Super Investor Arnold Van Den Berg sees the current developments in U.S. Research and Development as “so significant that I label it as another industrial revolution. Given the tremendous breakthroughs taking place in artificial intelligence, 3D printing, robotics and nanotechnology, it’s hard to see it any other way. Furthermore, America is a leader in almost every one of these areas.”
Mr. Van Den Berg has been managing money for institutions and the wealthy for nearly 50 years. Starting Century Management in 1974, this top portfolio manager follows “the Benjamin Graham school of thought, which is the value-investing approach.”
The Texas-based money manager declares that “numerous technology companies will benefit from this manufacturing renaissance. Three companies we own and like over the long run are Corning (Corning Incorporated, NYSE:GLW), Intel (Intel Corporation, NASDAQ:INTC) and IBM (International Business Machines Corp., NYSE:IBM).“
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
These three stocks “are trading between our established ‘buy’ zones and fair values as of this interview, they are good companies to keep an eye on. Should these companies pull back a little from their current prices, we believe these would be solid positions to own,” Mr. Van Den Berg said.
However, investors should avoid some stocks participating in the “new industrial revolution,” specifically 3D Systems Corporation (NYSE:DDD), with “an average price-to-sales ratio of 14.6 times during this same period. So while I would not recommend investing in 3D printing hardware companies today, I would recommend this investment theme and looking for companies that can benefit from the technology,” Mr. Van Den Berg adds.
It is rare to hear a money manager with 50 years of investing experience pounding the table for American businesses with such enthusiasm. It bodes well for the rest of the stocks that Mr. Van Den Berg recommends in this interview.
Starwood Hotels & Resorts Worldwide Inc (HOT) is on track to go asset-light, with a goal to have 80% of EBITDA managed and franchised, as the company sees tremendous system growth in emerging international markets, says Simon Yarmak, CFA, Vice President at Stifel, Nicolaus & Co., Inc.
“Back in 2000, about 80% of HOT’s EBITDA came from their owned portfolio, and 20% came from managed and franchised income. Today, about 40% of its EBITDA is derived from its owned portfolio, and 60% from the management and franchise business. As HOT goes through the cycle, they hope to sell $3 billion of real estate and to shift the owned portion of its portfolio to 20.0% of EBITDA, so about 80% of EBITDA will come managed and franchised. The shift in HOT’s revenue structure will coincide with investors favoring the operators over the owners,” Yarmak said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Additionally, 90% of Starwood‘s growth is coming from international efforts, primarily in emerging markets and particularly in Asia, Yarmak says. He expects HOT to generate a significant amount of free cash flow over the next several years, which will be returned to shareholders via buybacks and dividends.
“About 90% of HOT’s system growth is international, primarily in emerging markets, with about 80% of in Asia. They have one of the largest pipelines in China and in India, and we believe going forward a lot of the growth for hotels internationally is going to be in Asia. They’ve a pretty good footprint there and an excellent pipeline,” Yarmak said. “Lastly, the last couple of years they have sold real estate, paid down debt and pushed their balance sheet into the best shape it has ever been. Therefore the significant amount of free cash flow that they are going to be generating over the next couple of years will be returned to shareholders in the form of dividends and share buybacks.”
Non-functioning health insurance e-commerce sites have dominated the news about the implementation of the Affordable Care Act, but some portfolio managers have seen opportunity in the chaos. In a recent portfolio manager interview in The Wall Street Transcript, Willem Schilpzand foresees superior returns through an investment in Humana [HUM].
“Humana is a managed care organization, and their largest business is in the Medicare Advantage space, which is the private equivalent of government-provided original Medicare. Humana is the second-largest Medicare Advantage player with approximately 17% market share, and UnitedHealthcare (UNH) is the largest with approximately 20% share,” Schilpzand said.
This low-cost health insurance focus has been a long-term business objective of the Humana senior executive team. This quote is from an interview with Michael B. McCallister, currently the Chairman of Humana’s board but speaking as the Chief Executive Officer in 2004: “As I said earlier, there are big opportunities in the Medicare area and we’ve been in that business for 20 years. We’re the most experienced company in Medicare.”
FOR MORE INFORMATION ABOUT THESE INTERVIEWS CLICK HERE.
In another recent interview with Senior Vice President and Chief Service & Information Officer of Humana Inc., Brian LeClaire, the opportunity for information technology expertise at Humana is further emphasized: “If you were to speak to anyone here at Humana, you would hear that IT is integral to what we do as it enables every interaction we have with our members.”
Humana’s consistent focus on delivering Medicare benefits at a profit is a core competency that portfolio managers are now recognizing as an investment opportunity. This expertise in health care information technology and cost efficiency has created a sustainable competitive advantage for HUM, according to Mr. Schilpzand, and has led to his investment decision.
