Value Portfolio

Diamond Hill Investment Group announced second-quarter financials that were outstanding, with earnings up 46% and revenues up 28%. In the second-quarter fund performance guide, the investment firm’s Small Cap Fund I returned 6.16% during the quarter, outpacing the Russell 2000 Index’s return of only 2.05%. Diamond Hill’s year-to-date returns on the small-cap fund stand at 8.3% compared to the Russell 2000’s 3.2%. Management credits this outperformance to stock selection which has been somewhat defensive.  The company continues to employ its strategy for achieving the highest returns by examining trends in the market and allocating capital to the highest prospective returns.

The firm added John McClain as a credit analyst. Mr. McClain has six years of experience on high-yield credit and will work closely with portfolio manager, Bill Zox, CFA on the company’s Strategic Income strategy and on its research team. Diamond Hill also added Faith Stevenson, CFA, CPA as Director of Institutional Business Development. Ms. Stevenson has extensive experience with intermediary and institutional distribution and will serve clients in the Northeast US.

Fabrinet. Analysts at Stifel Nicolaus and B Riley & Co. have recently reiterated their ‘Buy’ ratings and a JP Morgan analyst reaffirmed an ‘overweight’ rating in July. Currently, all six analysts who rate Fabrinet a Buy have an average 12-month price target of $23.70. At its current price, this represents a potential return of 20.4%. Given its bargain P/E of 10 relative to its peer group of 20, this stock-price appreciation is highly achievable.

Fabrinet is scheduled to release fourth-quarter and 2014 financial results on Aug. 18. Although the company is expected to post a 2% earnings decrease, there is always the possibility of a surprise as the company has managed to beat estimates for 15 straight quarters.

Stewart Information Services shares retreated 5%in the past month as the company continues to reel from weak mortgage originations. Second-quarter financials were mediocre, with declines in both earnings and revenues. Housing prices are rising, but home sales have fallen recently. The first-time homebuyer has not yet come back into the marketplace. In the conference call, CEO Matt Morris made the following statement:

The overall market continued the themes over the last three quarters in the housing industry. Total title orders, while rebounding from the depressed level of the first quarter, remained well below last year. The spring and early summer season did not have the upward momentum most of us expected.

In June, Fitch Ratings affirmed Stewart’s Issuer Default Rating at ‘BBB’ and its senior unsecured debt rating at ‘BBB-‘. Fitch said Stewart’s rating outlook is “Stable,” stating:

Stewart’s ratings reflect sustained solid capitalization including modest financial leverage and sustained operating results through 2013. The ratings also consider lower mortgage origination volume, as refinance activity retrenches and mortgage rates climb.

Stewart’s capitalization remains within Fitch’s rating guidelines with a risk-adjusted capital (RAC) ratio of 149% at year-end 2013. On a non-risk-adjusted basis (measured as net written premiums to surplus) the company’s capitalization is also solid at 3.3x.

While shares have declined from its 52-week high of $37 in February, the price decline allows for more upside. Analysts following the company currently give Stewart a target average of $35.33 per share; this represents a 16% premium to its recent price of about $30. The Value Portfolio needs real-estate exposure, so I’m sticking with Stewart Information Services for now.

United Therapeutics shot up 8.1 percent on excellent second-quarter earnings that beat analyst estimates for both earnings and revenues. Orenitram, the oral-based version of trepostinil, had a great launch. The stock’s earnings-based gains were quickly given back, however, as the overall market suffered the beginnings of a correction. Investor fears over the upcoming decision in the patent infringement case against Sandoz are weighing down the stock price. In the conference call, CEO Martine Rothblatt predicted that generic versions of Remodulin (subcutaneous treprostinil) would only be able to capture 2-3% of Remodulin’s market share, so it’s not a big deal.

On June 27th, the biotech company’s board of directors authorized the repurchase of $500 million in common stock.  Ironically, this share repurchase is occurring at the same time that more insiders are selling. Its CEO, CFO and President, and a few Directors all dumped shares which makes me uneasy. However, UTHR has gained a sizable amount since I recommended it among the first names in the Value portfolio.