"Market Monitor"-John Hughes, President of Quantum Capital Management
Friday, January 23, 2009JEFF YASTINE: Our "Market Monitor" guest this week says, of the current market environment, quality franchises are on sale and we are buyers. He's John Hughes, president of Quantum Capital Management. John, welcome back to NIGHTLY BUSINESS REPORT.
JOHN HUGHES, PRESIDENT, QUANTUM CAPITAL MANAGEMENT: Thank you Jeff. It's good to be with you.
YASTINE: What do you define as a quality franchise?
HUGHES: We look for companies -- let's face it, all companies, especially in this market are going to suffer the vicissitudes of demand. We look for companies with adaptive managements, with durable business models, with certain competitive advantages, with sensible balance sheets. And these companies will survive in this environment, and they will thrive as we emerge from this environment. Conversely, those companies that are debt laden and are marginal competitors will fall by the wayside. So we own the former; we've eschew or we short the latter.
YASTINE: What's your sense briefly about the economy?
HUGHES: I think we're going through a needed adjustment. I think it's the point that one has to-- I have to make is that this is a needed adjustment in a working capitalist system. This is not an abrogation of the laws of economics. This is not a repudiation of capitalism. This is a needed adjustment. It's time to pay the piper. We're paying it. I think we're going to be paying it for quite a few years. I also think that there are companies that are cheap, that are going to generate cash flows and we're going to be much richer for owning them and buying them now.
YASTINE: Let's get to those in a moment. When you were last with the program with Paul last June, you gave us two picks. One was Cohen and Steers (CNS) and the other one was Autodesk (ADSK) and both down considerably.
HUGHES: We sold Cohen and Steers and Autodesk we still own. In fact, we own a lot more of it. Autodesk is a software and services provider that enjoys many of the attributes that I just talked about. They have a $900 million in cash on the balance sheet. There's no debt. The company has a -- is the preeminent provider of computer design software. We think the intrinsic value is somewhere north of $40 a share. We're buyers at $16.
YASTINE: And that's why, for your new picks and you have five of them for us, it's your first pick, ADSK, Autodesk.
HUGHES: It is indeed, yes.
YASTINE: Let's move on to the next one, then, which is Copart, (CPRT).
HUGHES: Copart is the largest processor of total loss vehicles for the insurance industry in the U.S. and in the UK. Again, a Sherman tank of a business model, a debt-free balance sheet that we believe will generate $150 million in cash flow this year. They may miss earnings in the next quarter or two. We would use that weakness to buy -- to accumulate more shares.
YASTINE: Your next pick, it's not really a company. It's an exchange- traded fund, the GLD, gold exchange traded fund.
HUGHES: Yes. Yes. You know, we're not so bullish on the metal as we are bearish on the currency, which its value is measured.
YASTINE: The dollar.
HUGHES: Right. And the Federal Reserve has been expanding the balance sheet at unprecedented and unprecedented rates and we believe that as long as the Fed creates money at a faster rate than we can discover gold, we're going to be owners of gold.
YASTINE: So that's your hedge against currency debasement, for lack of a better word.
HUGHES: Against all fiat currencies. Yes.
YASTINE: Let's move onto your other pick. It's Microsoft (MSFT).
HUGHES: A decade ago, Microsoft earned $0.70. The world loved it. It traded at $58 a share. Fast forward eight or nine years- it earns $2 a share and one of the greatest franchises in the world is trading at $17. We think the market has it all wrong and we're buying it.
YASTINE: It's amazing. It doesn't have a friend in the world these days it seems amongst the investment community.
HUGHES: It doesn't.
YASTINE: John, let's move on to your final pick here. It's the LQD, again, another exchange-traded fund. Tell us briefly what this one is.
HUGHES: This is to provide some respite against the unfriendly equity markets. We believe that high-quality investment grade corporate bonds are probably in the sweet spot of the credit spectrum. It earns about a 6 percent dividend per annum and there's enough diversification that the typical individual can't purchase by themselves.
YASTINE: Briefly, any disclosures on these?
HUGHES: We own them all. We own them all and we're happy to own them all, we are buying them.
YASTINE: Own your own cooking then. Our guest, John Hughes, president of Quantum Capital Management, thanks.
HUGHES: Great to see you Jeff.
