Qualcomm (QCOM) Recently Added To Union Investment Groups Portfolio: Find Out Why
March 17, 2010 - The Wall Street Transcript has just published Emerging Markets & Investing Strategies Report offering a timely review of the General Investing sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Ryan M. Sailer, CFA, is Vice President and Portfolio Manager of Union Investment Management Group, a division of Union Bank & Trust Company. He has 12 years of investment experience and is the portfolio manager for the Stratus Growth Fund, Union Bank's flagship equity fund. Prior to joining Union Bank, he managed the research function for a regional investment firm. He is a graduate of Creighton University, earning a BSBA degree with a major in Accounting. He manages a combination of institutional and private accounts.
TWST: Do you have any examples of industrials that you have favored?
Mr. Sailer: Yes, one would be Jacobs Engineering (JEC), a leading engineering firm. We think the stock is 30-40% undervalued from its current level. Jacobs differentiates itself from many of its competitors by staying away from fixed price bidding, and it generates a majority of its revenues from long-term customers. Although the business is in a pretty tough spot right now, management has controlled costs very well during this downturn and they're starting to see signs of life in some of their end-markets, while its infrastructure business related to government spending is performing well. Another company that focuses on machinery is Terex (TEX).
They are a smaller company with about a $2 billion market cap. They manufacture products including construction equipment, aerial work platforms, cranes and material processing equipment. During the economic collapse, their profits were crushed as would be expected. Looking forward, they've taken action to strengthen their balance sheet and position themselves for the future. Management recently stated that they expect to lose about $1 per share in 2010, but their goal is to get back to the revenue and profitability levels they were in during last positive cycle ending in 2007-2008. That would put them in position to earn about $6 a share in a few years.
TWST: What other areas of the market are you represented in?
Mr. Sailer: We typically have some exposure to most sectors of the market. I mentioned healthcare earlier, another stock within healthcare that we like is Becton Dickinson (BDX). This is another example of a high quality company with a great balance sheet, with no net debt and very strong cash flow conversion on its net income. We think Becton is about 25% undervalued and has a very stable and recurring revenue base given the nature of their products and they also demonstrated innovation as a way to grow their sales. We're a little underweighted in the financials area of the market. We think that commercial real estate is still an issue and is going to lead to some significant charge-offs.
We are also concerned about the possible impact of government proposals which would limit the size and the scope of the activities that some of the larger banks may engage in. That being said, within financials, we do see some of the higher quality names trading at very attractive valuations. We think JP Morgan (JPM) is the best managed of the large banks. They're trading right around book value and at pretty low multiple to what we think their normalized earnings are going to look like. We think there is the potential for strong upside and very limited downside from current levels. Technology was the best performing sector in the market during 2009. I mentioned Google as a stock that we sold as we thought some of the technology stocks had maybe run a bit too far.
We still do have a pretty strong weighting in technology as we like the overall quality of the companies. Earlier we talked about market volatility presenting opportunities, and one example of this was our recent purchase of Qualcomm (QCOM). We think it is a high quality stock that sold off significantly after lowering their 2010 outlook. We used the weakness in the stock as a buying opportunity. We think the stock's value is actually closer to $50, which represents 25% upside and that's based on pretty conservative growth estimates. They generate very high margins, pay a dividend and repurchase their stock. Qualcomm also has about $12 a share on its balance sheet in cash and investments with no debt. Again there is a nice level of safety owning a high quality company like Qualcomm. Moving to another sector, Energy is still an area that we like and carry a moderate overweight.
Oil is pretty close to $80 a barrel which is surprising given how weak global demand has been. If energy prices are this high in a weak economy, they are likely they go higher as the world economy rebounds.One stock we really like in energy is Exxon Mobil (XOM). Even though it's the biggest company in the United States, it's not very well loved by analysts and seems to be under-owned by a lot of fund managers. Exxon is very attractively valued despite its status as one of the few companies with a AAA balance sheet and consistent record of strong operations. Exxon was down 13% in 2009 when the market was up 26.5%, presenting an opportunity to own a great company at a very reasonable price.
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