The third and
final edited installment from Barron's 2023 Roundtable is
chock-full of more stock, bond, and fund picks from the last four members of
our panel.
Divergent
macroeconomic views and differing investing styles led to a wide array of
recommendations when the group met in New York in early January for
the 55th annual Roundtable.
Parnassus Investments’ Todd
Ahlsten takes a long-term, growth-oriented view and sees buying
opportunities in the tech selloff. Sonal Desai,
of Franklin Templeton Fixed Income, sees higher interest rates sticking around
and is being cautious ahead of a potential recession. Meryl
Witmer, of Eagle Capital,
and David Giroux, of T. Rowe Price,
both identified misunderstood assets trading at value prices.
Below are a few highlights from
the latest issue of Barron's.
Todd Ahlsten,
CIO and portfolio manager, Parnassus Investments:
Salesforce is a battleground stock. It’s right up our
alley. The company, a provider of enterprise SaaS [software as a service], has
a $140 billion market cap and $31 billion in annual revenue. The stock is down
about 50% from its peak of $310 a share. Salesforce was a market darling when
its revenue was growing by 20% a year. The macro environment now is more
challenging, and growth could be closer to 10% or the high-single digits. What
makes the situation even spicier is recent management departures.
Is Salesforce broken? We love stocks where the
narrative and the math get interesting. We see ample room for growth and margin
expansion here. The time to buy Salesforce is when it’s trading for four times
sales, not 10, 15, or 20 times...
Salesforce could grow free cash flow by more
than 20% a year, compounded, through 2025, generating roughly $11 a share in
free cash by fiscal 2026 [ending Jan. 31]. We see the stock reaching $215 in a
couple of years; that’s about 20 times enterprise value to free cash flow...
This part is for Scott
Black, our value guru: Salesforce trades for roughly 24 times
the next 12 months’ expected earnings. That’s about a 35% premium to the
multiple on the S&P 500. The three-year average premium is 160%, and it was
as high as 100% as recently as last August. We are buying it after the premium
has gone off a cliff. Is it still a little expensive? Yes, but I’ll take it.
Sonal Desai,
CIO and portfolio manager, Franklin Templeton Fixed Income:
While I am concerned about
bond yields rising further, we are closer to the end of the Fed’s tightening
cycle than the beginning. I have two funds that fit this theme. I continue to
believe that higher-quality, shorter-duration assets will outperform and
provide greater protection from potential fundamental weakness and
market-sentiment-driven volatility. In the investment-grade sector,
short-maturity bonds are yielding around 5%. Investors who want to stay short
can invest in IGSB, the iShares 1-5 Year Investment Grade Corporate Bond
ETF.
For investors who want the benefits of active
management and are willing to take on a bit more duration exposure, SIDCX, or
the SEI Intermediate Duration Credit fund, is one option.
The strategy historically has invested more heavily in the higher-quality
tranches of the corporate bond market, and tends to have lower credit risk than
peers. The fund is subadvised; there are three active managers, which in theory
should provide better diversification. The SEC yield is 4.92%.
David Giroux,
CIO, T. Rowe Price Investment Management:
GE
HealthCare Technologies was spun out of General
Electric on Jan. 4. It has a market cap of about $26
billion and trades for 15 times 2023 estimated earnings. It manufactures and
services imaging equipment and is a market leader in contrast agents and
radiopharmaceuticals. So, why doesn’t the market like the stock? The company is
viewed as a 4% organic grower [in annual revenue], which today isn’t fast
enough. Around half the business is capital equipment, and there are worries
about hospital capital spending. And GE still owns 19.9%, which is a short-term
overhang.
I agree that GE HealthCare
is a slow grower, but operating profit margins are about five percentage points
too low. They were 14% to 15% last year, and could grow by a third, to 20%, in
the next five years. Siemens Healthineers' imaging
business has margins of about 20%. There is a lot of low-hanging fruit here.
The combination of 4% organic growth, 75 basis points of margin expansion a
year, and capital deployment and tax-rate reduction should produce low-teens
earnings-per-share growth for the next five years...
We expect GE to exit the stock in the next
year, being smart about how it sells its shares in the open market. GE
HealthCare has the potential to double in the next five years.
Meryl Witmer,
general partner, Eagle Capital Partners:
I have recommended Holcim in
the past, but its transformation in the past year is significant enough to
merit an update. Under the terrific leadership team of CEO Jan
Jenisch, the company has been selling
capital-intensive cement assets in emerging markets. The proceeds have been
used to pay down debt and make acquisitions in building products and solutions,
in higher-return and less-cyclical end markets such as roofing. In the U.S.,
Holcim acquired Firestone Building Products and Malarkey
Roofing Products, in residential roofing. Firestone’s returns
have improved tremendously through better sourcing and operational excellence.
We estimate earnings from that business have doubled in the past year and a
half under Holcim.
When the final 2022 balance sheets are released
later this quarter, we estimate net debt will be around one times Ebitda.
Acquisitions in the building products and solutions business will be 25% of
2023 sales, compared with only 8% two years ago. Holcim is trading for around
50 Swiss francs a share [$54]. We think it’s a good value, with CHF6-plus of
sustainable free cash flow per share. Management agrees, and the company is
repurchasing 7% of the shares, worth CHF2 billion, from November through this
coming May. The stock is worth at least 12 to 13 times free cash flow, or CHF75
a share.
Find the rest of the conversation and 18 more
investment recommendations here.
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