Bobby Edgerton, Money Manager at Capital Investment Companies, says Wal-Mart Stores, Inc. (WMT) is an an undervalued company with plenty of cash and little to no debt.
“I concentrate on the world’s best companies with the world’s best balance sheets. I am a balance-sheet man first and foremost,” Edgerton says.
Edgerton buys the world’s best companies, but he aims to buy them when they are down and out of favor, like Wal-Mart is presently.
“The market hates Wal-Mart. Every hot stock in the stock market right now at some point was out of favor. I am a contrarian first and foremost, because when a stock goes down, that’s probably the biggest tip off of it getting cheap,” he says.
Bobby Edgerton
Edgerton believes the most misunderstood issue surrounding Wal-Mart right now is how much Amazon is supposedly hurting the company.
“It could be misunderstood when you are thinking so short term,” Edgerton says. “I think Wal-Mart has been totally wiped out in that the market value of Wal-Mart is $180 billion. The land, building, plant and equipments on the books are at $170 billion cost. They own about 88% of the North American location. It’s a real estate empire. People are not going to stop going to malls. They are not going to just stay home and buy everything online.”
“I think a lot of times people just get too exuberant about Amazon’s growth, although I like Amazon, but when they get down on Wal-Mart, they get so down that they value the company at probably less than the real estate,” he adds.
Chevron Corporation (NYSE:CVX) has run into difficulties amid a negative energy sector backdrop, says Senior Portfolio Manager Todd Lowenstein. He says the energy space has been a challenged sector in the sense that oil prices have collapsed over 50% over the last year.
“Oil is now starting to reset and find a new equilibrium, trying to restore the supply and demand imbalance that still exists with excess inventories. Not only has excess supply been an issue, but also one of the big problems in the oil sector really has been on the demand side. Weak worldwide global growth has really hurt energy consumption with emerging markets slowing and developed markets unable to reaccelerate, so it’s a perfect storm of problems,” Lowenstein says.
Chevron has been no stranger to difficulties during this time, he adds.
“They embarked on a lot of expensive, big-ticket projects during higher price levels in oil, and they needed these higher price points to justify the investments…They got caught as oil prices fell with having not finished on these projects that were either delayed or went over budget.”
However, Lowenstein thinks Chevron (NYSE:CVX) will come onstream shortly, and that it is still a well-run company that could see upside optionality should oil prices rebound.
“Management is now reorienting the company to deal with the lower price environment, and you will see some rationalization of projects, noncore asset sales, and you will see some cost discipline in a lower price-deck climate. We think the dividend yield is attractive,” Lowenstein says.
“There is a pretty attractive risk/reward here as a contrarian play. The stock is discounting difficult times far into the future, and as they prepare to survive the current downturn, there is upside optionality for them to thrive if oil prices rebound, which should occur over time as the supply/demand equilibrium is restored.”
Senior Portfolio Manager Todd Lowenstein of HighMark Capital Management says there are misconceptions about General Electric Company (GE) still being overly finance-exposed.
“In the past, [GE] was an empire builder, and during the financial crisis, it got exposed for being heavily reliant on short-term commercial paper financing, essentially funding short and investing long, relying on their AAA credit rating providing an advantageous funding position,” Lowenstein says.
“They spent a lot of money building a massive presence in various financial services unrelated to their core industrial business, which resulted in finance at the peak of last cycle becoming close to half their earnings power. Essentially, this wasn’t even a pure industrial company any longer; it was becoming a closet finance company capitalized as a premium industrial conglomerate. They had huge difficulties during the financial crisis when the commercial paper market froze and they weren’t able to roll over their paper,” he adds.
Lowenstein says the company has taken steps to unwind those past investments and return the focus back to its industrial heritage.
“They systematically decided to sell off most of their financial assets at pretty attractive prices and unloaded their lower-valuation, commodity-type industrial business, such as lighting and appliances, while acquiring attractive assets in areas where they have a scale presence.”
GE is now being shrunk to fit an attractive set of crown-jewel businesses, such as aircraft engines, power generation, health care and locomotive, Lowenstein says.
GE Power Generation
“They are going to take about $100 billion in capital and redeploy it in industrial acquisitions and shareholder buybacks. They are going to rake in over $100 billion in asset sales and will redeploy that capital back, investing in the industrial businesses, productivity improvements, margin expansion and shareholder returns,” he says.
“Ultimately, we think this slow-moving transformation will warrant a much higher valuation multiple, higher growth-rate potential, higher-quality earnings, and it’s going to be a very successful investment for our shareholders.”
Money Manager Bobby Edgerton of Capital Investment Companies says Apple Inc. (AAPL) is a prime example of investing in a company with free cash flow. Looking for plenty of cash is an important part of Edgerton’s investment strategy.
“I concentrate on the world’s best companies with the world’s best balance sheets. I am a balance-sheet man first and foremost. Before I buy a stock, I will look at the balance sheet…Primarily cash, plenty of cash, as in a lot of liquidity, with little or no debt. I look at free cash flow. Apple would be the number-one example of great free cash flow,” Edgerton says.
Bobby Edgerton, Money Manager
Edgerton says Apple’s stock is the cheapest now, and the company has $206 billion in cash.
“There is probably no stock that I wouldn’t at least look at, but if somebody gave me $1 million to manage right now, the first thing I’d ask them is how much Apple you could stand in that portfolio and sleep at night,” Edgerton says. “They could easily have free cash flow of $85 billion to $90 billion this year. I am not talking about earnings; rather, I am talking about free cash flow.”
