C.R. Bard, Inc. (BCR) is generating solid returns on equity and consistent free cash flow, in addition to being awarded several hundred million dollars from a patent infringement lawsuit against W.L. Gore & Associates, Inc., making BCR a valuable investment, says Mark W. Oelschlager, Portfolio Manager at Oak Associates, Ltd.
“One of our big holdings is CR Bard (BCR)…we’re talking about a company that generates returns on equity well into the 20s; consistent free cash flow; it’s trading at about a 7% free cash flow yield, whether you take the most recent year’s results or the last four years; and it is one of the leaders in its field,” Oelschlager said.
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BCR is an uncommon value, as it is a dominant company with strong financial metrics that is trading at a cheap valuation, and the stock is also not reflecting the company’s recent award from a patent infringement lawsuit, Oelschlager says.
“A kicker to the story there is that they recently won a lawsuit against Gore for patent infringement, and they are being awarded several hundred million dollars. Gore is appealing, but that’s a big chunk of change that should be coming Bard’s way, and it really doesn’t seem to be reflected in the stock at all,” Oelschlager said.
Jonathan S. Vyorst is Senior Vice President of Paradigm Capital Management, where he manages several deep-value-oriented funds including a “special situations” portfolio: “An old and important part of value investing.” Sunoco Logistics (SXL) is a publicly traded limited partnership formerly controlled by Sunoco.
SXL is now controlled by Energy Transfer Partners (ETP), which acquired Sunoco in 2012. This “special situation” was “much more valuable than the market recognized,” stated Mr. Vyorst in a March interview, but now this value has been unlocked. Yet is it time to revisit Sunoco Logistics as a standalone investment?
As reported to the SEC on May 15, 2013, the Chief Financial Officer of Sunoco Logistics, Marin Salinas, has been buying shares in the open market, most recently 2,750 shares at $62.86 per share. This puts Mr. Salinas’ current holdings at 5,150 total shares.
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On the other side of this trade is Jerry Swank, the Founder and Managing Partner of Swank Capital, with 35 years of experience in investment management and investment analysis.
In a interview at the start of 2012, Mr. Swank describes his sell decision on Sunoco Logistics: “A company like SXL, Sunoco, is a great company, made a lot of money, but the stock has gone up so much, 25%, 30% last year. And we brought it at yields of 7%-plus, and today it yields 4.3%. So we think we’ve generated most of the upside off of the stock. Even though we love the company, we just think its price performance from here is going to be pretty muted.”
Currently yielding 3.7%, SXL is trading above Mr. Swank’s sell decision.
Google Inc (GOOG) continues to gain market share as the company surpasses its competitors by providing advertisers with a more solid understanding of the return on investments of their advertising dollars, says Brian Pitz, Managing Director and Senior Research Analyst at Jefferies & Company, Inc.
“The data is overwhelming in terms of the share [Google] continues to gain. But the view is, these guys are really well-positioned to evolve their products, whether it’s search, video, display or mobile. We think it is the best-of-breed offering that provides advertisers with a solid understanding of their ROIs, return on investments, on advertising spending,” Pitz said.
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Pitz discusses the difficulty of understanding metrics on mobile and display, highlighting certain display ad formats that may influence consumer behaviors down the road, yet GOOG is the frontrunner on the measurement side in providing advertisers with more information.
“How do you attribute sales for an ad format which might influence to make a purchase several weeks down the road versus an ad format which receives last click attribution? The fact is, some display ad formats may actually have much more influence on consumer behaviors that is not really being captured or understood, so when you calculate the ROI, it is very complicated to determine the true ROI,” Pitz said. “We think Google is doing a better job than anyone else on the measurement side and believe that it is easier for advertisers to spend more money there.”
Amazon.com Inc. (AMZN) has competitive advantage as it continues to build out its same-day delivery capabilities, powered by AMZN‘s acquisitions of Quidsi brands and the Kiva System, says Brian Pitz, Managing Director and Senior Research Analyst at Jefferies & Company, Inc.
“Amazon will continue to raise the bar and provide consumers with the merchandise that they thought they would receive in two days, but actually receive in one day or less. Amazon already delivers this level of service in many markets such as New York or San Francisco. We have witnessed consistent best-in-class, one-day or even same-day delivery on products from some of Amazon’s Quidsi brands such as Diapers.com or Soap.com, or even Zappos,” Pitz said.
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The differentiator with Quidsi and Zappos is that both use the Kiva System, also owned by Amazon, Pitz says. The Kiva System is optimized for the standard-size packaging that Quidsi brands use, therefore improving productivity exponentially, Pitz adds.
“There are a ton of productivity improvements with a Kiva-based system, and we believe that Amazon will continue delivering items to consumers in a shorter duration than they expect through those properties in a growing number of markets,” Pitz said. “Amazon is pushing ahead to figure out even more efficient means of delivering goods. And while the company does not comment, we do believe more efficient delivery will be a bigger piece of the experience for Amazon consumers longer term.”
Enercare (TSE:ECI) rents water heaters in Canada and reduces landlord exposure to commodity-price fluctuations through its submetering business, a high-growth business for the company which allows it to have one of the best credit ratings in its group and a low payout ratio, says John McIlveen, Senior Vice President for Research at Jacob Securities Inc.
“They [have an] interesting high-growth business, submetering, which is really beginning to take off. What they’re doing in that business is going to an existing apartment or condo buildings and retrofitting electricity and water and heating meters to the individual residential unit level. They’re also installing them into new builds. Landlords and condo boards like this because it takes the commodity price risk right out of their picture,” McIlveen says.
