CIO William Smead of Smead Capital Management says Amgen, Inc. (AMGN) is the highest-quality stock in his portfolio.
Amgen, from a corporate standpoint, is doing almost everything right. It has balance sheet, free cash flow, consistency of earnings, transparency, shareholder friendliness, etc. That’s as good as any company, I think, in the entire S&P.
It had great earnings, has a projected earnings growth in 2016 and trades at a discount to the S&P. In fact, the four largest biotechs trade at the lowest relative p/e to the S&P they have any time in the last 10 years, and Amgen is one of those.
Smead says Amgen is currently focusing on the expansion of different patient groups that their cholesterol-lowering drug Repatha will be approved for.
[Repatha] in effect is kind of the next generation of what people take when the statins have not done the job for them. So right now, they are in a position — as the FDA approves more and more patient groups that can take it, for people that statins will not lower their cholesterol, the bad cholesterol, and raise their good cholesterol enough, that is the number one thing to take, it’s the most effective thing, but the employees are excited about a lot of expanded patient groups that are allowed to be prescribed the medicine.
Portfolio Manager Dan Hanson of Jarislowsky Fraser Global Investment Management says Alphabet Inc (GOOG) will have continued success as advertising continues to shift to the digital side.
Google is a dominant player in search. Because of their scale and technology and ability to continue investing, they’ve built a moat, which we think continues to get larger by virtue of their scale and investment. They’ve got a culture of innovation that we find highly compelling. And what they’re doing is providing, again, value to their customers. If you’re a user of Google Search, you want fast, relevant results in a noncluttered user experience.
But the majority of Google’s revenue is driven by customers of their advertising capabilities. And that’s where we find very compelling the long runway of growth, as the advertising pie continues to shift from traditional media to more effective forms of digital media. That’s a long runway of growth. Google has proven that they can add value to advertisers and demonstrate the value.
Hanson adds that GOOG is run by a management team that has earned his firm’s trust in terms of capital allocation, being stewards of the business and being forward-thinking.
Last year, the transition to the Alphabet Holding Company structure, we think, shows great maturity, and a proactive attitude around running the business, driving greater transparency and accountability to business units. We think it’s the kind of structure that will drive continued success going forward as future initiatives deliver results.
Dan Hanson, Portfolio Manager at Jarislowsky Fraser Global Investment Management, says Costco Wholesale Corporation (NASDAQ:COST) has a strong business model that is holding the company up against online retail migration.
In the context of the online world taking over, we’ve seen a number of business models that have proved very resolute. Costco and TJX are two that I would highlight where we see both companies delivering a value proposition to customers that’s resulted in consistent sales increases, and we think a continued runway for growth and competitively differentiated models.
In the case of Costco, ultimately, it’s about value to the customers. You see behind the cash register in any Costco a pledge that their first priority is to their customers, their second priority is to their suppliers, to be a good partner, and thirdly to their employees. And if they get all the above right, they know that the business and shareholders will get a fair return, and we think they’ve really lived by that framework.
In our mind, that’s a great example of how environmental, social and governance integration or sustainability can inform analysis of a business to really identify a deep moat.
Portfolio Manager Dan Hanson of Jarislowsky Fraser Global Investment Management says Comcast Corporation (NASDAQ:CMCSA) is a good example of a company with a strong competitive advantage relative to its peers.
It’s got a technology and a scale advantage that allows it to invest to further differentiate the value it brings to its customers. It’s got, we think, a culture of innovation that gives us comfort they’re going to continue to invest and maintain that advantage.
Driving all of that is, we think, a management culture that comes from the leadership. The Roberts family has played a huge role in building this business over decades and has brought huge value by bringing in a world-class professional management team. The likes of Steve Burke running the broadcast assets, Michael Cavanagh just joined as CFO, and we think that’s illustrative of just a best-in-class deep bench for great management strength.
So Comcast has got a great competitive position. They have technology and scale and, importantly, a great record for capital allocation to benefit shareholders — and all of that, we think, at a valuation that’s modest and fits the bill of a better-than-average business at very much an average valuation.
George Fraise, Founding Principal at Sustainable Growth Advisers, says HDFC Bank Limited (ADR) (NYSE:HDB) is bringing modern retail-banking practices to India and should see growth driven by the rise of India’s middle class.
HDFC is based in Mumbai, India, and was incorporated in 1994. It’s now the fifth-largest bank in India by assets. We typically do not invest in banks because traditionally those institutions are difficult to model because of the lack of transparency in their loan portfolio and the complexity of their operations. HDFC is different.
The banking sector in India has long been dominated by national banks, which offer Indian consumers very basic services. HDFC is bringing conveniently located, modern retail-banking practices to a growing middle class that is hungry for them.
Fraise says HDFC is growing by opening up more branches around the country, taking on deposits and making basic auto and mortgage loans.
