Emory Sanders, senior portfolio manager and U.S. equity specialist at Manulife Asset Management (U.S.) LLC, says that there is value to be had in a number of mid- and smaller-capitalization consumer-discretionary companies that are benefitting from an upbeat U.S. consumer.
"The U.S. consumer's financial health is showing a marked improvement," he says. Gross domestic product is accelerating and consumers, which account for 75% of the action, are making a material contribution to this, he adds. "They now have stronger household balance sheets and their confidence, which is carefully tracked, has been growing steadily and is at a seven-year high."
The U.S. unemployment rate has come down sharply, he notes, and wages, which have been flat up until now, should start to ramp up. "This augurs well for further increases in consumer spending on big-ticket items such as autos and housing and thus is good for those companies providing these products."
Based in Boston, Sanders is co-leader of the U.S. core-value equity team. His view is that the U.S. equity market overall still offers value, despite its strong showing in recent years.
From the beginning of the year to recent close, the Russell 3000 Index, (which represents approximately 98% of the investable stocks in the U.S. equity market) produced a total return of almost 10%. This index, says Sanders, currently trades at 14.5 times earnings-per-share estimates for 2015 versus the historic average for 20 years of 16.5 times. "This 14.5 times P/E multiple on forward earnings is in line with the 10-year average."
He cautions that stocks in some sectors of the U.S. equity market, such as health care, which has had a big run this year, have become expensive. Still, he says, there is value to be found in other key sectors.
At Manulife Asset Management, Sanders' mandates include lead roles in Manulife U.S. All Cap Equity and Manulife U.S. Large Cap Equity. These funds, and their corporate-class versions, are co-managed with Walter McCormick.
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| Emory Sanders | |
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The Manulife U.S. core-value team focuses on financially sound companies with distinct competitive advantages that trade at valuations well below the team's estimated intrinsic value.
Manulife U.S. All-Cap Equity, with 50 names, is benchmarked against the Russell 3000. The fund's sector emphasis continues to be on information technology, which was at a 27.2% weight at the end of October, financials (25%) and consumer discretionary (25.1%), for a total of 77.3% in these three sectors. "This is a reflection of where we consider there is value to be found, from a bottom-up perspective," says Sanders.
The current market-capitalization breakdown of this all-cap fund is 68% in large-cap stocks, defined as those with a market caps greater than US$10 billion, with the remainder in small- and mid-cap holdings. "We have been finding opportunities among the mid- and small-cap companies."
As a play on the U.S. consumer's improving financial profile, the team has added two new names in the auto-retailing industry. They are: CarMax, Inc. KMX and Group 1 Automotive, Inc. GPI. These two stocks are classified under the consumer-discretionary banner.
CarMax specializes in used vehicles, which it sells through its 150 stores across the United States, says Sanders. "It has one million cars in inventory and, as such, is one of the largest used-car vendors in the United States." The growth driver, he says, "is that CarMax continues to open new stores." The company also has a financing arm. The stock trades at 18 times earnings-per-share estimates for 2015 and "is expected to grow its EPS in the high double-digit range per annum over the next few years," he says.
Group 1 Automotive, a small-cap company, sells both new and used cars through car dealerships in the United States, says Sanders. It has also expanded into the United Kingdom and Brazil. This company is growing through acquisitions and is a consolidator in its field, he says. "The company is showing strong earnings-per-share growth and this is expected to continue." The stock trades at 12 times earnings-per-share estimates for 2015.
A prominent player in the U.S. housing industry, and a top-10 holding in Manulife U.S. All Cap Equity, is Lennar Corp. LEN. This mid-cap company builds homes in key residential areas in 18 different states. Lennar, says Sanders, was strategically buying up parcels of land in the depth of the U.S. recession at rock-bottom prices. "As a result, it is particularly well placed to take advantage of the upswing in new home starts." The company has a strong balance sheet and is taking market share away from its competitors, he adds. Lennar has good earnings-per-share growth, he says. The stock trades at 13 times 2015 EPS estimates.
Another mid-cap company that Sanders says will benefit from an increase in new home purchases in the United States is the mattress and pillow manufacturer, Tempur Sealy International, Inc. TPX. A brand leader in this business, the company"is reaping considerable economies of scale given its size and scope." The stock trades at 15 times 2015 EPS estimates.
| CarMax Inc. | Group 1 Automotive Inc. | Lennar Corp. | Tempur Sealy International Inc. | |
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| Nov.18 close | $55.13 | $86.11 | $45.69 | $54.30 |
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| 52-week high/low | $56.87-$42.54 | $88.95-$59.37 | $46.85-$33.82 | $62.00-$45.07 |
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| Market cap | $11.9 billion | $2.1 billion | $9.4 billion | $3.3 billion |
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| Total % return 1Y* | 12.3 | 31.4 | 32.8 | 17.1 |
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| Total % return 3Y* | 25.9 | 24.0 | 37.7 | -3.9 |
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| Total % return 5Y* | 21.8 | 25.8 | 26.0 | 20.0 |
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| *As of Nov. 18, 2014. All figures in U.S. dollars Source: Morningstar |
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Turning to the technology sector, Sanders believes Facebook Inc. FB, still offers value. This high-profile social-media stock is among the top-10 holdings in the fund. "Facebook has a big slice of the total viewings on the Internet on desk top computers." More importantly, he says, it has an even bigger percentage of the eyeballs on smartphones through its smartphone app. "This is where the growth is." Its combined clout on the Internet gives Facebook "considerable leverage with advertisers."
The stock, says Sanders, trades at 30 times EPS estimates for 2015, but is "growing its revenue at 50% per annum mainly because of its mobile offering." The Manulife U.S. core-value equity team's estimated intrinsic value on this stock is US$90 per share.
The team recently sold its long-standing holding in Apple Inc. AAPL from Manulife U.S All Cap Equity. The consumer-technology giant had been in the fund for some time and was among the top-10 weightings at the end of September. Sanders notes that the team has retained its holding in Apple in other mandates. Of the sale from the all-cap fund, Sanders says: "We booked a profit in Apple and used the proceeds to add to such smaller-cap names such as CarMax and Group 1 Automotive in the consumer-discretionary sector."
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