Q:  What is your investment philosophy?

A: We focus on four sectors - Tobacco, Alcoholic Beverages, Gaming and Aerospace Defense. We believe that these sectors tend to be defensive in nature and immune to macro economic events. Therefore, they tend to outperform during both economic and market downturns and we are searching for stocks that can sustain their growth regardless of the economic cycles.

Our approach is global and we aim to find the best opportunities within both domestic and international companies in these sectors to diversify away from the U.S. economy.

Q:  What are the macro trends that drive those sectors?

A: On one end of the spectrum we have Tobacco, Alcoholic Beverages and Aerospace Defense which tend to have less volatility relative to the market and high dividend yield. On the opposite end, we have the Gaming sector, which is high growth, very high beta, but no dividends. That complements what we are doing and helps us in up and down markets.

In the tobacco sector currently the domestic litigation risk environment has improved tremendously from that of the past decade. For a long time no foreign cigarette company entered the U.S. market, for fear of legal risk. However, earlier this year Imperial Tobacco bought the number four U.S. cigarette maker, one of the first instances of an entry by a foreign company in the past decade.

At the same time, despite the smoking bans, the companies have tremendous pricing power and are able to offset those declining volumes by increasing their prices. They are hugely profitable and pay good dividends. Furthermore, the litigation and the smoking bans being limited to the domestic and to some degree Western Europe, there are huge growth opportunities around the world. Right now, a wave of consolidation is underway in the industry. Strategic buyers are driving this wave, which will ultimately leave only a handful of players. There are also growth opportunities in smaller categories like moist smokeless tobacco.

As for the gaming sector, we see continued strength in Las Vegas by all metrics - visitation, gaming revenue and the value of land on the near gaming locations is astronomical. Gaming is the real American pastime with people spending more than on movies, videos, music and books combined. Except for Utah and Hawaii, every U.S. state has some sort of legalized gaming. The Government is a very big beneficiary in gaming. The states receive millions of dollars annually from gaming tax revenue to go towards public development. The same is true for the tobacco sector.

Business in general is expanding and we are extremely excited about activities in Asia and Singapore. In Macau there was a monopoly until 2004 when Las Vegas Sands came in, and in two short years they surpassed the revenue of Las Vegas. Singapore is coming online in 2009 and Japan, India, Thailand, all of Asia is beginning to embrace casino gaming. That is going to create a huge opportunity for the casino operators over the next few decades.

Another area of this sector that we like is the gaming equipment companies, like International Gaming and Technology and WMS, because there’s a major replacement cycle right around the corner. It is starting in 2009 and will be driven by a new technology called Server Based Gaming thus creating a big opportunity for the gaming equipment suppliers.

Consolidation too is an important development. In the tobacco sector it’s being driven by strategic buyers and in the gaming sector it is from financial buyers. There have been five major complete buyouts since the beginning of 2006. Thus, two of four sectors are consolidating, one through strategic buyers and one from financial buyers.

In the alcoholic beverage and beer sector we are seeing the most robust growth in the U.S. in super premium spirits category. We identify companies that are likely to benefit by looking at how they are positioned versus their competitors. We see the greatest growth opportunities for brewers in the emerging markets, more specifically Central and Eastern Europe, Asia- Pacific, Africa and the Middle East and Latin America that are the fastest growing beer markets in the world. Meanwhile, in the U.S., and even Western Europe their domestic beer markets are struggling with little or no growth, exceptions being Kraft Beers and Imports. That is the overlying trend within that sector.

We see defense stocks as cyclical but not tied to economic cycles as much as budgetary cycles and therefore they outperform the broad market when Defense Department budgetary authority is increasing. We think that at least for the next few years, the defense budget will continue to be on the rise. Right now, there are another two or three years left in this sector. The threat levels remain high; the defense programs are more integrated now than they ever have been before.

We see favorable trends in the commercial aerospace industry. In the 60s, commercial aerospace demand came from just the U.S. and Europe, and those two moved in tandem, so there was some strong cyclical behavior within the sector. A third area of demand is coming from Asia and the Middle East. This implies that the peaks and troughs in the cycles will be a little smoother, though not as deep, and also the cycles are going to last longer. Currently we are in an extended up-cycle in commercial aerospace demand that will last until about 2011.

Q:  Could you highlight your research process?

A: We do intensive research at both the industry and company levels. Within each of these four sectors we develop an extensive, macro-level view of the happenings and where the opportunities lie. We then do company-specific research and try to identify those that stand to gain the most within that broader framework and ones that are not going to do well too, because not every company will benefit from the overlying trends that are going on within the industry. Therefore, we seek to take advantage of that fact by taking a longterm approach in investing in companies that will benefit over many years, from the trends that we see, and selectively sell short companies that will be on the losing end.

Q:  Could you illustrate your research process with some examples?

A: Boeing fits into our portfolio and fits in with our position in the commercial aerospace cycle. We think we are mid-cycle with another few good years left so it meets the first criteria of a fitting with a beneficiary of our bigger picture macro theme. Boeing is a new product cycle story, with the Dreamliner 787. So here you have both a bigger picture macro theme as well as a real company specific driver that we think will be huge.

The 787 is Boeing’s most successful product launch ever, and the company has taken a very different approach. The development and production processes are different, the results of which will be significantly higher margins, especially as R&D costs decline over the next few years and the whole cycle is much more refined and shortened now. They’ve got well over 700 orders and as they start to recognize that revenue and as the R&D figures decline over time, their margins are set to expand and so we think that there is a 30% upside in Boeing over the next 12 to 18 months.

Q:  Can you give an example of a company you are now short on?