Edgerton likes investing in tech stocks because they’ve changed the world and have more money, and make more money, than anyone else.
“I love companies like Apple that are changing the world and making the world a better place for people. That’s what separates a great company from a good company. Good companies make money and run their businesses well, but great companies make things better for people like Apple has done.”
Money Manager Bobby Edgerton of Capital Investment Companies considers himself to be a balance-sheet man first and foremost. He concentrates on cash-rich companies, one of them being Costco Wholesale Corporation (COST).
“I manage retirement plans and individual accounts as opposed to mutual funds. My clients own their own stocks and/or bonds. They have a say-so on common-sense decisions. I am probably managing maybe $100 million and concentrate pretty much on cash-rich, debt-free companies,” Edgerton says.
“My guess is I may never sell Costco. I think my average cost basis for most people around Costco is in the 40s, and the stock is at $150. We’ve owned it probably almost 10 years now,” he adds.
While Edgerton understands the online ordering trend, he believes consumers are going to Costco for other reasons.
“People go to Costco for entertainment. They are not going to just sit and order everything online. Women, especially, like going during the day to Costco,” he says.
“The person who lives paycheck to paycheck, he or she is going in for one or two items and buying five or six items,” Edgerton adds.
KeyBanc Capital Markets Analyst Donald Hooker is currently recommending Medidata Solutions Inc (MDSO). While it is a data company, Hooker says Medidata focuses on the pharmaceutical and biopharmaceutical space.
“They are helping digitize clinical trials and observational research. They are well-funded, they have a deep product pipeline, and they are well-aligned with key trends,” Hooker says. “They have a big total addressable market and very reasonable consensus expectations on it.”
“So it’s sort of a beat-and-raise scenario, and some near-term catalyst potential for this within some different legislation that is in process of that addresses the use of information technology in clinical trials,” Hooker adds.
He is referring to the 21st Century Cures Act, which passed the House in July and is working its way through Congress to the President’s desk.
“That has helped set the stage for the health hubs and safeguards and regulations around using technology in clinical trials,” Hooker says. “That would accelerate demand for Medidata potentially over the next couple of years.”
Michael Alkire, COO of Premier Inc (PINC), says the company’s fourth quarter was a very good finish to its fiscal year 2015. Premier’s revenue was up 16%, adjusted EBITDA was up 12%, and earnings per share was up 10%.
“We ended the year with 3,600 hospitals and 120,000 other suppliers. That is up about 600 hospitals and up about 10,000 other providers from a year ago,” Alkire says. “We retained about 99% of our group purchasing business and 94% of our SaaS institutional renewal rates in our performance businesses…We exceeded $1 billion in revenue for the first time, and we generated an adjusted EBITDA margin of 39%.”
Alkire says Premier’s management has been growing and redefining its existing business and introducing new offerings across both of its segments.
“In performance services, we are expanding and enhancing our PremierConnect platform, introducing PremierConnect Supply Chain as a total all-in procurement solution,” Alkire says. “We implemented and launched the industry’s first quality cycle management system…and we introduced CommunityFocus.”
Managing Director Jason Wittes of Brean Capital says Globus Medical Inc (GMED) is in a strong position right now. He says the company is a $2 billion-plus market cap name that is well-capitalized and able to service markets as effectively as J&J or Medtronic.
“But they still have that focus and, most would argue, a significantly better product portfolio offering than those two largest players,” he says. “They’re unique in having the right scale and focus.”
That, Wittes says, is why Globus is consistently growing its top line in the low double digits. He anticipates that the company can continually drive strong topline growth, given its current position.
“Globus already has best-in-class operating margins, but I see opportunity for accelerated growth as it expands into trauma — an area where its aggressive product development and sales strategy could prove even more successful than it was in spine, given it’s a less competitive space,” Wittes says.
Analyst Dane Leone says Danaher Corporation (DHR) is becoming much more of a health care-centric company today and over the next 12 months.
“The management team at Danaher has made some very interesting acquisitions, with the most recent one being Pall Corporation that provides filtration equipment for the biopharmaceuticals industry,” Leone says.
“It will be resetting the clock on its business model of M&A in 2016 with the split of the company from the new Danaher to new company as yet to be named,” Leone adds. “The new Danaher will house most of the health care assets and be a very growth company looking to continue to broaden itself out and deepen some of the verticals in life sciences and diagnostics.”
On a multiple basis, Leone expects to see low teens for EBITDA, whereas the group trades in the midteens. He says he expects a high-single-digit EBITDA growth profile that is sustainable over the next several years to help to support that valuation argument.
“We think Danaher is one of the more interesting names,” he says. “It’s been underowned on the traditional health care side, somewhat as a function of its industrial history, but we see that changing over the next 12 months.”
Analyst Dane Leone of BTIG, LLC says one of the stocks that he likes on the midcap side is Alere Inc (ALR).
“Over the past 12 months they’ve had several success with new products, and one of those being Alere i platform, which is the first molecular platform for the near-patient setting or CLIA waiver setting in the U.S. It has done very well with potentially over 2,000 placements currently within the first nine months of launch with a significant opportunity ahead globally in best-in-class technology,” Leone says.
The new product cycle coupled with the new management creates a significant opportunity for Alere to expand the margins, Leone says.
“We think that makes Alere the most interesting re-emerging growth company in this space,” he says.
