Buy, hold or sell: Legg Mason Opportunity

9 December 2015


McLemore has held Twitter previously, but began adding significantly to her position in the social network earlier this year, after its share price hit a low of $21 (£13.91) - down from a peak of almost $75 in 2013.

She believes the stock, currently sitting at $29, has recovered from its lowest levels and is set to rebound further. 'We tend to add to things on weakness,' she says, pointing out that Twitter has been under pressure from Wall Street recently to increase its user base.

'Twitter is a sort of one-stop shop for interesting things in the world, but it takes a lot of work for users to set up. You have to go in and find people to follow and set up your network, and a lot of people just aren't interested.'

But under new chief executive Jack Dorsey, Twitter is looking to introduce features to make it more appealing to new users - of whom McLemore anticipates there could be droves.

It currently has about 300 million active users every month, with another 500 million unique visitors who don't have accounts.


Delta is one of three US airlines in the Legg Mason Opportunity fund that many have thought historically hopeless, but which McLemore is holding onto.

'Historically [domestic US airlines] have always been horrible investments, with serial bankruptcy and basically everything wrong with their business model that you can imagine.

'It was one of the few areas of the market where, when you talked to investors who look over the long term, the feeling was: "We don't even need to pay attention here".'

But following large-scale market consolidation, only four main airlines account for 90 per cent of the domestic market - Delta, United, American and Southwest (shares in the latter are not owned by Legg Mason Opportunity).

McLemore says this has created an effective oligopoly, which has previously led to better practices in other markets.

'They've all put in metrics around return on capital - and they've never done this, it was all about growth before.

For the three years prior to 2015, these three airlines were up 80 per cent on average per year relative to the market which was up 20, so massive outperformance. Now Delta's almost in line with the S&P 500 for the year.'

Delta has paid off a lot of its debt, and is on track to be almost leverage-free by the end of 2015, which means it could begin returning capital to shareholders. Cash flow has also taken a healthy turn and is on the up.

'We think it's highly likely that Delta will earn a profit in the next recession, and that's never happened before. Delta is our largest airline; the average price we paid was $7, and it's currently $50,' says McLemore.

American Airlines was trading as low as $9.70 and is now $46, while McLemore purchased United for $5.60 on average and it is now worth $60 per share.

Importantly, she says, the market is already pricing in the impact of a rise in the oil price, assuaging her worries about the rise in running costs.


McLemore bought into US-based consumer electronics retailer Best Buy back in 2012 for $11, during a period of controversy for the company.

'With the large debt balance they had and the declining store sales, people were worried it was going to shrink into oblivion and that there was no value in the equity.'

With a new chief executive and chief financial officer, Best Buy has now managed to improve earnings, although it is still afflicted by the issues affecting all physical retailers - namely the shift online.

It's currently trading at $36, and was sold by McLemore in the most recent quarter for about $34.

'We tend to buy things when they are shrouded in controversy like that [declining store sales],' she explains. 'But given that Best Buy has improved results and restructured some of the stores, earnings have improved.

'It's currently trading at 13 times earnings. I think when we bought Best Buy it was trading at six or seven times, and people thought the earnings were going away.'

Now, however, she believes its share price is more in line with the stock's fundamentals, meaning there are 'better opportunities elsewhere'.