Morningstar Advisor - Fall 2008 - 64

Investments á la Carte 22000 18000 14000 10000 6000 once-mighty American consumer reining in spending. In turn, firms are struggling and share prices have cratered. The worst-performers list for the past five years includes many consumer-related industries. In contrast, the top performers are commodity-related. But opportunity is often born of misery. The next five years are unlikely to mirror the past five, and forward-looking investors will find happy hunting among consumer-related plays. Overview by Michael Breen S $22K 18 14 Jackson Hewitt JTX S&P 500 TR 04 05 06 07 08 MF $20K 17 14 11 03 Oakmark Select OAKLX S&P 500 TR 04 05 06 07 08 This beleaguered fund has more than half of its assets in consumer-related stocks, a big reason it’s deep in the red over the past year. Such names as apparel retailer Limited LTD and Liberty Interactive LINTA, the owner of online retailer QVC, have hit potholes. But manager Bill Nygren makes strong cases for both. He Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-03says that Limited has shed unprofitable divisions to focus on its two dominant 20000 franchises, Victoria Secrets and Bath & Body Works, May-04 Mar-05 Feb-06Nov-06Aug-07 Jun-08 Oct-07 Feb-03Nov-03 Sep-04Jun-05Mar-06 Mar-07capital. Mar-03 Mar-04Dec-04Sep-05Jun-06 Apr-07 Mar-08 Apr-03 which shouldNov-05returnsJun-07 Apr-08 May-03 Apr-04 Feb-05 boostJul-06 May-07 May-08 Jun-03 Jun-04 Apr-05 Apr-06 Jul-03 Jul-04 May-05 May-06 Aug-03 Aug-04 Jul-05 Aug-06 on Sep-03 Oct-04 Aug-05 Sep-06 Jul-07 Jul-08 Oct-03 Nov-04 Oct-05 Oct-06 Sep-07 Aug-08 16000 Feb-08 Dec-03 Dec-05 Dec-06 Dec-07 LibertyFeb-04 Interactive was spun outFeb-07Nov-07 of Liberty Media, which Nygren has had a long and 12000 fruitful relationship with. The firm continues to generate prodigious free cash flow and has a 8000 dominant market position. Nygren recently grabbed electronics retailer Best Buy BBY. He says that it’s a top operator that had oversold on macroeconomic concerns. This fund has had its travails, but we think it is well positioned going forward. This small-cap value stock has carved out a narrow moat for itself and is trading at bargain-basement prices, in our opinion. The company focuses on a niche of the multibilliondollar tax-preparation business by focusing primarily on low-income filers. These filers tend to receive refunds and prefer bricks-andmortar locations, which typically provide faster refunds through piggy-back services such as Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 refund anticipation loans. Though not without risks—two years Apr-06 Nov-06 Aug-07Mar-08 is Aug-04Mar-05 Oct-05of declining volume Jan-08 Aug-08 Sep-04 Apr-05 Nov-05 Aug-06 Oct-04 Nov-04 Aug-05Mar-06 Oct-06 Dec-04 Sep-05 Jan-05 Feb-05 Dec-05 Sep-06 Jan-06 Feb-06 Dec-06 Sep-07 Apr-08 Jan-07 Oct-07 Feb-07 Nov-07 Dec-07 Feb-08 May-05 Jun-05 May-06 Mar-07 believeJun-08 Jun-06 Apr-07 May-07 Jun-07 May-08 certainly a cause for concern—we that Jackson Hewitt can right the ship. The fallout from its 2007 regulatory issues should pass, Income Overview and the firm’s geographic market penetration is still only 40%. Refund anticipation loans, A quick computer screen unearths a which can have annual percentage rates above cornucopia of high-yielding securi100%, have been the center of government ties that appear too good to be scrutiny and civil litigation. Regulation was true. Many are. What you see isn’t passed in 2007 that put a 36% cap on interest always what you’ll get. Trailing charged to members of the military. Additional regulation like this could reduce the revenue yields tell you the income a security from financial products. Our analysis suggests has already paid relative to its that the market is currently pricing in customer current price. They can’t tell you if a attrition from 3.4 million this year to 2.7 million security will continue to pay the by 2012, which seems unlikely to us. SA $20K keeps about 40% of its assets. Rogers has long avoided energy and materials firms because unpredictable commodity prices are the main driver of those businesses. This combination has provided the worst of both worlds in recent years, and the strategy has lagged badly. But a stock-by-stock review of this portfolio points to a resurgence. For example, Energizer Holdings ENR owns a 40% share of the U.S battery market, a leading razor-blade brand, and Playtex, whose personal-care products are cash cows. Rogers says Energizer is an industry leader that trades at a big discount to its peers and the market. Rogers has been adding to Tiffany TIF and Sotheby’s BID lately. He says the former is a luxury jeweler whose clientele is not overly impacted by a dicey economy. The latter’s high-end art auctions continue to trend upward on international expansion and demand from the Mideast and Russia. This portfolio is filled with cheap, profitable firms. Ariel Mid Cap 16 S&P 500 TR 12 03 04 05 06 07 08 Manager John Rogers favors dominant franchises with strong and predictable cash flows. He has often found them among consumer stocks, where this strategy currently same income. And with a slowing economy and credit crisis impacting firms and municipalities across sectors and regions, investors need to dig into the financials to confirm expected payouts will remain intact. In many cases, they will not. Below are a handful of securities we expect to continue delivering solid income streams in a tough environment. Overview by Michael Breen 64 Morningstar Advisor Fall 2008

Morningstar Advisor - Fall 2008

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