A professional investor tells MoneyWeek where he’d put his money now. This week: Richard Bernstein, manager of the Brown Advisory US Equity Value Fund
Our value-based approach seeks out firms that are fundamentally strong, but currently out of favour and hence cheap. Right now we see exciting opportunities in America’s highest-quality global businesses. While US equity markets are having a tough time adjusting to the likelihood of recession, a serious bear market in housing and related problems in the credit markets, we believe current depressed conditions create some exciting long-term opportunities.
So we have been selectively buying shares, provided the firms are leaders in their respective business sectors, managed by proven boards, enjoy conservative capital structures, generate surplus cash flows and still trade at record-low relative valuations.
Merck (NYQ:MRK) is a good example. It now has a unique business model, having revamped its research and development process, and has enjoyed early positive results from its ongoing commercial restructuring. We particularly like its robust new product cycle.
Januvia is a first-in-class diabetes drug launched in 2007, at least two-years ahead of the competition, with multi-billion-dollar revenue potential. Isentress, a first-in-class anti-Aids drug, is also two to three years ahead of the competition and has huge revenue potential. Lastly, there’s Gardasil, a first-in-class anti-HPV (another sexually transmitted disease) vaccine launched in 2006, which has already benefited from the delayed launch of GSK’s rival product and crossed the billion-dollar revenue mark.
In short, it’s rare for a company to remain so consistently ahead of the competition in terms of first-in-class new products. Yet Merck in addition has a robust product pipeline with no fewer than seven drugs in Phase III clinical trials, several of which are also first-in-class.
Despite prevailing poor Wall Street sentiment, Dell (NSQ:DELL) remains another global leader, this time in the fragmented computing market. Dell has solid finances, generates significant free cash flow and superior returns on invested capital and is starting to implement a strategic plan aimed at improving profitability, gaining global market share and boosting growth.
Yet the stock is relatively cheap on several measures. It has an attractive 8% free cash-flow yield (even before an expected $3bn in annual cost savings) and has approximately 20% of its market cap in cash, providing us with a comfortable margin of safety. Factor in some exciting growth initiatives and we believe Dell is a compelling long-term prospect.
We also think there are now some good opportunities in the financial services industry. One is BB&T (NYQ:BBT), a regional bank based in North Carolina. BB&T’s share price has suffered unfairly from the current general banking malaise, given that it carries few overinflated assets due to a conservative lending culture. It should also maintain a decent dividend.
Finally, we favour Oshkosh Truck Corporation (NYQ:OSK), a manufacturer of speciality vehicles for the defence, fire and rescue, and commercial vehicle markets. Despite the anticipated slowdown in commercial construction in America, Oshkosh’s commercial businesses should benefit from the tightening engine emission standards expected next year. On a forward p/e of just eight, the shares are good value.