“Humana’s Medicare Advantage HMO plans provide a 30% savings versus original Medicare, and Humana’s plans on average save close to 17% versus original Medicare. Savings are accomplished through narrower networks and more integrated care, which a government entity would have a very hard time replicating,” Schilpzand said.
Alpine Capital Research is a value-oriented portfolio manager currently sitting on 40% cash because, as portfolio manager Willem Schilpzand puts it: “Our cash is a reflection of a lack of opportunities.” However, Alpine is currently putting money to work in Intel Corporation stock. In a recent interview with The Wall Street Transcript, Schilpzand explains that “…the belief was or perhaps still is that Intel can only make performance-heavy chips while mobile products require power-efficient chips, and that therefore Intel’s mobile ventures would fail. This negative sentiment sounded like a potential opportunity to us.”
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
The massive dominance that Intel has in the personal computer and data center server markets has actually seemed to penalize the company, as the lack of the same 85+% market shares are not duplicated in the fast-growing mobile computer space which dominates current investor focus. As red-hot tablet and mobile phone device growth rates begin to slow, and new Intel products get rolled out to those form factors, perhaps investors will also begin to realize the massive opportunity in the security space.
Mr. Schilpzand believes that “Intel has an opportunity here to build antivirus or other protection onto the chips they sell and provide better security without the software slowdown issues” that occur with security-conscious computer users. He further suggests that the prudent investor consider that “Intel is the only company that has a tablet chip out that is compatible with both Microsoft’s (MSFT) and Google’s (GOOG) mobile operating systems…So if you are an original equipment manufacturer who sells both Windows and Android tablets, you can now go to Intel to buy one chip and…streamline the purchase process for the chips.” Given all these positives, the recent selloff in Intel may be an opportunity to add to a value-oriented stock portfolio.
Bottomline Technologies (EPAY), a company that provides cloud-based payment, invoice and banking solutions, is eyeing both near- and long-term growth drivers with its recent acquisitions as well as the success of its Legal eXchange and Paymode-X businesses, says Brett Huff, Research Analyst at Stephens Inc.
“I think [these] are good acquisitions. They add to a relatively underappreciated business line that Bottomline has called SWIFT bureaus. So SWIFT is an international network for financial institutions and corporations to pass financial data back and forth in a secure way. That’s a business of EPAY’s that we think is largely underappreciated, and we think that these acquisitions they did give them additional scale in that business,” Huff said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
While the SWIFT business is a promising growth driver over the long term for EPAY, Huff points to the company’s other businesses as growth areas that will drive the stock in the near term.
“There are other parts of the Bottomline story that will more likely drive near-term stock appreciation, including the growth in the Legal eXchange business, which is legal spend automation software as a service, and the Paymode-X business, which is a business-to-business payment network. We think those are the two more important businesses relative to the things that are going to drive the stock, more likely in the near term, though like I said, I do like the two acquisitions that they did,” Huff said.
The Ultimate Software Group, Inc. (ULTI), a provider of cloud-based human capital management solutions, is seeing consistent 25% growth as well as profits from its best-in-class product, says Alex Zukin, Research Analyst at Stephens Inc.
“You’ve seen [ULTI] trade up significantly over the last six months. I upgraded it in July based on the fact — I truly believe that they have a product that is best-in-class, they have a moat that is very wide, and they have chosen to grow at 25% consistently and only invest 20% to 25% of sales and marketing, and I think that model works,” Zukin said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
While historically Ultimate Software has not been looked at as a growth company, Zukin believes that ULTI is in fact on a steady growth path and has been profitable due to its differentiated technology.
“Growth investors are rewarding them for being able to grow sustainably and be profitable. I think that historically the knock on them has been this is not a growth company, and I don’t think that’s accurate in my view. I think that they are a steady growth company that has the luxury of being able to grow at its current pace and be profitable because of the competitive differentiation they’ve developed in their technology,” Zukin said.
SolarWinds Inc (SWI) hit a record level of recurring revenue in Q3, and what is driving the high growth is an increase in customer retention rates, a unique pricing model and a new subscription revenue stream from the company’s acquisition of N-able, says Kevin Thompson, President and CEO of SolarWinds Inc.
“We’ve seen a couple of things over the last 24 months that are really driving that very high growth in recurring revenues. First, we’ve always had very high customer retention rate, so once you’re a customer of ours, you generally stay a customer for very long time, and you continue to pay us maintenance revenue every year because we deliver a lot of value to you for that maintenance revenue. In general, we’re going to release two new versions of our products every 12 months, and your maintenance contract is for 12 months, so unlike a lot of companies that have a new release every two or three years, we’re going to put new technology in your hands a couple of times every 12 months while you’re under maintenance with us,” Thompson said.
FOR MORE INFORMATION ABOUT THIS COMPANY CLICK HERE.
