Vincent Lorusso, Partner and Portfolio Manager at Clough Capital Partners, says Comcast Corporation (NASDAQ:CMCSA) is an example of a stock that should benefit from what he calls the digital disruption theme.
[Digital disruption] encompasses the ongoing evolution of the Internet infrastructure, the proliferation of smartphones and tablets, the rising propensity of media companies to stream content directly to consumers, the evolving advertising landscape and emerging retail trends.
Comcast is a company that has come under a little bit of scrutiny in the equity markets — we think partly associated with broader headlines around cord cutting and unbundling…
When we look closely at these evolving media consumption habits, we would agree consumers have begun to de-emphasize the traditional video bundles, but we think this shift is gradual in nature, and where consumers are able to reduce their dependence on a video bundle, they may simultaneously, even if unintentionally, increase their dependence on their Internet infrastructure — often from the very same provider.
Lorusso adds that having a robust Internet connection has become almost essential in many households, and while the shift to streaming media may diminish the utility of a traditional video bundle, it only adds to the utility of a vibrant Internet connection.
This means that precisely as the cable companies migrate customers away from a video bundle and into a high-speed data plan, companies like Comcast can actually grow gross profits. That high-speed-data customer is more dependent on the service, has fewer alternatives, and we think they bring greater pricing power to the Internet service provider.
Cognizant Technology Solutions Corp
Lisa Ellis, Senior Analyst at Sanford C. Bernstein & Co., says Cognizant Technology Solutions Corp (CTSH) is an IT services firm that is not as well-known as Accenture, and as a result is priced favorably.
I am a big fan of Cognizant…Cognizant I think offers an opportunity for investors because it is similarly well-positioned like Accenture, but it’s not nearly as well-understood.
What is very differentiated about what Cognizant does is that they are almost exclusively industry-specific work. For example, two of their big industry verticals are health care and financial services, so they were enormous beneficiaries of Dodd-Frank and Obamacare, because when a bank needs to write a new risk management application to make sure that they are conforming to the Dodd-Frank requirements, they would call Cognizant to design and build that application for them. Their bread and butter is custom application development for industry-specific applications.
Ellis says Cognizant has a strong legacy in offshore because it was a spinout of Dun & Bradstreet 20 years ago.
They were the offshore-shared services center of Dun & Bradstreet. But they have a much higher value bend than is often perceived, and because of this domain expertise they’ve got, they are very well-positioned as the industry makes this industry shift. And the stock not well-understood, and so like right now they are my top 1H16 pick across all my coverage.
Senior Vice President Matthew Norris of Waddell & Reed, Inc. says Microsoft Corporation (MSFT) is an example of a stock trading at a significant discount to its true intrinsic value.
Whenever I buy a company, we think about what it’s truly worth, what’s that stock worth. If it’s trading at a big enough discount — for me, that should be usually 30% discount to what I think its true intrinsic value is — then it’s a buy.
Microsoft was below $50 only about nine months ago or so. I think Microsoft is viewed really as an old-school-type stock that isn’t very exciting the way Facebook and Amazon and Google are, but they are competing very well with cloud computing. When you think of cloud computing, everyone thinks of Amazon Web Services; that’s the big winner.
A lot of people don’t realize it, but Microsoft’s cloud-computing service is somewhat hidden inside such a large company but growing very rapidly. They are a major player.
The stock started to move up recently because I think as each quarter comes and they announce how they are doing, that’s becoming more and more apparent to people. That is a name that was cheap because people thought it was being left behind, and that wasn’t really accurate.
Managing Director Scott Blasdell of J.P. Morgan Asset Management says the main attraction of General Motors Company (GM) has been valuation and the continued improvement in its operations and reputation.
As you know, General Motors acquired new leadership after its bankruptcy restructuring during the financial crisis. Under the new management, they’ve been making very good progress improving the company. They’ve been reinvesting in the product.
We have seen a lot of new models coming out, and the reviews are good. It is still early in the turnaround of the Cadillac division, but new management there is terrific.
Blasdell says GM is also well-positioned in the pickup-truck market, which is doing well as gasoline prices have come down.
Importantly, the company is resisting adding to capacity, which historically undid the industry in prior cycles.
We think the company could earn close to $4 in a normal environment and is trading at about 8.5 times that number. Because the automobile industry had such a horrific experience in the last recession, we might need to see the company go through another recession to prove that it’s a better company this time around. But we’re comfortable owning it at these valuations, waiting for that payday to come.
Scott Blasdell, Managing Director at J.P. Morgan Asset Management, says that while Citigroup Inc (C) is a controversial name, he sees opportunity for the company to earn a lot more.
Citigroup, it’s probably been the most controversial bank since the financial crisis. First, it had to be rescued by the U.S. government, then it had trouble with the Fed’s CCAR exam, and there were various management changes.
As is typical with a controversial name, the stock looks quite cheap to us. We think the company can earn a lot more, particularly if they are allowed to return capital to shareholders. We think the company can earn $6.90 in a more normal environment, which is one of the cheapest multiples of normal earnings of any bank; the stock is currently in the low $50s.
We like current management. We think they’ve cleaned house and are moving in a positive direction.
Christopher Mullarkey, Co-Portfolio Manager at Markston International, says Apple Inc. (AAPL) is still interesting for investors, and is an example of how his firm focuses on finding value with a catalyst.
