2016 INVESTMENT ROUNDTABLE
JEFF ROTTINGHAUS PORTFOLIO MANAGER T. ROWE PRICE U.S. LARGE-CAP CORE FUND
AUTOZONE, AZO: Thursday’s close $795.57. Sells automotive replacement parts from more than 5,000 stores in the U.S., Mexico and Brazil.
WHY HE LIKES IT: AutoZone has steadily increased its earnings per share and sales at stores open at least a year and has also been buying back stock. AutoZone is trading for 14 times expected earnings in 2018, making it an attractive relative value especially if tax rates come down. The company also has limited competition as the “industry that’s largely consolidated amongst two big guys” including Advance Auto Parts (AAP).
AMAZON, AMZN: Thursday’s close $761. The U.S.’ biggest online retailer that also has a fastgrowing business of selling computer capabilities to other companies.
WHY HE LIKES IT: While it might seem Amazon has a firm grip on online shopping, T. Rowe Price estimates that it only has a 3% share of the entire future ecommerce market. A big piece of growth comes from its Amazon Web Services business, where Amazon rents out computing capability to other companies for a fee. This could be a dramatically larger opportunity as more businesses shift their technology to the cloud. “Talk about disruption, this is a disruptive company going after two of the largest end market opportunities that we see,” namely online retail and cloud services, he says.
JP MORGAN CHASE, JPM: Thursday’s close $86. The most valuable U.S. bank by market value with community banking, investment banking and asset management operations.
WHY HE LIKES IT: The management team continues to show an ability to boost returns. That strong management could be even more successful if there are benefits for financial firms in terms of tax reform or lower regulation. Specifically, any new regulation that lowers the amount of capital banks must keep could boost profitability. “It’s the highest quality bank in the market,” he says.
VISA, V: Thursday’s close $79.50. Visa is a global leader in payment systems and it gives merchants the ability to be paid online or in physical locations.
WHY HE LIKES IT: Visa is a classic example of a “secular growth” stock, in other words, a company that could benefit no matter what happens with the global economy. Only 20% of global payments are electronic, a percentage that will increase as more consumers turn away from the inconveniences of cash. Growth will only continue in 2017 as Visa integrates its acquisition of Visa’s European operations. “There’s a lot of room to run here,” he says.
RUPAL BHANSALI CHIEF INVESTMENT OFFICER OF INTERNATIONAL AND GLOBAL EQUITIES AT ARIEL INVESTMENTS
GILEAD SCIENCES, GILD: Thursday’s close $75.55. A biotechnology company working on treatments and cures for a variety of diseases ranging from liver malfunctions to HIV and hepatitis.
WHY SHE LIKES IT: The stock is “dirt cheap” as it has been sold off, she says. The company generates “ridiculous amounts of ” cash flow, so much so it could buy back the entire company in five years at the current rate. The company’s big promise is that it’s not just working on drugs to improve conditions, but rather, to cure them. Justifying a high drug price is easier when selling a cure. “Companies that create value will be able to charge for that. And they are curing a disease. That’s the Holy Grail of medicine,” she says.
NOKIA (ADR), NOK: Thursday’s close $4.72. A seller of wireless networking infrastructure equipment and mobile Internet gear.
WHY SHE LIKES IT: Growing demand for mobile data is a boon for Nokia, which is one of the biggest left of a “handful” of players that have largely merged with each other. While there is a “lull” in investment in mobile data infrastructure technology, since there was a big wave of investment already, demand will increase as mobile workers and consumers demand access to information from anywhere. The stock has fallen this year, but “if you are patient, as we are, you can look forward to the next wave that will ensure inevitably,” she says.
CHINA MOBILE (ADR), CHL: Thursday’s close $52.78. A leading provider of mobile telecom services in mainland China and Hong Kong.
WHY SHE LIKES IT: China Mobile is already larger than Verizon, AT&T, Sprint and T-Mobile combined. It has 66% market share in China with 800 million subscribers. Currently, customers in China are only paying about $10 a month for telecom services, vs. $60 in the U.S. Expect Chinese consumers to demand faster speeds and more data, which will likely boost the amount they’re willing to pay. Chinese consumers are still shifting, too, to smartphones which will increase demands for data telecom services. “In China, you’re still migrating towards smartphone penetration. So that’s another opportunity,” she says.
TELEFONICA DEUTSCHLAND, DB:O2D: Thursday’s close 3.98. A telecommunication service in Germany that offers wireless and hardwired communications services to consumers and businesses.
WHY SHE LIKES IT: European regulators have been more permissive about mergers in the industry, which is a potential win for this major company. In the U.S., there are four major wireless carriers for a population roughly equal to Europe. Yet, in Europe, each country has three of four telecom players. “It is a market that is crying for market consolidation,” she says. With fewer companies, prices for telecom services should rise. Currently, consumers can get a decent wireless plan for 5 euros, which could rise if there are fewer competitors and consumers use wireless more.
