27 Apr 2012 Sound Shore - Q1 2012 Commentary ( Portfolio )
US equity indices were broadly higher in the first quarter of 2012, extending the rebound that started in the latter part of 2011. Markets were helped by solid corporate earnings and better than expected economic trends, especially for US employment and housing.

With macro concerns fading a bit, company-specific factors drove several of our holdings to strong gains. For example, cable service leader Comcast outperformed its media peers and the market after its announced dividend increase and share repurchase both topped expectations. Comcast’s decision to payout a larger portion of its free cash flow provides confirmation of corporate America’s still increasing shareholder friendliness.

Similarly, biotechnology tool maker Life Technologies outdistanced its lagging health care sector to be among our larger contributors. We started our position in Life in the fourth quarter of 2011 after the stock had declined significantly from its peak and was valued at less than 10 times forward four quarter earnings. Our research concluded that Life’s core genomics sequencing, service, and resupply offerings provide stable cash flows, and that significant incremental value from its proprietary bench-top initiative is not yet reflected in the company’s stock price.

While higher interest rates broadly helped financial stocks, our holdings in Bank of America and Citigroup beat the sector due to improving company fundamentals. Bank of America advanced after reporting better than expected improvement in its capital, while Citigroup rose on indications of strong earnings progress into 2012. Both stocks also benefitted from the Federal Reserve’s “stress test” which confirmed their solid equity positions. Even after their first quarter gains, each of these stocks remains priced well below tangible book value.

Our biggest detractors in the quarter were hybrid utilities Exelon and Public Service Enterprise which declined with lower natural gas and power prices. By contrast, it was stubbornly high jet fuel prices that caused margin concerns for Southwest Airlines, which lagged with a modest decline.

For the third year running, we are able to write that, “this March quarter was the S&P 500’s best since 1998.” However, conditioned by the volatile and macro-driven selloffs that soon followed the strong starts of 2010 and 2011, many pundits are calling for another bout of midyear market blues in 2012 due to well-worn concerns about the upcoming US elections, fiscal gridlock, and Europe. With equities still largely out of favor (as evidenced by record equity fund outflows from 2008 – 2011) and the US economy showing gradual improvement, we regard the short term as typically unpredictable. We continue to monitor the global economic issues, but remain focused on our investment horizon which is measured in years, not weeks or months.

Sound Shore remains committed to its 34-year-old investment process: We seek out of favor, attractively valued companies that we conclude will build value through making their own tailwinds. At March 31, 2012, the Fund’s portfolio was attractively priced at 11.3 times forward earnings versus the S&P 500 at 13.8 times, despite better than market projected earnings growth for our holdings.