Consumer staples stocks are currently at high valuations, analysts say, as investors have been moving toward the space in search of stability, higher quality, yield and shareholder returns in a time of uncertainty. These companies have been perceived by investors as safer and more stable relative to other types of stocks recently, analysts say. Some analysts even go as far as saying investors view these companies almost as a proxy for bonds.
Growth prospects for the space as a whole have remained fairly tepid, analyst say, adding that growth in emerging and developing markets has slowed over the last several quarters. Even though stocks for staples retailing have been performing well recently, analysts say the business and revenue growth performance could be described as subdued at best. The outlook doesn’t seem good, according to these analysts, particularly where there is deflation working in to the system and growing competition. Barriers to entry, particularly in food, are coming down, and there are many new companies in food that have been growing large. Analysts say there has been much competition in staples that has eroded shareholder returns in some cases, especially in retail grocery.
Some analysts also say there are too many stores being built relative to the slow population growth in the United States, which is down about 70 basis points. Demand seems fairly slack as well, partially attributable to demographics, with analysts saying Generation X didn’t have as many children as previous generations. Analysts identify one trend, however, that is growing and which they are the most bullish on: health and wellness. Consumers have been moving toward healthier products, as opposed to what they considered to be more diet-focused. There’s continued growth in natural and organics, as well as fresher offerings. Some food manufacturers are having a difficult time giving customers minimally processed food because they are by nature food processors, but there are a few that have distinguished themselves and benefited from this trend. These companies have opportunities with cost cutting in the short term, but in the long term they’ll have to focus more on the wellness trend, analysts say. The food industry is also consolidating, as one large company expanding has translated into the competition looking to grow as well. Baby Boomers are looking for ways to stay healthy as they age, and Millennials are also adopting healthier lifestyles. This trend is not only in specialty stores, but also in conventional traditional grocers.
Analysts are looking for a company’s ability to outprice in excess of inflation, as well as a firm’s relationship with retail and the resources a firm has toward supporting these intangible assets, which becomes more difficult as consumers are more particular about where they spend their money, and some of the older brands are seeing new consumers not having as much of an emotional attachment to them, especially in products such as laundry detergent. Instead, analysts say, consumers are focusing on health, wellness and the environment. One of the pockets of brand loyalty, however, seems to be cosmetics.
Retail companies are engaging in e-commerce on an increasing fashion, and although most of this internet retail is currently happening on desktops, analysts say the growth in mobile is more than 50%. Although e-commerce and mobile advertising are new phenomenons, analysts devote much of their time to this mode of retail. They say retailers focused on brick-and-mortar stores are having a difficult time competing with web-only services, and Amazon has emerged as one of the key players in the space. Online retailers, however, still have some types of merchandise they haven’t successfully marketed yet, with groceries emerging as one of the most clear examples.
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Steve Brozak specializes in health research and banking across many segments. Right now Mr. Brozak is seeing one of the most significant demands for innovation. He says there is a limited availability of money to fund research and pay for drugs, and he is seeing more financial calculations based on revenue that shouldn’t be rewarded, as well as companies making incremental improvements of older drugs being rewarded. He says resources are being wasted to support these types of activities. Mr. Brozak is looking forward to seeing some pushback, and he’s starting to see some around the periphery. He discusses five companies with novel drugs that investors should be noting.
Full interview available here.
Equity Analyst David Weinstein of Dana Investment Advisors says Alaska Air Group, Inc. (NYSE:ALK) is currently trading at a discount, and over the long term the company should generate significant earnings and cash flow.
All of the major airlines are trading on a forward-earnings basis at single-digit multiples. Alaska is 8.5 times right now. ALK also has a 10% free cash flow yield, and historically, they have generated significant free cash flow. So you’re getting a lot of cash with your investment. You’re getting a company trading at a really significant discount to the broader market and to the industrial sector and to the transports in general.
Returning to the fuel costs, two years ago, crude was $100, right? In 2013 to 2014, crude was $100, and ALK made a lot of money back then. So we know that there’s a defined downsized scenario that we can model. Our view on crude is — and I don’t think this is outside of consensus at all — but our view on crude is that with the technology that fracking has brought to the table, you’re not going to see crude up near $100 in the next several years for any sustained period of time. So we think that fuel costs are an overborne concern. They do affect the quarter-to-quarter EPS volatility, but over the long-term, ALK is generating significant earnings and cash flow, which is supporting your investment.
