Millennial Media (MM) provides technology and services for mobile advertisement with a focus on applications and media consumption, and although its trajectory has has been less than perfect so far, the company is expected to overcome difficulties and see growth, says Eric H. Jostrom, Chairman, CIO & Member of the Investment Committee at Ipswich Investment Management Co., Inc.
“In the iPhone/iPad area, we are quite keen on Millennial Media, which was one of those IPOs that was greatly oversubscribed and the stock went up only to collapse a couple of times. But we think the advertising business that they are involved in makes a lot of sense, and they’ve got a sound strategy,” Jostrom said.
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Jostrom says companies like MM generally go through some difficulties along the way of growth, but the price at which he bought the stock makes him comfortable.
“These types of growth companies are going to have a bump in the road along the way. We expect that, but if we can get an entry point that we think makes that risk acceptable, we will do it. We did it in that case; that’s a stock that we’ve bought since the end of the year, and we’re comfortable with it,” Jostrom said.
Roche Holding Ltd. (VTX:ROG) stands out even among high-quality, multinational companies with strong balance sheets and reasonable dividend-growth policies and a very long term view of their business, says Eric H. Jostrom, Chairman, CIO and Member of the Investment Committee at Ipswich Investment Management Co., Inc.
“The bellwether stock that I would cite in this regard would be Roche Holding. We have owned that stock for a long time, and when it was really battered in the global meltdown it was at the top of my list. And we bought the bearer shares in spades, so to speak, and we’ve been very well rewarded in that,” Jostrom said.
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Jostrom says Roche hasn’t changed its strategy with the financial ups and downs of the market, maintaining a consistent strategy throughout, and he says shareholders will be rewarded going forward.
“Nothing really changed at the company in terms of what was going on, its commitment to diagnostics, its commitment to oncology and genetics, that strategy is still in place. The company hasn’t been warped. We think the market really began to recognize that Roche has something very special. We think it will continue to reward the shareholders going forward. We have similar views on Novartis (NVS), but not with the conviction that we have on Roche,” Jostrom said.
Chevron Corporation (CVX) and Exxon Mobil Corporation (XOM) are showing dividend growth rates up to 12% and payouts of up to 25% of earnings, supporting the lengthening mortality of the oil sector, says Eric H. Jostrom, Chairman and Chief Investment Officer of Ipswich Investment Management Co., Inc.
“We…like the way the oil companies have come around to addressing the payout issues, and we think that will continue to support interest in these stocks. When you have companies like Chevron (CVX), which has a one-, three- and five-year dividend growth rate between 9% and 12%, and Exxon (XOM), 10% — and yet these stocks are still in low double digit p/e, yes they are up from eight times or nine times, but the payout on Exxon is something around 25% of earnings. So those things are all very positive,” Jostrom said.
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Jostrom takes on a global perspective when looking the expected mortality of sectors, and he believes that the major oil companies are the longest-living ones to invest in. Additionally, Jolstrom sees growth prospects for the sector with new developments in technology.
“We came to the conclusion that the major oil companies are probably the longest-lived companies that one can invest in, and that they basically have reserves and other activities that will carry them to plus or minus 75 years. Some can say that oil is a depleting asset, but we take the view that with all the assets that the oil companies have, they continue to get a significant extension of their life and prospects for growth due to developments in technology,” Jolstrom said.
The TJX Companies (TJX) and Ross Stores, Inc. (ROST) are two discount retailers that appealed to investors through 2008 and continue to hold positive long-term expectations as both companies look to grow domestically and internationally, says Randell A. Cain Jr., Portfolio Manager at Herndon Capital Management, LLC.
“These are both discount branded retailers that are gradually making their way across the country, Ross coming more so from the West Coast moving toward the east, and TJX being a company that started more so on East Coast and is moving west, as well as to the U.K. and Canada with other branches and franchises. Both offer something that I think was particularly appealing in 2008, when we had the financial selloff in the markets,” Cain said.
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TJX and ROST continue to appeal to both cost-conscious customers and those looking for fashionable yet cost-effective purchases, Cain says. He expects both stocks to continue to perform well in the long term.
