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Interview With Brian Harper, CFA: March Underfollowed Author Champion

Summary

I conduct an interview with the champion of my March Madness stock competition.

We discussed his contest entry of Marathon Oil.

We discussed his general investing strategy as well as other topics.

The following is an interview I conducted with Brian Harper, CFA, who was the winner of my March Madness stock competition. I looked for underfollowed authors here on Seeking Alpha to submit a selection from the S&P 500 (NYSEARCA:SPY) that they thought would perform the best over the month of March. For those who have not seen, the following paragraph is the thesis that Brian submitted with his entry of Marathon Oil (NYSE:MRO):

"The thesis behind MRO is based on the price of oil; MRO is highly levered to oil prices, which we expect to rebound as the year progresses. Shares trade at just 1x 2014 operating cash flow. World oil demand continues rising while supplies are on the decline due to curtailment of unprofitable projects. The potential for a surprise OPEC cut would cause a surge in oil and in shares of MRO."

Brad

Brian, thank you for taking the time for this interview and congratulations on winning my March Madness stock contest with your selection of Marathon Oil.

Over the month of March, oil increased 12.42% and your selection of MRO increased 35.69%, which plays into your thesis of MRO being highly levered to the price of oil. In addition to MRO being highly leveraged to oil, you noted that it was trading at an attractive valuation based on its operating cash flow.

Were those the two deciding factors that drew you to MRO over other oil companies?

Brian

Yes, the thesis was based on two parts. The first and biggest piece was the fact that oil supply has been coming in faster than had been expected. Offshore rigs have been idled as they come off contract; shale drillers are not drilling new wells. Most of the new oil that has come online in the past 5 years, particularly in the U.S., does not produce an economic profit with oil at $30-40. Oil demand is self-correcting in that more is consumed as prices go lower. I feel that oil will have to settle at $70 or higher within the next year, based on the economics of the industry.

The 2nd piece was the valuation of MRO. Shares were trading at 1x 2014 operating cash flow and had dropped 80% from mid 2014. Unlike many MLPs and other E&P companies, MRO carries a reasonable debt load and had actually reduced outstanding shares in the prior few years.

Overall, though, to win a contest like this, you need to pick an outlier. Exxon (NYSE:XOM) or Chevron (NYSE:CVX) would be unlikely to win; they simply are too big, too close to the mean. I picked a stock that had the potential for a huge move. I have actually never owned a single share of MRO.

Brad

For all the reasons you stated above, is there a point at which you would consider owning MRO?

Brian

I have exposure to energy mostly through credits, which I found through the downturn fell faster and harder than many of the associated equities despite being senior. I might consider owning MRO, but frankly have not done enough work on it yet to put actual $$ in it.

Brad

Moving on, I want to talk about your general investment process you use. On your Seeking Alpha profile page, you note that you use a bottom-up, fundamental approach to investing. What are some key fundamental factors you look for when searching through ideas?

Brian

I do source ideas by things like fundamental screens, looking for companies at cheap valuations with low financial risk. I occasionally buy franchise-type names when they are available at cheap prices as well. I presently own Blue Bird (NASDAQ:BLBD), which is valued like a car company but has returns on invested...


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