Editor's note: In the third and final installment of this week's Morningstar global equities roundtable, our three value managers talk about specific stocks they've been adding and discarding from their portfolios.
The panelists are Norman Boersma, executive vice-president and director of research at Templeton Investment Management, part of Franklin Templeton Investments Corp.; Gavin Ivory, vice-president, global equities, at Toronto-based Beutel, Goodman & Co. Ltd.; and Chuk Wong, vice-president at Toronto-based Goodman & Co., Investment Counsel Ltd., which manages the Dynamic family of funds. They spoke with columnist Sonita Horvitch.
Q: Gavin, time to discuss individual names in the portfolio. You have been adding more U.S. stocks?
Ivory: A new U.S. name is Kroger Co. ( KR), with a market capitalization of US$13 billion. Kroger is among the most unloved stocks in the world. It is the second largest U.S. food retailer after Wal-Mart Co. ( WMT). Kroger trades at a forward price/earnings multiple of about 12 times and has a 2% dividend yield. The action in the global equity market has certainly not been in domestically oriented U.S. stocks.
The company has been battling Wal-Mart for 20 years and has still produced a return on equity of more than 20% virtually every year. The valuation on the stock has come to the point, like many of the stocks that we are buying, that it is discounting flat or declining cash flow. We think that it can do better than that and continue to grow its dividend.
Boersma: I own and like Kroger. It is about 1% of the portfolio.
Ivory: We have added to Nokia Corp. ( NOK), which is one of the major handheld wireless device-makers globally. It has stumbled. Its competition is increasing and it has been bumped off its pinnacle position of a 40% market share globally. Management has started to make changes in the company. The current stock price is discounting a terminal decline in earnings and cash flow. We do not think that that will be the case.
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| Gavin Ivory: Kroger has been battling Wal-Mart for 20 years and has still produced a return on equity of more than 20% virtually every year. | |
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We have also recently significantly added to our holding in Fiserv Inc. ( FISV), a U.S. stock, which has a market cap of US$8 billion. It is the number one payments- and transactions-processing company in the world. It is a fee-generating, recurring-revenue company. It will have US$700 million in free cash flow this year. It used to be a growth company and is now trading at 12 or 13 times earnings.
A recent sell was an older holding in the portfolio, Allstate Corp. ( ALL), which is a property and casualty company. Allstate is being attacked by low-cost online insurance providers and on the high-service end by Chubb ( CB) and Travelers ( TRV). The stock was fully valued at one times book value.
Q: Norm, time to discuss your strategy.
Boersma: I manage $8 billion, mainly for institutional clients. The model portfolio has 100 names. Geographically, the portfolio has 52.7% in Europe, including the UK, which represents 15%. North America is 28% and Asia is 13% including Japan. We have been finding a few opportunities in Japan. The weighting in Japan is 4%, which is underweight. It is not about Japan, it is about stocks.
Ivory: A couple of Japanese stocks are also on our radar screen. The valuations are cheap and the sentiment has gone from bad to worse. Everyone is negative on Japanese stocks.Beutel Goodman World Focus Equity has 1.3% in Japan.
Wong: My Japanese weighting is about 5% in two names. I still find it difficult to identify really cheap Japanese stocks.
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| Norman Boersma: We have been finding a few opportunities in Japan. But it's not about Japan, it is about stocks. | |
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Boersma: Like Gavin's, the portfolio has a couple of big overweight positions in the more defensive sectors of the market. These include such sectors as telecommunications services at 10% and health care at 13%. These stocks have low P/E ratios and good dividend yields. Telecoms are a mixture of emerging markets and developed markets. In pharmaceuticals, we own most of the big global names in 1% to 1.5% weightings, such as GlaxoSmithKline PLC ( GSK) and Pfizer Inc. ( PFE).
Ivory: We own those two names.
Wong: Health care is only 1% of our portfolio. I own a U.S. company, DENTSPLY International Inc. ( XRAY). It is the world's leading supplier of dental consumables.
Boersma: On sector weightings, we have 16% in consumer discretionary stocks, which are more cyclical, and 12% in information technology, another more economically sensitive area. A reasonable amount of info tech is in emerging markets: Korea, Taiwan and Israel.
We have a fairly big list of buy ideas. It is across sectors. An energy stock that was a recent purchase is Chesapeake Energy Corp. ( CHK), a U.S.-based natural gas producer. It has a market capitalization of US$18 billion. The company is in the shale plays. At the time we bought it, its valuation was half of the company's net asset value. The stock has moved up, but we still think it offers value.
Turning to Europe, I am choosing the second largest electricity utility in Spain. It is Iberdola S.A. and has a dividend yield of 4%. Half of its production is in clean energy: nuclear, hydro and wind. It has a big emerging markets exposure in Latin America, which provides some growth. It is the largest wind-energy producer in the world.
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| Chuk Wong: I continue to like Bank Rakayat Indonesia, which specializes in micro-lending in the country's rural areas. | |
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Also in Europe, a private health care company with clinics and hospitals in Germany is Rhoen-Klinikum AG. It has moved up, but still offers value. In health care, I have sold down my holding in U.S. medical devices manufacturer Boston Scientific Corp. ( BSX). I bought the stock last year when it sold down sharply, but it has since moved up. The areas that the company operates in are mature, and there are new entrants into these markets.
Q: Chuk?
Wong: I am directly responsible for managing $1.1 billion.Dynamic Global Value is an all-cap fund with 45 names. I think that China's 361 Degrees International Ltd. has good prospects. It focuses on the mid-market (for sporting goods). As personal income continues to grow in China, this company will benefit. The stock trades at 10 times 2010 earnings per share. It is one of the most exciting ideas in the portfolio.
I continue to like Bank Rakayat Indonesia, which specializes in micro-lending in the country's rural areas. There are high barriers to entry in this business. The average size of its loan is about US$400 to US$500. This bank has been around for more than 100 years. The stock trades at 10 times 2010 earnings-per-share estimates.
A British company that is the world's largest provider of temporary power systems is Aggreko PLC. For example, it supplies power to sporting events, including the Vancouver Winter Olympics and World Cup Soccer in South Africa. North America and Europe account for 40% of its revenue. The main story is the emerging frontier markets, particularly in Africa. The stock is a little more expensive at 14 times earnings. But there is still some upside.
I have recently sold my holding in a leading medical equipment company in China that has a U.S. listing, Mindray Medical International Ltd. ( MR). It makes medical imaging systems and diagnostic equipment. It has 50% of its revenue in the United States and 50% in China. The stock has done very well. The P/E ratio has gone up from 12 times to 25 times.
Full coverage of the Morningstar global equities round table:
Part 1: A tale of two worlds
Part 2: Red flags raised over Chinese banks
Photos: www.paullawrencephotography.com