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McIlveen says not only do landlords benefit from Enercare‘s submetering business, but builders stand to benefit from the rental model because it reduces total house prices by including a rental heater instead of a new unit with the purchase of a house.
“Enercare is a different company altogether because it rents water heaters. “People in the U.S. always are amazed that people here in Canada actually rent their water heaters. Someone who already owns a water heater is not going to switch to a rental. However, if you’re talking new construction, Enercare will provide heaters for a whole subdivision, the contract is assumed with the purchase of a house, and that enables the builder to lower the selling price by $1,000. That’s why builders like it,” McIlveen said.
Primary Energy Recycling Corporation (TSE:PRI) uses waste heat from industrial processes to generate electricity, providing a way for industries to reduce their energy costs while complying with federal targets for energy efficiency, says John McIlveen, Senior Vice President for Research at Jacob Securities Inc.
“Primary Energy uses waste heat to make power. They’re essentially almost like a back-end power unit that’s taking all the heat from a steel plant for example and then turning that heat into electricity the same way a coal plant would, by burning the coal to make heat and that spins the turbine. Waste heat is found in industries like food, cement, steel or anything that creates a lot of heat — you can put these waste-to-power turbines in there,” McIlveen said.
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McIlveen says Primary Energy is sitting on enough cash plus borrowing ability to be able to expand without going to the equity market, which is one the qualities he likes about this Canadian high-yield stock. He adds that the cost-saving and compliance benefits are a positive for the company.
“There are actually federal targets to utilize waste heat because there’s so much of it. After all, the biggest line item cost for a steel plant here would be power. So that will be their biggest expense. If they can take their waste heat and utilize that power at less cost than what the grid will supply to them, then they are quite happy with that,” McIlveen said.
The Boeing Company (BA) is a promising industrial play that is attracting investors and clients due to the fuel efficiency of the 787 as well as the strength of BA‘s other aircraft workhorses, says George B. Bolton, Chief Investment Officer and Portfolio Manager at WestEnd Capital Management, LLC.
“Our thesis on Boeing — and we have owned it for four years at a price of $60 — is that the 787 is going to be so good in terms of fuel efficiency, so attractive to the client in terms of getting from A to B in a very comfortable way,” Bolton said.
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Bolton is bullish that Boeing is a multiyear play, as the company holds historically strong aircraft and is in a solid position in their defense business.
“You have that sprinkled on top of the workhorse 777 and the greatest workhorse in history, the 737, and we don’t see their defense business folding like a tent — they are in the right part of the defense industry budget,” Bolton said.
Target Corporation (TGT) and Novartis AG (NVS) are two attractively-priced companies that have grown their dividends over the last 10 years, and both are strong plays to include in an equity portfolio, says Russell Sims, Portfolio Manager and Director of Research for Osborn Rohs Williams & Donohoe.
“Target has, in the last 10 years, grown its dividend nearly 20%. It’s attractively priced and has great near-term fundamentals, so it really stands out in my mind as one of the top names in the portfolio,” said Sims.
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Sims also recommends Novartis, who despite slower dividend growth, is paying a higher yield. These two companies are part of Sims’ dividend growth portfolio strategy, helping clients to maintain strong, growing dividend income.
“Novartis is another terrific name. It’s grown its dividend a little slower, around 13%, over the last 10 years, but it pays a higher yield, it’s about a 3.3% dividend yield, and it’s also attractively priced,” Sims said.
Renren (RENN) faces increasing competition from the growing social platforms from the Chinese Internet giants Sina Corp. (SINA) and Tencent (HKG:0700), along with traffic monetization pressures as its users shift from PCs to mobile, says Cynthia Meng, Managing Director at Jefferies & Company, Inc.
“On RENN, when we initiated more than two years ago, we already pointed out that they are a niche player with the majority of the users coming from students: high school students and from college or graduate school students. Also two or three years ago, Sina Weibo was not as powerful as they are compared to today, and two years ago Tencent social network was not as powerful as they are today. And Tencent even has a new, very popular competitive product on the mobile side that’s called WeChat. That didn’t exist more than two years ago,” Meng said.
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Meng says the shift from PCs to mobile further pressures RENN, leading her to rate the stock a “hold.” The Internet company not only faces more competition from others, but it is still scrambling to monetize its mobile traffic through advertisements.
“These are the things Renren is facing, in addition to its own challenge of PC-based traffic transferring to mobile. They are also seeing the challenge of PC-to-mobile transition, with 50%-plus traffic on mobile and still no effective way to monetize the mobile traffic through mobile ads,” Meng said.
Mastercard (MA) and Google (GOOG) are growing their international revenues as demand for their services grows along with services demand in international emerging markets at a faster pace than domestic inflationary pressures, says Wally Obermeyer, President at Obermeyer Asset Management.
“[Mastercard] is a strong U.S. company that’s well-positioned for global growth, given the tendency of so many consumers to put everything from a $3 charge at the grocery store to regular purchases, such as parking, and major purchases on their card. We think demand for electronic payments is likely to increase,” Obermeyer said.
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Obermeyer says global large caps like Google offer the international exposure to benefit from emerging market growth, along with geographical diversification for more stability.
“Another sector we like are large-cap companies with significant sales and revenue derived from overseas. For example, the last I looked, 52% of Google’s revenue was non-U.S.-derived. We like that a number of the global companies are well-diversified that way,” Obermeyer said.
