Rob Rutschow, Lead Analyst at CLSA Americas, says the trend toward passive investing is having an impact in the asset management space, and for firms like BlackRock, Inc. (NYSE:BLK) that have large ETF businesses, this has led to growth.
Our view is that BlackRock is unique among the investment managers, given that nearly one-third of their revenue and perhaps more of earnings come from ETFs. That’s the highest growth segment within asset management. The asset managers tend to be high-beta, meaning that when markets go down, the asset managers will go down more, but that when markets go up, they tend to go up more.
There are few areas in finance services that have really good organic growth prospects. ETFs are one of the areas. There are projections that ETF assets globally could double over the next five years. If that was to occur, then BlackRock might see half of their earnings coming from the ETF business. Ultimately ETFs could match or exceed the size of the mutual fund business, given the tax advantage they enjoy.
We feel that Blackrock has a good business mix, and if anything, we would like to see them have more ETF exposure. But given that they have about one-third of the market share they are in a pretty optimal position.
Enterprise Products Partners L.P.
Senior Vice President Jeff Jorgensen of Center Coast Capital Advisors says Enterprise Products Partners L.P. (NYSE:EPD) is a best-in-business MLP that ticks all the boxes on how to run a company through commodity cycles.
[Enterprise Product Partners] has a simplified structure with no general partner, which gives it a nice equity cost of capital. It’s investment-grade. It has the liquidity and the access to the capital markets to manage its growth, which it has kept consistent and modest, even when coverage ratios expanded for them tremendously.
It’s run by one of the higher-quality management teams. And its diversified footprint gives it the commercial strength to win projects, to participate in M&A, and to really offer E&P or demand-facing customers a full suite of midstream products. So Enterprise Product Partners would be one of those large-cap diversifieds that we think is a really great MLP.
Executive Director Shneur Gershuni of UBS Investment Bank says Kinder Morgan Inc (NYSE:KMI) is in an interesting position after cutting its dividend by 75% late last year.
Many often view a big dividend cut as a material decline coming in their base business, but that was not exactly the case. In fact, their earnings were actually expected to increase in 2016 versus 2015.
The challenge was access to capital more than anything else. Bond yields had gone up, their equity yield had gone up, and basically their dividend was almost as big as their operating cash flow, yet they still had at that time almost $5 billion capital plan which they had expected to fund out of the capital markets, and the capital markets were increasingly tougher and tougher to access. So they made a decision to cut their dividend, and that way they could still continue to fund their capex growth.
We expect with the cut that they will actually be able to delever over the next seven quarters and be able to reevaluate their position on a go-forward basis. We think that their issue is mostly behind them at this point, and so you are able to look ahead, and when you look at it on a true cash flow basis, their earnings are actually still expected to continue to move up.
Jeffrey Cornell, Portfolio Manager at Johnson Investment Counsel, says CVS Health Corp (NYSE:CVS) continues to grow sales by making acquisitions.
They bought the Target (NYSE:TGT) pharmacy business. They’ve made some other big acquisitions here, which has been very helpful. Their old Caremark business that they bought years ago, which is basically mail-order pharmacy, continues to win over a lot of contracts, and we expect continued consolidation within that industry.
So it’s very positive for them, and the other leader in that field also, which is Walgreens (NASDAQ:WBA). CVS has a yield that is little bit under the market. It’s about 1.7%. They’ve got plenty of free cash flow. They’ve got about $4 billion in free cash flow that they can do what they would like to do to increase that yield, do additional buybacks or whatever.
Portfolio Manager Chad Clauser of Lawson Kroeker Investment Management says Gilead Sciences, Inc. (NASDAQ:GILD) is a standout in the pharmaceutical sector, and one of his firm’s top investment picks.
Gilead kind of bucks the trend with what we are seeing in the pharmaceutical space, which are cheap acquisitions, cut R&D basically, strip a lot of the costs out of the business. Gilead kind of does the exact opposite. This is really an innovation incubator with some of the best R&D on the street. What they are good at, they are very good at.
The products that they have are over 50%-plus market share, but not only that, but also have the highest efficacy in the drugs that they create. So it’s not something that’s prone to patent cliffs and genetics coming in and basically eroding their pricing power. Their efficacy is so high, but there is not really a close second competitor around their products compared to most pharmaceutical companies.
If they want to switch the gears on the research and development, they are at their highest levels of cash that they have ever had. So this is a very large holding with no debt that they could deploy, should they want to expand their product offering if there was something they felt they needed to do. But historically, the nice thing about these guys is it’s not been an acquisition story at all, it’s been an internal development story by and large.
Portfolio Manager Jeffrey Cornell of Johnson Investment Counsel says his number-one favorite name in his portfolio is Apple Inc. (NASDAQ:AAPL), as he believes the company is undervalued.
It’s very cheap in our minds. We understand that moving from a hardware-, software-based company to something that’s dependent for two-thirds of sales and 80% of profit on iPhones changes the valuation parameters of that company, but the company in our mind is very cheap.