“With both TJX and Ross Stores, you’re able to buy quality goods — again, branded goods — at much better prices than what you’re going to get typically at the retailers that may sell the goods themselves or potentially at mall-based stores. And so we think that, long term, these companies have a great deal of appeal to the cost-conscious consumer, but also just to that consumer who wants to go perhaps on a retail treasure hunt and see what they can pick up that is going to still be fashion conscious, but not necessarily a budget-busting purchase…we are still very comfortable owning them for the long haul,” Cain said.
Philip Morris International (PM) enjoys strong international brand equity and exceptional brand loyalty, with strong growth prospects across the world while keeping its production costs low and its customer base returning for more product, says Gautam Dhingra, Founder and CEO at High Pointe Capital Management, LLC.
“Not only are the buyers addicted, but also the regulators too. As much as some people think that government is an adversary for tobacco companies, the reality is that the governments need the revenues that tobacco companies provide through the high taxes that are levied on their product. The cost of producing the product is minimal as tobacco farmers have no pricing power. Lastly, this industry is an oligopoly, and that brings with it additional intangible benefits, because oligopolies usually ensure that pricing competition will be benign,” Dhingra said.
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Dhingra says the international aspect of PM gives the company more of an edge after the spin-off of Altria (MO), and after owning the stock for many years, he continues seeing strong opportunities in Philip Morris and the Marlboro Man.
“All of these characteristics are intangible in nature and do not show up on the balance sheet of Philip Morris, but they make Philip Morris one of the exceptional businesses in the world. From time to time, when this company becomes available at a reasonable price, it offers a buying opportunity like few others. We have owned this for quite a number of years, and we continue to hold it today, because unlike in the U.S., where cigarette consumption is declining, opportunities to grow in Asia and Eastern Europe are significant for Philip Morris,” Dhingra said.
Valeant Pharmaceuticals Intl (VRX) acquires R&D results from other companies in the pharmaceutical industry and maximizes the return on those assets, acting as a private-equity-type company of sorts while also using its Canada domicile on a tax basis, says Gautam Dhingra, Founder and CEO of High Pointe Capital Management, LLC.
“[Valeant‘s CEO] realized that the productivity of R&D dollars in the pharmaceutical industry had declined consistently for quite a long period of time. So he set about designing a company that spends very little on R&D, but instead focuses on buying existing products that were developed by other pharmaceuticals. He then cuts costs and takes advantage of tax laws to minimize the tax burden, and in this process generates extraordinary income from the same assets that a traditional pharmaceutical company could not,” Dhingra said.
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VRX bypasses the entire traditional strategy of investing billions in R&D in hopes of finding a blockbuster drug, and the company is able to generate income from R&D assets in ways traditional companies cannot.
“When you compare this company to other pharmaceuticals, you see that instead of spending 15% of the revenue on R&D the way a traditional pharmaceutical does, Valeant spends hardly 3% on R&D, so that saving goes directly to the bottom line. On top of that, the company’s tax rate is 3%, compared to the normal 25% that other companies pay. And lastly, Valeant benefits from cost cuts as it generates economies of scale,” Dhingra said.
Serving the marine terminal storage and transportation needs of the petroleum industry in the United States has been the focus of Martin Midstream Partners L.P. (MMLP) for many years. In a March 2004 interview, Scott Martin stated that “we are considered a ‘hard to handle’ product carrier. Molten sulfur is our largest product handled, which must be kept between 250 and 300 degrees to be kept liquid and this can present major challenges on a three to five day movement Across the U.S. Gulf in the wintertime, asphalt must be kept hot as well. The other niche products we handle are comparable, where good service is one of the most important things to keeping a customer happy.”
Keeping customers happy has paid off recently, as MMLP’s unit price has gone from $32 to $45 so far this year. The units currently pay out $.775 each quarter for a 6.9% yield. Martin Midstream actively manages its business asset mix, and recently added vessels to its liquefied petroleum fleet for its Gulf Coast operations.
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Institutional investors in the oil and gas MLP sector have been increasing their ownership of MMLP. For example, Center Coast Capital Advisors added over 251,000 units and now owns almost 1.25 million units. Green Square Capital established a new position in MMLP and now owns over $750,000 worth.
