29 Aug 2011 Sound Shore - Semi Annual Report ( Portfolio )
After a strong first quarter 2011, stocks treaded water in the second due to uncertainty about global growth. As emerging economies fought inflation and the European Union and U.S. worked on debt and deficit challenges, it was the health care, utility, and consumer staples sectors that performed best. In contrast to this otherwise cautious backdrop, small cap stocks continued to outperform large caps and growth continued to outpace value, extending trends from the first quarter, according to data from Standard & Poor’s.
Sound Shore's portfolio was behind the indices during the quarter as signals of a slower economy caused a few holdings to decline. For example, shares of glass bottle maker Owens-Illinois were lower as currency-driven sluggishness in Australian wine exports caused the company to marginally lower its 2011 earnings outlook. Similarly, semiconductor equipment provider Applied Materials and electronics assembler Flextronics pulled back on mixed demand for technology products, partly due to Japan’s slowdown. Meanwhile, despite stable book value per share Bank of America was down due to regulatory and revenue pressures.

On the plus side, global pharma leader Novartis was our best contributor as it benefitted from better than expected generic drug sales and a strengthening Swiss franc. Fellow health care related holdings Baxter International and CVS were also strong performers, as the former advanced after reporting faster than expected gains in its core blood plasma business, and the latter was up following a significant drug distribution contract award. Meanwhile, Visa moved higher after the federal government approved a smaller than expected reduction in merchant debit fees. And finally integrated gas company El Paso, an investment since 2004, outpaced the lagging energy sector after announcing plans to spin off its exploration and production segment.

Similar to last summer, midyear 2011 markets seem to reflect great uncertainty about how macro factors will unfold. As uncertainty often yields profitable investment opportunities, Sound Shore remains diligently focused on identifying inexpensive stocks with strong earnings and cash flow prospects that are likely to beat low expectations. Our bottom-up based portfolio currently has a forward four quarters price/earnings multiple of 11 times versus 14 times for the S&P 500 and should be well positioned going forward.