We believe the iPhones’ cycle’s probably bottomed. The company is sitting on $220 billion in cash, and even though a lot of that is overseas, they can do a lot of things with that money: increase dividend, do buybacks, make acquisitions. Their free cash flow is just gigantic, and we like that type of company.
We think Apple is probably worth about $140 a share, and it’s somewhere around $103, I believe, this morning. So it’s got quite a bit of upside in our minds.
Bryan Brokmeier, Senior Equity Research Analyst at Cantor Fitzgerald, says Illumina, Inc. (NASDAQ:ILMN) has been taking on initiatives in the oncology market, driving growth around 30% each quarter.
Illumina has recently introduced new oncology panels that will increasingly compete with Thermo Fisher and is an area with a lot of growth […] We can start to see acceleration as they get these panels on the market and form new partnerships with additional biopharma companies as well as the academic market.
Liquid biopsies are one particular area where Illumina has been investing and recently announced an acceleration of that investment through the formation of its subsidiary, GRAIL. GRAIL seeks to accelerate the development of a cancer screening test using circulating tumor DNA.
Brokmeier says that while there are many companies investing in liquid biopsies, they are many years away from developing screen tests.
Illumina is really one of the leaders and bellwethers of the industry, but the stock has pulled back significantly because of reimbursement concerns, and expectations for growth aren’t as strong as they were two years ago. But they are still growing at a double-digit rate, which is unheard of for a large-cap company in the tools space.
If large-cap growth investors are looking for a tools company, the only option they have available to them really is Illumina. They have such a strong foothold on the market, and as they focus on the oncology market on the research and the biopharma side and increasingly penetrate clinical markets, we believe there is a significant growth opportunity to continue to expand on the success they have already had.
[Liquid biopsy] is an estimated $20-plus billion market opportunity, and Illumina recently said it may turn out to be a $200 billion market opportunity.
While George Stark, President and CEO of Stark Capital Management, has typically stayed away from airlines because of their boom-and-bust reputation, he says Southwest Airlines Co (NYSE:LUV) is an exception.
The reason for our enthusiasm for Southwest is that it’s rare to find an airline that has the ability to expand its network meaningfully since, generally, as you know, most of these companies have grown by cannibalization.
In this particular case, the decision by the city of Houston to open up a new international terminal in the airport in Houston, which is Hobby Airport, that is used by Southwest Airlines opens up an avenue of international routes to various Latin American countries in short hops, whether it is Mexico or Central America, all of which are within one and two hours of flying time from Houston and creating the connection from the Southwest Airlines network, which pretty much spans both coasts down to Latin American, and allows them to compete with United and with a number of other international carriers very effectively. And they do so by being very aggressive on pricing.
But we anticipate that this will be a very fine growth area that will be growing at 10% to 15% per annum over the next 10 years, the international part, not the domestic part obviously. But it’s rare to find a small carrier — it’s not so small anymore — but nevertheless, an airline that really does have in front of it an opportunity to expand its network in a meaningful way.
That terminal has opened now. It’s been opened within the last couple of months, and the marketing and expansion of their routes have begun aggressively now. And also, obviously, they are one of the applicants for whenever travel to Cuba becomes approved. They are on the list of applicants for permission to have scheduled air service between the United States and Havana.
President and CEO George Stark of Stark Capital Management says his firm aims to invest for the long term, and Gilead Sciences, Inc. (NASDAQ:GILD) has been a very large-percentage gain for his clients.
This is a pharmaceutical company, which as you know, or many know, has come with a cure for hepatitis C and which has a renowned research capability. Previous to the discovery of this hepatitis C cure, they had actually made significant progress in developing drugs that would help AIDS patients and also various cancer-related drug cures.
The company is selling at a p/e of 7.2 times, which we consider to be very reasonable, and the company has an enormous cash position. So we are playing the fact that management will go out and find other acquisitions or drugs in development that they can buy that would add to the company’s growth as they have in the past.
George Stark, President and CEO of Stark Capital Management, says that while Visa Inc (NYSE:V) has the potential to see more growth domestically as the economy continues to expand, the more interesting opportunity is in the developing world.
[Visa] is a still a very high-growth business. The credit card business in the United States is much more mature, although it obviously has the potential for a cyclical recovery given that consumer spending could improve as the economy continues to expand and the percentage of consumer debt, which declined dramatically in the post-crisis era, the last few years has begun to slowly creep up again.
What is really appealing to the Visa story, as well as to MasterCard (NYSE:MA), but Visa has been the one that we have chosen to play for some time, is the fact that in many parts of the world, consumers, workers do not have access to banking. They cannot open bank accounts, and they cannot get checking accounts, but employers can pay them with these prepaid cards, which for security reasons protects them from having their money stolen and expands, if you will, the role of credit cards into a payment system for individuals that in a sense supplants the use of checking accounts.
And so in the developing world, we’re finding the demand for the credit cards and prepaid cards both for telephones and telecommunications as well as for payments for salaries and for household goods has skyrocketed. And the reason is the ability of employers to protect their employees and pay them with these credit cards. So we think that will continue to be a high-growth area for Visa, and it really goes well beyond what’s happening in the more developed countries, in the United States and Europe.