Larger scale purchases by institutional investors could secure an increase in the limited partnership’s value, and as the business builds on its long-term plan, the increasing distribution of profits will develop a larger a payout. Investors in the oil and gas transportation and storage space will be keeping an eye on this company.
Fidus Investment Corp (FDUS), Hercules Technology Growth Capital (HTGC) and Solar Capital Ltd. (SLRC) have above-average dividend growth and above-average potential yield based on their dividend growth, leading to potential double-digit returns, says Vernon C. Plack, Director of Research and Senior Analyst at BB&T Capital Markets.
“If you look at this group, historically the alpha in this space has been with companies that have had higher-than-average dividend growth or were some type of special situation or turnaround. Our current favorites include stocks that offer above-average dividend growth potential, which is largely a function of available capital and an relative attractive valuation based on the dividend growth potential. Our three best ideas today include Fidus Investment Corp., Hercules Technology Growth Capital and Solar Capital,” Plack said.
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All three business development companies have different strategies, investing at ends of the market, but Plack says their high-yield potential makes these his favorite picks among BDCs, even when he has “buy” ratings on other stocks.
“These are three very different companies. Fidus invests at the lower end of the middle market, Solar invests at the upper end of the middle market, and Hercules lends to companies that are primarily backed by venture capital firms. So these are three very different stories that lend to very different types of companies, even though they are all structured as business development companies,” Plack said.
Kilroy Realty Corp (KRC) and Essex Property Trust (ESS) enjoy better fundamentals that many of their REIT peers thanks to their increased exposure to California, presenting investors with opportunities interested in real estate investment trusts, says Anthony Paolone, Senior Analyst at J.P. Morgan.
“Our top ideas this year have been Kilroy in the office business, mainly because of its exposure to northern California, which is a very strong office market, and also because it was very early in building a large development pipeline with attractive returns. There is a lot of value creation that we see accruing to shareholders over the next two or three years as those projects reach fruition,” Paolone said.
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Paolone says the REITs exposure to the West Coast serve the double function of limited exposure to East Coast headwinds, and a REIT like ESS further benefits thanks to the more favorable apartment business conditions in the Pacific Coast.
“We’ve liked Essex in the apartment business, because it’s 100% West Coast-focused, which has very strong fundamentals. Within the context of the apartment business, we think that the name will be more insulated from a lot of the supply that is impacting the East Coast, such as in Washington, D.C., and that metro, where most apartment REITs have sizable exposures, so as we look out the next couple of years, not having exposure to D.C. should help provide Essex with an above-average same-store growth profile,” Paolone said.
In a recent interview, Douglas W. Jamison, CEO of Harris & Harris Group (TINY), touted about one of his publicly traded venture capital company’s investments: “D-Wave has produced the world’s first commercial adiabatic quantum computer. That’s a very interesting and unique investment opportunity. D-Wave’s computer can solve problems that no other computer can solve, and it can solve many problems faster than a classical computer.”
Google (GOOG) has described its use of the computer: “On the hardware side we are collaborating with D-Wave in Vancouver, Canada. D-Wave develops processors that realize the adiabatic quantum algorithm by magnetically coupling superconducting loops called RF SQUID flux qubits.”
Lockheed Martin Corporation (LMT) is using its adiabatic quantum computer in its research venture with the University of Southern California: “In partnership with the University of Southern California, [Lockheed] has founded the USC-Lockheed Martin Quantum Computation Center (QCC), home of D-Wave One, the world’s first commercial adiabatic quantum optimizer and by far the largest functional quantum information processor ever built.”
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In another positive sign, the senior executives of the Harris & Harris Group have been using their spare cash to buy up shares. On June 28, 2013, the Chairman and CEO of the company filed notice of his purchase of 3,000 shares at slightly under $3.10 per share. This brings Mr. Jamison’s total shareholdings to 199,334 shares. On June 14, 2013, Robert Burns, the Senior Vice President of Harris & Harris Group, purchased 1,500 shares at $3.27 per share.
Sandra Forman, the General Counsel of the company, has also indicated her confidence by purchasing an aggregate of 2,000 shares on May 21, 2013. These insider purchases highlight an interesting high growth investment opportunity.
