R. Burns McKinney discusses NFJ Investment Group as well as the U.S. Dividend Value and the International Value strategies. The firm as a whole is considered contrarian and buys stocks the market dislikes. Mr. McKinney uses a rules-based approach, requiring each stock to adhere to three core principles. This approach identifies stocks that pay dividends and have a low p/e relative to their peers. In addition, Mr. McKinney uses a price-momentum overlay to help with his timing and to avoid value traps.
Full interview available here.
Adam S. Abelson discusses Stralem & Company Incorporated and the U.S. Large Cap Equity Strategy. Mr. Abelson’s motto is participation with protection. His goal is to outperform the market with less volatility for downside protection. In order to build long-term wealth with lower volatility, Mr. Abelson’s stock selection framework is critical. The process marries top-down macro views to bottom-up stock selection. Generally, the portfolio holds between 28 and 35 high-quality stocks and is benchmarked against the S&P 500. In addition, Mr. Abelson is invested alongside the firm’s clients.
Full interview available here.
Data hosting centers and data storage analysts agree: the shift toward cloud computing is the single, most important trend in the space — more specifically, the shift from private cloud to a public cloud. The more traditional model where a company would pay upfront for its own hardware and host and compute data in-house is becoming more and more scarce, and companies are becoming more comfortable hosting more of their data in the public cloud, along with much of the computing itself. The cloud is introducing a paradigm shift where the software as a service model is being used instead of upfront software and hardware buys.
This shift, however, is taking longer than some analysts had previously expected, as it’s a complex shift with many moving parts. There are some segments that are growing faster, such as security, data center switching and infrastructure software, but analysts do not expect total IT spending to grow meaningfully. In this migration of data from on-premise to the cloud, some of the largest Web 2.0 players are opting for white label hardware, forgoing premium hardware and preferring commodity-type devices, which has benefited some of the optical components companies. They say there has been a move away from expensive specialized hardware and toward commodity servers, switches and storage equipment. Hardware companies are realizing that this era of winning based on speeds and feeds is over, and that equipment needs to have some differentiated technology such as analytics or security on top. Optical components companies could benefit further as data centers upgrade toward new architecture, replacing older technologies and standards such as copper in preference for fiber optics, which allow for faster data transfer speeds.
Analysts say the shift from private cloud to public cloud is causing a diminution of the expected longer-term growth potential of virtually every company in the space. They add that the shift is somewhat aided by the volatile economy, which is pressuring people to be more efficient. It is also catalyzing conversations to move to the public cloud at a faster pace. Analyst and investor sentiment has been positive on the data center REITs for the last 12 to 18 months, and they say performance for data center REITs is up around 110%. The sentiment wasn’t positive a couple years ago, but there has been a shift driven largely by the cloud service providers.
Analysts say the industry has experienced both growth and multiple expansion, and although they don’t expect much multiple expansion in the coming years, they say organic growth thanks to good levels of demand can be expected. They also say consolidation could increase in the space. Security is a core issue in IT infrastructure.
Full report available here.
Shayne M. John, Principal at Decatur Capital Management, says Activision Blizzard, Inc. (NASDAQ:ATVI) is everything he likes in an earnings stock due to the company’s strong portfolio of video game I.P.
Activision Blizzard is the world’s largest video game publisher, as you know. Everyone knows it for “Call of Duty,” but since the start of this summer, the earnings cycle catalyst has been a game called “Overwatch.” It’s a little different from “Call of Duty” in that “Overwatch” is predominantly a PC download game. This makes it more profitable on a per-unit basis than most of the other Activision games because, when you download it on a PC, you remove a large slice of ATVI’s distribution costs.
“Overwatch” is what’s really pushed the stock up from $35 to $41 over the last few months. We think that ATVI has a very strong portfolio of video game I.P., and it could easily be a $50 stock over the next 18 months. “Call of Duty” is one of the strongest titles out there, and even though it’s gone through a number of iterations, it hasn’t lost its attraction to the gamer community.
ATVI has very good management. They’ve done a very good job, ever since they purchased the company back from Vivendi (EPA:VIV), in turning out successful hits. The balance sheet is very good. They have a ton of cash, and they are paying down debt. Debt to EBITDA is about 1.2 times. So ATVI’s got everything that we like in an earnings cycle stock. Earnings estimates are going up with consistent earnings surprises, and you have very good visibility into the earning stream over the next 21 to 24 months.
Dr. Daniel Lang, CIO at RS Investments, says Allergan plc (NYSE:AGN) has been neglected by investors because of the Pfizer (NYSE:PFE) deal fallout. However, Dr. Lang says Allergan has the potential to grow revenue and free cash flow in the double digits.
The opportunity here is basically that I think the company has been neglected by investors or underappreciated over the past 12 months because of the Pfizer (NYSE:PFE) deal. Pfizer was expected to acquire Allergan in 2016, but because of a ruling by Treasury, the deal fell through in the second quarter. During this time, the company was continuing to create value and advance their pipeline of products, so we believe there was an information gap in terms of the fundamentals of the company and the valuation.
Allergan has been under pressure because many investors consider it to be a specialty pharma company like Valeant (NYSE:VRX). With the multiples of the specialty pharma companies coming down, Allergan stock was also under pressure. So this is a company that we believe has the potential to grow its revenue at high single digits, expand margins and also grow its free cash flow at double digits.
Despite the positive attributes, the company trades below the broader market multiple. We believe returns have the potential to improve dramatically over the next few years as their pipelines continue to deliver and they realize some of the synergies they expect to get from the Actavis/Allergan deal.
Additionally, we consider Brent Saunders, CEO, to be one of the better CEOs in the health care industry because of two things. One, we think he is a great operator of the existing business. I believe that he is going to be able to improve returns on existing assets. And second, in our view, he has been a great capital allocator, divesting relatively low-return generic businesses and acquiring high-return businesses like Allergan.
Youssef Squali covers internet and new media, which cuts across e-tail commerce and advertising. Mr. Squali says e-commerce and advertising lines are bleeding into each other, and the one theme that is playing out is around mobile. He is seeing an acceleration in the migration of desktop commerce on mobile and desktop advertising on mobile, and says growth in mobile commerce is north of 50%. He expects that theme to continue to play out. Mr. Squali also sees opportunity around brand advertising as TV dollars flow online.
Full interview available here.
Scott Devitt covers direct-to-consumer retail, or e-commerce retail companies. Mr. Devitt says these companies are more consumer-centric than traditional retailers. He says the main theme right now is the major growth in e-commerce, as consumers are valuing convenience in retail in a way they never have before and are voting with their dollars in terms of share shift. He says e-commerce is by far the most important way to reach the customer on an incremental basis, because that’s where all the growth is coming from.
Full interview available here.
Ali Dibadj covers consumer staples stocks. He says investors are looking at the space as a set of stable companies, which he thinks is correct; however, he says there’s not a lot of value in the stocks given where valuations are at the moment. Mr. Dibadj prefers the beverage names to the household personal products.
Full interview available here.
Benjamin Bienvenu covers auto parts and convenience stores. Mr. Bienvenu says the big trend again this year is low gasoline prices. He says that now there is a defensive business sector in both convenience stores and aftermarket parts, and that miles driven and retail gasoline prices are the most important metrics in his coverage.
Full interview available here.
Alexia Howard covers packaged food companies. She says for the traditional large packaged food companies, the themes are cost cutting, margin expansion and dealmaking. Ms. Howard says valuations are high right now, which is leading to concerns among investors. She is expecting more M&A in the industry. Near to medium term, she says there is real opportunity for margin expansion because of company cost-cutting potential.
Full interview available here.
