involves administrating pension and profit-sharing plans, has largely been consolidated. We think they can earn $3 a share this year and more going forward.

Your next-largest position by percentage is energy stocks. Where do you find undervalued energy stocks?

Finn: We are underweight in energy relative to the broader market, but there are stocks worth buying. One of our most recent positions that we bought was Nabors Industries, Ltd. [NYSE: NBR]. They primarily operate land-based drilling rigs. They went through a downcycle already and their stock had declined.

Another area that we’ve added to is oil refiners. One of our stocks is Sunoco, Inc. [NYSE: SUN]. It’s been painful so far, but this is an area of energy that I don’t think anyone would characterize as overvalued. Sunoco accounts for their inventory on a last-in, first-out [LIFO] basis, which is a little unusual for an oil company. They have many LIFO layers, which means that if you take the quantity of oil on their balance sheet and multiply it by today’s prices, the company’s inventory alone would be worth about $4 billion before taxes.

How often do value stocks turn into growth stocks?

Finn: Hopefully, really often, because that’s how we win. We owned an industrial company called Flowserve Corporation [NYSE: FLS]. It was a conglomeration of companies, and for a time struggled integrating acquisitions and the stock got down into the $20s. We knew some of their end markets were going to benefit from spending on energy and global infrastructure; they make pumps, valves, and seals. We bought a position in the mid-$30s per share and during the last year or so it got into the high $70s. That’s about when we felt the operating performance was not sustainable, so we ended up selling out of the position at $80, feeling that we had a nice run. But it has continued to rise to about $135 and hasn’t topped out yet, because it got anointed as a momentum stock. Unfortunately, we didn’t capture 100 percent of the move.