Global stocks have "catching up" to do

CI's Stephen Jenkins finds modest valuations relative to growth prospects

Sonita Horvitch 22 February, 2012 | 7:00PM
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Stephen Jenkins, senior vice-president, investments, and global equity specialist at Harbour Advisors, says that there are select opportunities to buy world-class companies with above-average growth prospects at reasonable valuations. "2011 was a difficult year for global equities," he says.

There was greater focus last year on high-profile macroeconomic concerns, rather than on the fundamentals of the companies and the stock market. The market did not, therefore, move in tandem with the "surprisingly robust" corporate earnings growth. "It has a lot of catching up to do this year," says Jenkins.

While corporate earnings growth might not be as powerful in 2012 as in 2011, the growth is expected to remain strong this year, he says. Also, importantly, "interest rates are likely to remain at historic low levels for some time." There is thus "reason to be optimistic about the global equity market for 2012."

Jenkins notes that his strategy for tackling the tough 2011 equity market was to take advantage of relative valuations, selling those stocks which had reached full value or proved to be disappointing, and buying high-quality companies where there was value to be had. The objective, he says, was "to upgrade the portfolio."

Harbour Advisors, a division of Toronto-based CI Investments Inc., manages assets of some $16 billion. Jenkins is the lead portfolio manager of Harbour's foreign funds. He has managed CI Harbour Foreign Equity Corporate Class   (assets $500 million) since its inception in December 2001.

This portfolio is fairly concentrated in 30 names. The top 10 weightings account for more than 40% of total assets. The holdings, says Jenkins, consist of "best-of-breed companies" with strong competitive positions globally that are capable of generating above-average profit growth.

Stephen Jenkins

These companies, he says, also still trade at modest valuations relative to their growth prospects and "should see an expansion of the price/earnings multiple on their stock over time." The emphasis, he says, is on companies based in industrialized countries.

Last year, Jenkins established a position in the global financial-services company Bank of New York Mellon BK, which is now in his top 10 holdings. Formed in July 2007 from the merger between The Bank of New York and Mellon Financial Corp., "this company is one of the world's leading custodians of financial assets."

It has US$25.8 trillion in assets under administration and custody and US$1.3 trillion in assets under management. Its business model is largely fee-based, says Jenkins. "Some 75% of its revenues are from asset or securities servicing and 25% from asset and wealth management."

Bank of New York Mellon's growth prospects are solid, says Jenkins, with its earnings highly correlated with the size of its assets under management and under administration." The stock trades at some nine times earnings estimates for the current year, which Jenkins considers to be reasonable.

Of growth prospects for the traditional major U.S. banks, Jenkins cautions that these banks are under considerable pressure to boost their capital bases and face ongoing headwinds from tougher regulation in the wake of the financial meltdown in 2008-2009.

By contrast, the global credit-card issuer MasterCard Inc. MA continues to impress. This stock has been the largest holding in Harbour Foreign Equity for some time and continues to be so. At the end of 2011, it was 5.6% of the fund. This stock was one of Jenkins' selections in the Encounter column in May 2011. At the time, the stock traded at US$282.38.

Bank of New York Mellon MasterCard Inc.
Feb. 21 close $22.16 $399.55
52-week high/low $31.45-$17.10 $401.79-$240.36
Market cap $26.9 billion $50.5 billion
Total % return 1Y* -28.4% 59.6%
Total % return 3Y*    0.8% 36.4%
Total % return 5Y* -10.0% 30.3%
*As of Feb. 21, 2012. All figures $US
Source: Morningstar

The stock "has been a big success," says Jenkins. "Its P/E multiple has been growing and I have taken some profits in the stock twice, since I bought it." The company is increasing revenue in the low double-digit range per year, he says, and is expanding its operating margins by reducing costs. "MasterCard is also achieving good growth in the emerging economies." The stock trades at 17 to 18 times its current earnings-per-share estimates, and the company is growing its earnings by 20% annually.

In the consumer-staples sector, Jenkins notes that he sold his "long-standing and significant position" in Nestlé S.A. Based in Switzerland, Nestlé is one of the world's largest food-products companies. "When I sold the stock in the second half of 2011, it was trading at a P/E multiple north of 17 times and I considered that the multiple-expansion story had played out." Jenkins says he would consider owning the stock again if its valuation improved.

In the last quarter of 2011, Jenkins boosted his holding in the Swiss-based Aryzta AG, "a smaller company than Nestlé with a higher growth rate and a lower valuation." Aryzta is a global leader in the growing specialty bakery industry.

"It is an outsourcing story," says Jenkins. Aryzta is "an innovative producer and marketer of high-quality baked goods, supplying its products to customers in the food-service industry, as well as to consumers through retail outlets."

The company has operations in North America, South America, Europe, Southeast Asia, Australia and New Zealand. In the United States, for example, Aryzta owns the cookie maker Otis Spunkmeyer, the artisan bread maker La Brea Bakery, and the frozen-pizza maker Great Kitchens. In Canada, Aryzta had a joint venture with Tim Hortons Inc. in Maidstone Bakeries and acquired Tim Hortons' 50% interest in 2010. Aryzta's stock currently trades at around 10 times estimated current earnings per share.

Across the Pacific Ocean, Jenkins says a Japanese company that also dominates its niche globally is Nidec Corp., which has an American Depository Receipt and trades in New York NJ. The company manufactures precision electric motors and related equipment.

Founded in 1973 by its still-active CEO and president, Shigenobu Nagamori, the company, says Jenkins, originally focused on micro motors for computers and hard disc drives. "This still represents more than 50% of Nidec's profits and the company has roughly 80% of the global market for these products."

Nidec is decidedly global, Jenkins says, with 70% of its manufacturing outside Japan, including in low-cost jurisdictions. "In all, Nidec is well run, has excellent growth prospects and is committed to the creation of shareholder value, which is what I look for in an investment."

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Sonita Horvitch

Sonita Horvitch  

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