Bobby Edgerton, Money Manager at Capital Investment Companies, says he looks at macro events when evaluating stocks, but he is more concerned with what big tech companies are doing, such as Facebook Inc (FB).
“One phenomenon that has happened in the market is the emergence of the five tech companies to get even more and more powerful, and those are Amazon (AMZN), Apple (AAPL), Facebook, Microsoft (MSFT) and Alphabet (GOOGL),” he says.
“I like tech stocks the best because they’ve changed the world. They have more money than anybody else. They make more money than anybody else. If you looked at Microsoft’s and Apple’s balance sheet as well as Alphabet and Facebook, then that’s my favorite sector,” Edgerton adds.
“The competition is just absolutely ferocious, especially between the big tech companies. Google wants what Facebook has got. Facebook wants what Google has got, and they go at each other. But probably both are going to do well,” Edgerton says.
“I am a contrarian first and foremost, because when a stock goes down, that’s probably the biggest tip off of it getting cheap, which is what happened with FedEx at $65 a share two or three years ago. It was selling below what their assets were across the world,” Edgerton says.
Edgerton says the essence of the stock market is that each company at all times has two values: the value the market is placing on a company at a certain point, and the actual worth of a company.
“There are times like right now when FedEx was being valued at $44 billion. I just look at the land, building, property and equipment, and that’s $44 billion. So the stock market is saying that the entire FedEx Corporation is worth what they paid for their properties, trucks and planes owned. That is what triggers my buy: a stock that’s worth a lot more than the market’s valuing the company at.”
Stifel, Nicolaus & Co., Inc. Managing Director Tom Roderick says that when looking at the big trends driving enterprise software and adoption within the enterprise, there is a wave of disruptive pressure coming from cloud companies like Salesforce.com, Inc. (CRM).
“Cloud-centric companies like Salesforce.com, they used to be seen as smaller departmental types of solutions or solutions that are emphasized for the small or midsized business. That has all changed over the course of the last four, five years,” Roderick says. “You’re seeing big, big, seven- and eight- and sometimes even nine-figure investments into cloud-based technologies.”
Roderick says what is new is the willingness to rip out a heavy investment in legacy systems and move forward with leading cloud vendors as the next platforms of choice.
“These are not just investments and applications around the fringes. These are investments and platforms and systems that are replacing core functions,” he says. “You’re seeing that with Salesforce.com for a number of front office software technologies.”
Salesforce is still Roderick’s number one SaaS name of choice.
“I know it’s a widely beloved and widely held stock, but we think it’s still just right on the cusp of becoming an even greater disruptor in the enterprise with more and more solutions that are being adopted from not just the Sales Cloud offering that they built, but also with their Marketing Cloud, their Service Cloud and even their PaaS platform offering known as force.com. We’re starting to see the larger and larger enterprises make even greater investments toward cloud-based technology, and Salesforce is becoming the aggregator and consolidator of that power,” Roderick says.
Managing Director John Rizzuto of SunTrust Robinson Humphrey says Oracle Corporation (ORCL) is one of his top picks. He says the mega-vendor is very broad in where it competes, and he is optimistic on its transition to the cloud.
“In the large-cap world, Oracle is playing in this [data analytics] space aggressively,” Rizzuto says.
“It is important to note that everything starts from the infrastructure that enables it. We need an infrastructure to move and store the data, and an infrastructure to host the applications. Oracle too has infrastructure solutions in addition to applications; this is increasingly common among the mega-vendors,” he adds.
Rizzuto says the top 10 software vendors, which includes Oracle, control a massive amount of the market and play across many segments of the software industry. He believes that investors’ concerns about the company moving to the cloud are misplaced.
“Oracle is one of the companies that we just upgraded and that we like going forward as it transitions to the cloud. As Oracle moves toward the cloud, many investors are viewing it as a threat. We believe that at some point within the next 12 months, people will start to realize it’s not a threat at all, but an opportunity. It is because we expect Oracle to manage the transition very well,” Rizzuto says.
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.
“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.”
“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.”
“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.
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.
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.”