GAVIN BAKER PORTFOLIO MANAGER AT FIDELITY OTC FUND
ALPHABET, GOOGL: Thursday’s close $815.65. A leading online advertising company with interests in mobile technology, cloud software and the Google search engine.
WHY HE LIKES IT: The company’s large database on consumer behavior used for online advertising paired with viewing con-
sumption on YouTube and its mobile technology allow it to be a winner in the artificial intelligence era. The company’s hand with the Android mobile operating system also puts it in a position of strength. “If anyone is going to bring us the Star Trek computer which can answer any question or do any task ... I think it’s Google,” he says.
ACTIVISION BLIZZARD, ATVI: Thursday’s close $36.99. A top publisher of video games for computers, video game consoles and mobile including titles like Candy Crush Saga and Call of Duty.
WHY HE LIKES IT: Video-game companies are winning as technology used in gaming devices continues to improve. Video game companies’ ability to sell directly to consumers with app stores and downloads — rather through physical retailers — boosts profitability and allows them to sell add-on features over time to extend the lure of the game. Electronic sports competitions draw many gamers and customers who want to watch the professionals play. Games like “Call of Duty, Overwatch and Battlefield are the new NFL, NBA and Major League Baseball,” he says. Call of Duty and Overwatch are both published by Activision, while Battlefield is owned by Electronic Arts.
CHIPOTLE MEXICAN GRILL: CMG. Thursday’s close $382.85. A fast-casual Mexican food chain operating more than 2,000 locations.
WHY HE LIKES IT: The company’s stock and customer traffic have taken a hit following food safety scares. But those concerns will pass, as has been the case with other restaurants. “Lots of restaurants all over the world have been through food safety scares, and there’s a very predictable pattern for how they ... recover,” he says. Adjusted for stock buybacks, the company’s peak profit was $21 a share in the 12 months ended in the third quarter of 2015. Now the company is earning about $3 a share annually. Profits are hurt by investments in food safety and lower customer visits. But Baker is looking for better digital marketing and mobile payments to boost results.
TESLA, TSLA: Thursday’s close $197.58. A seller of electric cars as well as power storage devices and solar generation equipment. WHY HE LIKES IT: Tesla is often seen as just an electric car company, but “it’s just the world’s best car company,” he says. Tesla competes with BMW, Mercedes, Lexus, Porsche and Audi for luxury car buyers and has the top market share in that segment in the U.S., he says. Tesla’s Model S, a four-year-old car, sold better than the new BMW 7 Series by two to one, he says. Tesla’s cars are also designed so users can upgrade them, for instance, once self-driving cars become approved, he says. New models will have lower price points, making it a choice for lower-end markets.
Footnote: These are not recommendations to buy or sell, but rather, top stocks that Baker owned in the Fidelity OTC fund as of Oct. 31.
DAVID KOSTIN CHIEF U.S. EQUITY STRATEGIST AT GOLDMAN SACHS
BANK OF AMERICA, BAC: Thursday’s close $23.16. A global U.S.-based bank with consumer banking, wealth management, global market and other services.
WHY HE LIKES IT: Of all the U.S. banks, Bank of America is the most exposed to interest rates, so will benefit most from the rising in interest rates, Kostin says. The bank is also focused on reducing corporate spending and “would be a big beneficiary of reduced financial regulation,” he says. Goldman thinks the stock could be worth $24 a share.
DISCOVER FINANCIAL SERVICES, DFS: Thursday’s close $72.47. A banking and payments service based in the U.S. that offers credit cards as well as student loans and banking products.
WHY HE LIKES IT: Discover is another example of a bank that could benefit disproportionately from higher interest rates. Meanwhile, the company’s relatively high 37% tax rate puts it in a good position to benefit from any coming cut in the corporate tax rate with the new president. Goldman thinks the stock could be worth $75 a share.
uNETFLIX, NFLX: Thursday’s close $125. The company streams video content such as movies and TV shows to subscribers in the U.S. and internationally.
WHY HE LIKES IT: Netflix has already been growing by 25% a year as more consumers shift their video viewing to the online service. “It’s a ... shift of the way people consume media and watch television,” he says. The company has also spent heavily to create its own unique content that can’t be found on competing networks. The risk is that Netflix is hardly an undiscovered stock and is pricey.
COSTCO, COST: Thursday’s close $160.11. Operates retail warehouses with both branded and private-label products in groceries, electronics, apparel and other categories.
WHY HE LIKES IT: Given the President-elect’s focus on boosting U.S. growth rates, Goldman Sachs is focused on U.S.-centric companies. “About 73% of the revenue (are from) here domestically,” he says. The company should also be able to start boosting the membership fees. Costco also has less sensitivity to rising labor costs than some of its competition. Goldman sees the stock worth $186 a share in the next 12 months.