Clearly there is value there. If you’re aware, Carl Icahn has been publicly saying that it’s a very inexpensive stock and has had discussions with management to continue to return cash to shareholders through stock buybacks. The company also initiated a dividend.
We look for management change, and while Steve Jobs was clearly an absolute visionary and an incredible leader, we have been extremely impressed with Tim Cook and his team, and really believe that Wall Street’s myopic focus on smartphone sales fails to recognize the direction the management team is taking the firm to grow its intrinsic value.
Mullarkey says Apple distinguishes itself among peers as a great technology company with a large market opportunity, combined with the marketing power to grow share and improve margins as it gains scale.
Historically, a lot of tech companies need to cut price in order to grow sales and at best maintain their profit as margins drop. We actually see Apple as having the ability to continue to leverage its brand, 500-plus million user-installed base and its growing ecosystem to continue to go up market with products and services in a new computing paradigm.
Christopher Montoya, Senior Vice President at First Financial Trust, anticipates improvements in Union Pacific Corporation (UNP) in 2016.
[Union Pacific] is a company whose stock has not done very well in 2015. As a matter of fact, it’s down in excess of 30%. And the selloff is mainly because they’ve had very difficult year-over-year earnings comparisons. And so they’ve been disappointing the analyst community with their 2015 results.
We think that improves in 2016, as those year-over-year comps get much easier. The stock is very cheap, trading at 12.8 times 2016 earnings estimates, which is below its 10-year historical average of 13 times. The p/e is actually at trough levels, excluding 2008, but the return on equity during that time frame has improved tremendously, enabling this company to be much more profitable with their operations today than what they’ve been in the past.
Montoya says investors have shied away from Union Pacific because of the difficult year-over-year earnings comparison, as well as the belief that manufacturing and shipment of goods is not very strong.
That was validated recently with the ISM Manufacturing number being in contractionary territory for the first time since 2011. A big reason why I think the ISM is in contractionary territory is because inventories have been dropping for five straight months.
Our belief is that inventories can’t drop forever. So at some point in the near future, there has to be an inventory rebuild that replenishes the channel with new products. This will enable Union Pacific to grow revenue.
They have a 2.85% dividend yield with the ability to grow the dividend still further from here. They also still have some additional stock buybacks left in their buyback program.
Senior Vice President Christopher Montoya of First Financial Trust says Discover Financial Services (DFS) is a financial stock that will benefit from higher interest rates, while also having the potential to raise its dividend.
On Discover Financial, they are very cheap, like J.P. Morgan. They are at 9.77 times 2016 earnings estimates. The dividend yield here is 2%. We think they have the ability to grow it much more. And like J.P. Morgan, they will also be helped by the higher interest rates.
In 2016, we actually forecast there will be earnings-per-share growth and p/e multiple expansion as they grow their loans, they improve their internal efficiencies, and we see growth in their non-credit-card products.
Discover has seen its earnings impacted by increased marketing expenses, Montoya says, but the company is now seeing signs of the marketing push helping its business.
Consumers are liking the new features with their Discover it program, such as double cash back, the Freeze It feature on the smartphone, the ability to use Discover products on Apple and Android Pay, and the program seems to be really catching hold with Millennials, which is an up-and-coming demographic that we think is very important for Discover’s long-term growth profile.
Senior Vice President Christopher Montoya of First Financial Trust is investing in JPMorgan Chase & Co. (NYSE:JPM) because of rising interest rates, which he says will be very positive for the financial sector.
J.P. Morgan is currently trading at 10.7 times 2016 earnings estimates and barely above book value. It has an attractive dividend yield of 2.64%. They have a strong balance sheet. They are very well-capitalized, and our anticipation is, in March, they will be given the green light by the Fed to do additional capital increases to shareholders through more buybacks and an increased dividend.
Also, J.P. Morgan will be helped by the increased interest rates by the Fed. A large percentage of their loans are floating rate versus fixed rate. They have a low loan-to-deposit ratio, which enables them to increase their lending as rates rise.
Montoya adds that credit cards are among the highest ROA businesses in banking, and 85% of JPMorgan’s credit card portfolio is with consumers with FICO scores above 660.
The likelihood that there will be charge-offs is going to be very low, and they are able to capture these profits. And finally, with J.P. Morgan, the litigation expenses, which have been hurting earnings for several years, are beginning to wind down as they settle many of these disputes with the government. So that too will also aid earnings.
Senior Vice President and Equity Manager Christopher Montoya of First Financial Trust says Apple Inc. (AAPL) is an example of a stock his firm is looking for going into 2016.
Our strategy going into 2016 is to look for stocks with attractive valuation, near-term catalysts for earnings growth and financial strength to distribute capital to shareholders.
Apple, for example, currently trades at 11.98 times 2016 earnings estimates. They have $205 billion in cash, $141 billion in net cash, which is 21% of the total market cap. And so when you look at estimated earnings minus the net cash, the stock is actually trading at a little under 9.5 times 2016 earnings estimates, which is extremely cheap in comparison to the overall market.
Montoya says Apple sells great products that are very popular, and that the operating margin on those products is 30%.
They’re pretty much a cash-generating machine, whilst the stock currently trades as if they’ll never sell another iPhone. We see growth in wearables like the Apple Watch. There is a potential for a TV streaming service in the future, and then, we still see improvements in their software to strengthen their ecosystem.
So all of this would generate additional cash that enables the company to do research and development, some tuck-in acquisitions and still be able to grow capital distributions for shareholders.
