Michael Hatcher, head of global equities and director of research at Trimark Investments, says it's challenging to find high-quality companies around the world that offer good value.
Essentially a stock picker, Hatcher targets companies that are prominent in the markets they serve and have sustainable competitive advantages. He looks for stocks that trade at a discount of some 30% to his assessment of their intrinsic value.
Such stocks are currently tough to come by, says Hatcher. This is the case whether the companies are based in the United States or in Europe, both of which are important hunting grounds for the fund. "Companies in both areas are fairly valued, though European-based companies have a slight edge."
At present, says Hatcher, the media headlines are focusing on the political deadlock in the United States, due to the confrontation in Washington between the Republican-controlled Congress and the Democrat-controlled Senate. "While there is much posturing, some agreement will be reached."
For Hatcher, the problem with such political accommodation is that it does not address the need to reduce the U.S. government's debt load, a growing and long-term challenge. "European countries have been under pressure to address their sovereign debt loads, whereas the United States has so far avoided this pressure."
In the latest spat on Capitol Hill, says Hatcher, the Republicans have been stonewalling the budget in an attempt to delay President Barack Obama's health-care reform, the Affordable Care Act, which aims to broaden the availability of U.S. health insurance. "Despite the opposition to it, this is moving forward," Hatcher says.
From the U.S. health-care industry's perspective, the introduction of Obamacare, as it is called, creates a "heightened degree of uncertainty." From an investor's perspective, a strategy for selecting stocks in this sector, says Hatcher, is to focus on those companies that will likely be relatively immune to the cost-saving pressures that it will bring.
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| Michael Hatcher | |
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At Trimark Investments, a division of Toronto-based Invesco Canada Ltd., Hatcher's mandates include Trimark Europlus, Trimark Global Fundamental Equity, Trimark International Companies and the flagship Trimark Fund.
Hatcher has managed Trimark Fund for 18 months. As at the end of June, the fund (assets of $2.9 billion and 40 names) had 37% of its holdings in U.S.-based companies. "Generally, the U.S. holdings in the portfolio are no longer cheap, as the stocks have done well," he says. "But these stocks still represent reasonable value."
Trimark Fund has strong weightings in sectors such as health care, consumer- discretionary stocks and information technology. Hatcher's targets, he says, have a common theme: a stable business and solid cash flows, low debt and a high return on invested capital.
Two U.S.-based health-care companies that Hatcher considers will be relatively unaffected by Obamacare are Becton, Dickinson and Co BDX and Express Scripts Holding Co. ESRX. They are among the top 10 holdings in Trimark Fund.
| Becton, Dickinson and Co. | Express Scripts Holding Co. | The Walt Disney Co. | ||
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| Oct. 1 close | $100.92 | $62.63 | $64.83 | |
| 52-week high/low | $104.98-$74.18 | $67.66-$49.79 | $67.66-$49.79 | |
| Market cap | $19.6 billion | $51.0 billion | $115.8 billion | |
| Total % return 1Y* | 30.3 | -0.9 | 25.9 | |
| Total % return 3Y* | 12.7 | 8.7 | 25.9 | |
| Total % return 5Y* | 6.4 | 11.1 | 27.0 | |
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| *As of Oct 1, 2013.All figures in $US Source: Morningstar |
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Becton Dickinson is a global medical-supplies player that specializes in making needles and syringes, says Hatcher. "These items are low cost and necessary in the provision of health care." This means, he says, that within the United States, the company is likely to be less vulnerable to the impact of Obamacare." The cost-saving measures will focus on big-ticket items, he says. Another plus for the company, at this juncture, "is its growing business in emerging economies."
On Becton Dickinson's financials, Hatcher notes that the company has raised its dividend each year over the last 37 years. The stock has done well this year, he says. It currently trades at an enterprise value (EV) to EBIT (earnings before interest and taxation) of 12 times based on estimates for the next 12 months. "I am not adding to the stock or selling it, he says.
Express Scripts is a leading pharmacy-benefit-management (PBM) company in the United States, says Hatcher. "It is a dominant company in this business." Last year, Express Scripts acquired another major PBM company, Medco Health Solutions Inc. "This brought with it further economies of scale in what is essentially a scale business."
The acquisition also enhanced Express Scripts' bargaining power with the drug companies and the pharmacies that distribute its products, he notes. "This helps to reduce costs to both the health-care insurers and the insured." The company trades at an EV/EBIT of 10 times. "It is a high-quality company offering a pure play on PBM, and the stock still represents good value."
Turning to the consumer-discretionary sector, an entertainment and media company that Hatcher likes for its dominance in two key market segments is The Walt Disney Co. DIS, one of the top 10 holdings. The business, he says, is split roughly 50/50 between the sports network ESPN and the ABC network, and the Disney offerings. The latter include the original Walt Disney Studios, Disney Parks and Resorts and a "thriving" merchandise business.
ESPN, says Hatcher, is in a "sweet spot" as the company dominates sport viewing around the world and "people want to view sports in real time, which is good for the advertisers."
Disney is a "franchising machine," he says. Building on its legacy Disney franchise, the company has acquired Pixar, Marvel Entertainment (Spider-Man), and Star Wars, he notes. The stock has had "a nice run." It trades at an EV/EBIT of 11 times.
In the technology sector, Google Inc. GOOG is another significant holding in Trimark Fund. "The company has a commanding share of the search-engine market," says Hatcher, "and there are high barriers to entry in this business."
Hatcher sees Google as in essence an advertising company. He points out that Google's share of the advertising-revenue pie is growing strongly, that of television share is stable and modestly growing, while print's share is declining." Google trades at an EV/EBIT of 12 times, he notes. "The valuation still represents a discount to what we think the company is worth."
Hatcher has reduced his position in another major global-technology giant, Apple Inc. AAPL. "I have concerns about the ability of this company to remain at the top of the innovation cycle; its market is becoming increasingly challenging."
