31 Aug 2010 Sound Shore - Q2 2010 Commentary
There is much fretting about equity markets currently due to sovereign stress and the possibility of a US and/or worldwide “re-recession.” Long-term investors, however, should also keep in mind that the S&P 500’s forward P/E multiple of 13.0 times, according to Thomson Baseline, is reasonable when compared to the 15-year median P/E of 17.0 times and also attractive versus the limited competition from interest rates. As well, corporate America’s financial health, unlike that of households and most governments, is in aggregate very strong.

We anticipate the unpopular, yet higher quality stocks we have favored are poised to resume their outperformance particularly if economic concerns continue. Sound Shore’s process remains focused on locating and investing in companies that we believe have market or better financial prospects which are priced at a discount to historic norms and the market. Currently our portfolio’s aggregate forward four quarter P/E multiple and 2011 earnings per share growth are estimated at 10.6 times and 21%, respectively, based on consensus estimates, both of which compare favorably with the S&P 500.

14 May 2010 Sound Shore - Q1 2010 Commentary
The rebound in equities that began in March 2009 continued during the first quarter of 2010. Investor optimism about corporate profits and balance sheet strength more than offset emerging concerns regarding record fiscal deficits in the US and many other countries. For the period, industrial and financial stocks performed best, as they have since the market’s bottom, while utilities and telecommunications were the only sectors in negative territory.

Sound Shore’s best contributors included Smith International, Baker Hughes, and Valero, energy holdings which well outpaced their lagging sector. Drill bit maker Smith was a significant gainer after it agreed to be acquired by larger rival Schlumberger, while its oil service peer Baker Hughes benefitted from better than expected pressure pumping trends at its recently acquired BJ Services segment. Meanwhile, oil refiner Valero, which was higher after unexpectedly announcing the potential sale of its Delaware facility, also benefitted from improving fuel profit margins. Financial institutions Citigroup and Bank of America were also strong performers as both confirmed stable to improving profitability in their core lending and capital markets businesses.

Global utility AES was the biggest detractor for the quarter as its share price dropped with declining power prices and also due to its sale of new shares to the China Investment Corporation. AES remains a full position given its reasonable valuation of 11 times 2010 earnings and 6 times cash flow and its differentiated growth pipeline that appears poised to add significantly to earnings through 2013. Also, mobile semiconductor company Qualcomm was down after it lowered its outlook for royalty related revenues. However, our research indicated minimal long term earnings and cash flow impacts from this factor and we expect Qualcomm to benefit from the global growth in smart phone demand due to its patented technology.

After the market’s spectacular and broad gain off last year’s bottom, many of its valuation metrics, including price/earnings, price/book, and price/sales, are close to regaining their long term averages, according to Thomson Baseline. Sound Shore has always demurred from making shorter term market predictions, and instead has focused on owning out-of-favor stocks that we believe over time will be good investments and potentially more rewarding than owning the market indices. During this past ten year period ending March 31, 2010, a $10,000 investment in the Sound Shore Fund would have grown to $15,884, while a comparable investment in the S&P 500 would have declined to $9,365.
With the ten year return for the S&P 500 negative and in the lowest decile of returns since those of the Great Depression and with bond yields around historic lows we remain optimistic about future equity returns. We expect to see greater differentiation between companies based upon franchise strength and the potential to build value. Sound Shore’s investment process should be well positioned given its focus on quality businesses at out-of-favor valuations and rigorous company research.