So it’s a simpler business model. Over three quarters of the revenues come from the interest on those multiyear loans, and another 15% from fees and services, so 90% of the revenues are recurring.
The growth prospects are also quite strong. The company has 28 million customers in a country with over 1 billion people, so there are a lot more branches that they can open. We can see this business continuing to grow organically at 20% per year over the next three-plus years driven by continued rapid growth of the Indian middle class and expansion of the retail-banking footprint.
Jay Jackley, Senior Portfolio Manager of Compass Capital Management, says health care is an area where he has found value in the market, and CVS Health Corp (CVS) is a stock that has delivered.
[CVS is] the leading health care services provider in the United States with its large pharmaceutical services company and the United States’ largest retail pharmacy chain. The company fills over 1 billion prescriptions per year and has 7,800 stores in 40 states. In addition, the company provides medical services through its MinuteClinic walk-in clinic business.
The company is projected to grow earnings at 12% to 14% annually over the next five years. The company has steadily increased its operating and net profit margins over the past 10 years. The recent acquisition of Omnicare, a pharmacy services company with a focus in nursing homes, will help further the company’s growth.
The company has a strong balance sheet, and the business generates about $6 billion in cash flow annually. This has helped fuel a 30% growth rate in the dividend payout over the past five years.
Senior Portfolio Manager Jay Jackley of Compass Capital Management says Thermo Fisher Scientific Inc. (NYSE:TMO) is an example of how his firm has found value in the health care sector.
One of the names that we own is Thermo Fisher. Thermo Fisher Scientific is a well-run company that makes scientific testing equipment, and has single-digit organic revenue growth and consistent double-digit earnings growth.
They’ve had consistent margin expansion, and they have shown that they have a core competency doing mergers and acquisitions without any major missteps. They’ve bought companies that have added to their growth over time, including their $13.6 billion acquisition of Life Sciences in 2014.
Jackley says his firm bought Thermo Fisher in 2012 when the stock was around $50.
At that time, it was one of our bench stocks. We were looking at it during the budget sequestration, and because Thermo Fisher has some exposure to government spending, we thought it would be a good time to enter and were able to purchase shares at a cheap price.
The management team executed well through that problem. Now Thermo Fisher is trading for about $135 a share. It is a company that has a consistent earnings growth pattern, and it was the right time to buy the stock.
Joseph Ray, President of Gerald L. Ray & Associates, is seeing real opportunity with Southwest Airlines Co (LUV).
Given the low fuel prices that we’re seeing, their business is excellent. The stock hit new highs just again couple of months ago, and oil prices continued to go down, but the stock went down with the rest of the market at around $39, $40 today. It’s going to earn about $4 to $4.25 this year, maybe the same in 2017.
There’s probably upside because of fuel, high/low factors, stable pricing, expanded route structure, again, real earnings growth, and we’re talking about less than 10 times earnings, returning cash to shareholders through buybacks.
I think they’ll increase the dividend — and just a real opportunity. I think transports, especially the airlines generally, haven’t really benefited the way some would have thought with the lower fuel prices. I believe earnings will prove that will be an interesting place to be.
Joseph Ray, President of Gerald L. Ray & Associates, says now is the time for investors to buy Celgene Corporation (CELG).
One of our favorite longtime holdings, which has gotten cheaper, like most of the market in recent weeks, is Celgene. That’s a biotech stock, which is a bit of a dirty word I think around Wall Street these days, but it’s an area we’ve been very successful in investing in the last really, I’d say, 15 years or so. We’ve owned Celgene for a long time. We’re buying it still for new accounts. We think that the pullback in the shares is a great opportunity.
REVLIMID is a fantastic story, continues to grow. They have more uses for the drug. It’s being used longer, it’s being used with co-agents, and Celgene is one of the best companies to partner with. There is a lot in the pipeline.
Ray says Celgene is looking at somewhere around 17% sales growth for this year and 20% earnings growth.
The company has actually published a $13 number for 2020. The biggest question involving the stock was a patent issue on REVLIMID, their biggest drug, and they’ve favorably resolved that, and yet, the stock is down from that time. Therefore, we think it’s a tremendous opportunity to step into a really quality health care company.
Portfolio Manager Matthew Krajna of Nottingham Advisors says his firm favors the health care sector because of stocks like Johnson & Johnson (JNJ) that offer attractive valuations.
We find health care valuations relatively attractive, but we also see earnings per share growth in health care being higher than the S&P 500 for the coming year. And we think that stocks like Johnson & Johnson, which is the largest holding within the XLV ETF, offer interesting and compelling risk/return outlooks when taken as a whole.
Johnson & Johnson can be viewed as a company that typically offers value-like characteristics. That’s the interesting thing about health care as a sector, as it is this quasi-growth, quasi-value-type sector that has a component of biotech stocks that make up between 15% and 20% of the ETF but also has another slug of traditional value-type names such as Johnson & Johnson that pay higher dividend yields and offer more attractive valuations than the overall market.