Thompson also points to the company’s unique pricing and packaging model, which is focused on the long-term value of a customer, as another area that is driving the growth in recurring revenue. Additionally, with SWI‘s acquisition of N-able, they are also seeing revenues from a monthly subscription service.
“We acquired a company called N-able back about five months ago now, and they sell a set of technologies through MSP channel to a bunch of very small businesses around the world that have anywhere between 15 employees and maybe a couple hundred employees, and they sell all in a subscription model. So that technology is delivered in a fast way from the cloud. Some of that technology is deployed on premise, but it’s all sold in a monthly subscription, so when you combine increasing customer retention rate with the subscription revenue model we added to the business, we now have 61% of our total revenue, which is recurring, which is really unusual for a license model-based software company,” Thompson said.
Hasbro, Inc. (HAS), along with other major toy companies in the sector, will see an impact from the release of new Xbox and Playstation consoles while already battling with the tablet and smartphone market, as the toy retail space faces a weak season ahead, says Gerrick Johnson, Analyst at BMO Capital Markets Corp.
“More than video games, tablets and smartphones and their apps have had an impact on this market. We are living in the era of free apps, so the consumption of that product for a child is pretty inexpensive,” Johnson said. “We also expect to see some impact when the new Xbox and Playstation consoles come out late next month. If you ask an 8-year-old boy if he would rather play a physical game or the new video game, he’s likely going to pick the video game.”
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
With few hot trends and no must-have toy coming from the major toy companies, Johnson is not recommending any stock in the sector, and has a “sell” on Hasbro specifically, because he believes it is overvalued. In order for toy retail to recover, Johnson is looking for an improvement in the economy as well as better products on the line.
“It’s all cyclical. So what needs to change is, one, the economy needs to do better so people feel more confident about spending a little bit more when they go to a retailer or a shop for the holiday season. Two, you need to see better products out there to attract the attention of the consumer, so more innovative products. There are some innovative things, but they come from the private companies, the smaller companies,” Johnson said. “Most of my stocks are neutral. I have a ‘sell’ on Hasbro because I believe they are overvalued…overall, the space just frankly isn’t that appealing right now.”
Hasbro, Inc. (HAS) is in front of a significant pipeline of movie content for 2014 and 2015, and with its strategic merchandising relationship with The Walt Disney Company (DIS) is expected to benefit considerably from the release of Marvel movies as well as the highly anticipated Star Wars, says Stephanie S. Wissink, Principal, Senior Research Analyst and Co-Director at Piper Jaffray & Co.
“We actually tend to bias toward the Hasbro model, which is start with the brand, invest in the brand and allow toys to just be one component of how that brand is actually consumed,” Wissink said. “We are in front of a very significant pipeline of movie content that they have the master licenses for in 2014, and one of those key properties is Transformer, which is actually a Hasbro-owned brand…They also have the license for Marvel, which would includes Spiderman, The Avengers, Captain America, and a new property called Guardians of the Galaxy also coming next year.”
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Wissink is also looking forward to the monumental Star Wars release, in which Hasbro should benefit due to their strategic relationship with Disney, a company that has been highly successful at turning entertainment properties into global brands.
“The godfather of them all is ‘Star Wars,’ which in the entertainment business right now is the most anticipated movie in 2015…This is actually being projected to potentially be the largest-grossing movie in history, so it’s massive,” Wissink said. “It will be a global release, and Disney also bought Lucas this year, and if I know Disney well enough and working with our media team, Disney doesn’t just monetize movies when they are in theater. Disney turns entertainment properties into global, in some cases lifestyle, brands…it’s going to be a several hundred million dollar event.”
Interpublic Group of Companies Inc (IPG), an advertising agency holding company, is set up for a turnaround with new business wins this past year, and could see margins improve from 10% up to 13%, which would mean up to 30% improvement in profitability, says James Dix, Senior Research Analyst at Wedbush Securities.
“[IPG is] a fairly well-diversified name in terms of geography of revenue…advertising agencies are a play on global growth, as opposed to the more regional growth that you might find in any one particular market,” Dix said. “Their margins at the moment are below those of their peers, but as it seems like the trends for global growth, and for their growth in particular, because they have some new business wins this past year and probably are in as good a position in terms of the amount of new business they’ve won this year as they’ve been in several years, for next year look pretty good.”
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Dix expects IPG‘s new business to improve its margins over the next couple of years from 10% to up to 13%, and while that number doesn’t appear instrumental, it could mean up to 30% improvement in profitability for the company.
“For a service-based business, probably about the most important thing that you can get in terms improving your profitability is new business and faster growth, because you’re able to get a positive margin,” Dix said. “I think you could see margins over the next couple of years improve from say 10% this year to 12% to 13% in a couple of years, and although that doesn’t seem like a lot, when you talk about the difference between 10% and 12% or 13%, that is 20% to 30% improvement in your profitability, which can lead to a lot of growth in your earnings power.”
