Johnson Controls International plc
Co-Portfolio Manager Jennifer Chang of Schafer Cullen Capital Management says Johnson Controls International plc Ordinary Share (NYSE:JCI) has a strong recurring revenue stream with its building control systems. Additionally, she says the company should profit from its fuel-efficient battery business.
Johnson Controls runs building control systems, the HVAC systems — heating, ventilation and AC — for many commercial and industrial companies. They recently bought Tyco, which added a strong fire and safety business to their operations, a natural adjacency.
Their model is quite attractive; they sell upfront equipment at high margins and then sign long-term maintenance agreements with customers, a strong recurring revenue stream. We talked to people in the industry about whether that combination makes sense, and it appears that aggregating a lot of these products and functions, and housing it in one company is where the industry is heading. There are a lot of cost-cutting and cross-selling opportunities as well.
The other part of the company that we like is their battery business. They have a 70% market share in the hybrid start-stop battery market. That specific battery is about 5% to 10% more fuel-efficient than a traditional lead-acid battery but also twice as profitable for Johnson Controls. If you think about the rolling federal fuel-mileage standards that are taking place over the next couple of decades, these batteries help auto OEMs improve their fuel-mileage efficiency and meet those standards. We expect accelerating adoption, and recently, Ford (NYSE:F) and GM (NYSE:GM) have said that by 2020, they want 100% of their vehicles using hybrid start-stop batteries.
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Sam Coquillard discusses his firm’s large-cap value fund. Mr. Coquillard looks for companies where there has been some perception or insight that has been overlooked by the market, and as a result a misplacing has taken place. He invests in companies he can understand with management he believes is trustworthy and shareholder friendly. He also wants businesses that have a competitive advantage. Mr. Coquillard says there are a lot of large-cap names that have been left behind in this market rally, and he is surprised by the valuations.
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Brian E. Peery discusses Hennessy Funds and the Hennessy Cornerstone Mid Cap 30 Fund. This fund is quantitatively managed and uses a consistent, disciplined process. Mr. Peery starts with a universe of 10,000 public companies through the Capital IQ database. From there, he removes ADRs and companies not within the $1 billion to $10 billion market-cap range. This ensures he is left with purely domestic companies within the midcap space. Mr. Peery then looks at companies based on price to sales ratio, earnings year over year and price movement. Finally, the companies are ranked by 12-month price appreciation, and the top-30 stocks are chosen for the portfolio and equally weighted.
Full interview available here.
Co-Portfolio Manager Jennifer Chang of Schafer Cullen Capital Management says Metlife Inc (NYSE:MET) is a high-quality life insurance company with a strong track record of underwriting and financial discipline, and is a major beneficiary of higher interest rates.
It’s one of the cheapest stocks in the portfolio, trading at about 10 times earnings with a 3% dividend yield and having raised their dividend quite substantially over the last couple of years. MetLife is led by Steve Kandarian, who used to run the investment portfolio back during the financial crisis. He is a strong risk manager and gets a lot of credit for navigating the investment portfolio successfully during that time by avoiding a lot of subprime MBS.
MetLife is a major beneficiary of higher interest rates and a steeper yield curve, given that their investment portfolio is a longer-duration book. The company is also undergoing a bit of a portfolio transformation at this point with the impending spinoff of their U.S. retail business, including most all of their variable annuities. That segment has been a huge overhang on life insurance companies since it tends to have significant tail risk, is highly interest-rate-sensitive and extremely competitive due to the aggressive industry guarantees.
We think the remaining business will generate steadier earnings, more consistent returns and, therefore, get a better multiple as it focuses on growing its international businesses over time. They have a great footprint in Asia, Latin America and the Middle East. For many of our portfolio companies, we still believe that emerging markets will continue to be a major driver of growth.
James Cullen and Jennifer Chang discuss Schafer Cullen Capital Management, Inc., and its High Dividend strategy. Their investment philosophy is based on Ben Graham’s advice to focus on having a price discipline and a long-term view. For this reason, the High Dividend strategy invests for the long term and starts by looking for stocks with a low p/e. From there, Mr. Cullen and Mrs. Chang look at a stock’s dividend yield and dividend growth. Overall, Mr. Cullen and Mrs. Chang think it is important for investors to be cautious about valuations and that those who have a long-term investment horizon should invest in equities, which is a bet on the growth of the U.S. and global economies over time.
Full interview available here.
Michelle Clayman discusses New Amsterdam Partners LLC. Ms. Clayman looks for U.S. equities that can provide growth at a reasonable price. In order to identify investments, Ms. Clayman starts with a quantitative model to find attractive names and then uses a traditional process to look further into a company’s financials. Ms. Clayman manages money across the market-cap spectrum. She offers products that are unconstrained as well as those that use ESG factors, which is a trend particularly of interest to Millennials. Ms. Clayman advises investors to take a long-term perspective and to understand their personal finance picture.
Full interview available here.
John Buckingham discusses how AFAM went from investment newsletter to money management firm. He says the firm is bottom-up and uses a three-stage process. The first stage looks at investable companies and ranks them across valuation metrics; the second is qualitative review; then Mr. Buckingham has to be satisfied that the business will be viable over the long haul.
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Todd Griesbach discusses RMB Capital and the Core Equity strategy. The Core Equity portfolio holds 20 to 25 stocks. Mr. Griesbach invests in high-quality companies with distinct competitive advantages. He looks for secular growers who are growing faster than their peers. Mr. Griesbach aims to hold a company for three to five years. While the portfolio is an all-cap strategy, Mr. Griesbach generally doesn’t invest in market caps under $500 million. He tends to gravitate toward midcaps and large caps.
Full interview available here.
Harry Burn III and Mayo T. Smith discuss Sound Shore Management, Inc. From a universe of the 1,000 largest U.S. companies, Mr. Burn and Mr. Smith use relative p/e to find cheap companies that are out of favor. They want to invest in better-quality companies with stronger growth prospects and healthier balance sheets. Through their fundamental work, Mr. Burn and Mr. Smith aim to identify companies that have lost investor support but still have the ability to exceed expectations. Mr. Burn and Mr. Smith run a concentrated portfolio of 35 to 45 names that are weighted fairly equally. They try to keep their process flexible and limit industry weightings to 25% rather than enacting sector constraints.
Full interview available here.
Joseph Boskovich Sr. shares his firm’s investment strategy, which is identifying smart owner/managers of companies with track records of success and then closely following their investment activity in the transactions of their own stock.
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