Weinstein adds:
So what you’ve seen is, of course, Alaska is growing, probably going to grow earnings somewhere in the region of 10% this year. That’s also with a 10% free cash flow yield.
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Mariana Kou covers after-school tutoring companies in China and international schools. Ms. Kou says for the after-school tutoring companies, leading players are investing in digital offerings, and that’s helping them take market share. She says demands are strong in Asia for international school education, and that trend in China is really kicking off because of rising income levels and the government encouraging private education. Ms. Kou says the education space is very attractive at the moment.
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Jeffrey Silber discusses the education sector. Mr. Silber is more optimistic on for-profit education than most, as there are a number of selective companies that can be good investments, particularly those going from a public pay model to a private pay model. He says nonprofits have had to change their themes a bit to compete with for-profit companies with the demand for education that helps students increase their employability. Mr. Silber favors the child care and premium K-12 sector, where he expects to see continued growth.
Full interview available here.
Chief Investment Officer Joan Lappin of Gramercy Capital Management Corp. says Ambarella Inc (NASDAQ:AMBA), a semiconductor processing solutions company, is recovering from the GoPro (NASDAQ:GPRO) crash and running business in a very cash-efficient way.
Ambarella was the supplier of the guts of the GoPro cameras, and as GoPro rose dramatically, Ambarella was dragged along for the pretty impressive ride. I evaluated both companies at that time, and I decided that GoPro was kind of a one-trick pony. It had the cameras. The cameras were hot, hot, hot; however, it was clearly a fad…
What I like about Ambarella is, it did then and still has no debt. It also has several legs to its table. It had the action cameras, and it’s also actively in the drone market. It’s also involved in these video cameras that are now being used by security people, including the police and home surveillance systems, which Comcast (NASDAQ:CMCSA) is promoting to its customers. And also, when you watch a football game on TV, a lot of what you see is based on action recording devices that are based on the Ambarella technology.
We had great success with Ambarella last year, rode it from 40 to about 100. When GoPro inevitably came crashing down, AMBA came crashing down as well because GoPro was such a significant customer for it. AMBA peaked very close to 130, and it dropped back into the 30s and has begun its recovery and is now in the 50s. I believe that it has turned the corner. Now, GoPro is also predicting a stronger second half with new models. That is probably a mixed blessing.
[…] I believe that Ambarella is a well-run company not given to hyperbole. It’s been around for a long time. And it seems to be run in a very cash-efficient way, which is why they have no debt.
Joseph Walewicz discusses his coverage of specialty pharma companies. Mr. Walewicz says the election cycle and talk of drug pricing are headwinds for pharma overall and particularly for the small caps in his coverage. He believes that clarity will be realized over the next year and that people will revisit the small-cap pharma space. With stocks beaten down, Mr. Walewicz looks for companies that are focused on organic growth and have low or modest leverage.
Full interview available here.
Dr. Gbolahan Amusa covers biopharmaceutical companies. Dr. Amusa looks for companies that can create value for the overall global health care system either through disruptive innovation in developed markets and/or by providing access to medicines in less developed nations. He is focusing on emerging areas such as gene therapy treatments, stem cells and regenerative medicines, and personalized genomics health care. Dr. Amusa says innovation is higher than it has been historically, as drug approvals last year had their second best year in history.
Full interview available here.
Gregory A. Gizzi discusses Delaware Investments. Mr. Gizzi invests in the municipal market. He had modest expectations for 2016, but so far, returns are on pace to beat expectations. Rather than allow macro events to dictate the investment strategy, Mr. Gizzi focuses on income, which he believes is the key driver of total returns over the long term. The portfolio structure is driven by a bottom-up fundamental credit process. According to Mr. Gizzi, the portfolio tends to be overweight the lower investment grades. Right now, he is finding value in revenue bonds, MSA tobacco bonds, health care and transportation issues. As for investors in the municipal bond market, Mr. Gizzi’s advice is to diligently reinvest coupon interest because the compounding effect will increase the ultimate return.
Full interview available here.
Joan E. Lappin discusses Gramercy Capital Management Corp. Mrs. Lappin believes that investing is an art and not simply a science based on algorithms. In her view, the primary problem with algorithms is that they are based on the past and don’t take changing circumstances into account. Overall, she thinks that future earnings drive stock prices. Mrs. Lappin considers herself a contrarian, and her approach is to wade into controversy. This allows her to find opportunities in companies that others want to avoid. She also looks at a company’s debt level and advises investors to stick to companies that have little to no debt.
Full interview available here.
