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.
[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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.