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FUNDVIEW-Neiman finds value in U.S. consumer stocks
* Likes Costco, McDonald's, VF Corp
* Dividend-paying stocks could outperform once rates rise
By Nick Zieminski
NEW YORK, April 14 (Reuters) - Fund manager Harvey Neiman uses "quality at a discount price" to describe a favorite retailer, but it also applies to his approach to investing.
The manager of the Neiman Large Cap Value fund has loaded up on consumer names like Costco Wholesale (COST.O), McDonald's Corp (MCD.N) and H.J. Heinz Co (HNZ.N), as well as energy stocks including Chevron (CVX.N), Schlumberger (SLB.N) and Suncor Energy (SU.TO).
"In this recovering economy, so many choices come up on a value screen," Neiman said.
His "bottom-up" stock picking means the fund is sometimes concentrated in certain sectors: technology and healthcare together account for only about 5 percent of holdings.
Every stock must pay a dividend for inclusion in the fund. Other criteria include price-to-earnings ratios below 30 and generally in the teens; price-to-book below 3; and a debt-to-equity ratio of 1-to-1 or better.
Many industrial stocks fall well within that last parameter. The fund owns Emerson Electric Co (EMR.N), a global diversified manufacturer geared toward infrastructure spending that is also a technology leader, Neiman said.
Neiman, a former law professor, formed Neiman Capital Management with his son Dan in 2000. The Large Cap Value Fund dates back to 2003. The fund fell 22 percent in 2008, still outperforming the broader market, but lagged the S&P 500 in the rebound years of 2009 and 2010.
Morningstar has a "five-star" rating on the fund, meaning its return beats the category average. The fund owns stocks with market capitalization of at least $5 billion, but holdings tend to be above $20 billion.
A major feature is its use of covered calls: the fund sells the right to purchase one of its holdings at a given price, giving up some of the upside but lowering the average cost. The manager may buy a stock for, say, $100, but contract to sell some shares at $105. Selling that option for $3 a share effectively lowers the cost of a $100 stock to $97.
"We create a little bit of a floor," Neiman said.
Costco is the fund's second-biggest holding, behind Chevron, and Neiman also owns the stock in a personal account.
"The American buying public, those that know about Costco or are happy customers of Costco, those people are still uncertain about the future of the economy, so they're going to stick to the closest quality discount," he said.
Rivals cannot match the discount retailer's inventory efficiency and membership numbers are growing, Neiman said.
McDonald's (MCD.N) is attractive, despite potential pressure from rising food costs.
"They are the most innovative in figuring out new fast food products that can be produced at a lower cost with the same margins," Neiman said. The fund also holds shares of VF Corp (VFC.N), parent of Lee jeans and North Face jackets, which has kept debt well within the value fund's parameters.
About 15 percent of the Large Cap Value fund is in cash, reflecting caution ahead of expected market volatility.
Large-caps, as measured by the S&P 500 index .SPX, have almost doubled from their 2009 lows but stocks could climb further, especially once rising interest rates make bonds less attractive, Neiman said. Some conservative bond investors will switch to stock funds that offer income from dividends. (Reporting by Nick Zieminski; Editing by Tim Dobbyn)
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