Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Mike Jennings, senior investment manager of global equities at Premier Asset Management.
‘Unprecedented’ is an overused word, but 2008 has provided ample opportunity for its legitimate use. Records are being broken every day, all of them bearish. At its November low, the US equity market was down 48.7% for the year. If it were to finish the year at that level, then 2008 would be the worst in US stockmarket history, exceeding the 45.6% fall seen in 1931, amid the Great Depression.
But while it’s easy to find gloomy data, I am mindful of Warren Buffett’s quote: “Be fearful when others are greedy. Be greedy when others are fearful.” We are just at the start of what is likely to be the worst recession for decades, so the headlines will be dreadful throughout 2009. Yet with global equities now trading on a price/earnings discount of about 40% to the 40-year average, I would argue that the worst of the news is more than discounted at current levels. I can’t tell you whether stockmarkets have bottomed, but I am confident that there are plenty of great opportunities for those investing for the medium or long-term. With credit availability tight, I target companies with strong balance sheets and sound business models that will be long-term beneficiaries of the current turmoil as they outlast their competitors.
Altria (NYSE:MO), better known as Philip Morris, is the dominant tobacco firm in the US with its iconic brand, Marlboro. As it is trading within a mature market, Altria’s management is focused on maximising shareholder value. For example, the spin off of its Philip Morris International business returned substantial amounts of cash to shareholders. As well as a defensive product line, Altria has a strong competitive position and sound management. It has only modest financial gearing, and offers a gross dividend yield (in dollars) of 8.1%. That’s very attractive compared to 1% on the Federal Reserve funds rate and less than 3% on a ten-year Treasury.
Fresenius Medical Care (DAX:FME) is the global leader in the provision of kidney dialysis products and services. Together with its nearest competitor, Fresenius controls two-thirds of the US dialysis market. This is a non-cyclical market and one where demand will, unfortunately, continue to benefit from strong growth. The company expects to grow net income this year by 12%-15%. In a low-growth environment, such solid growth rates will be increasingly sought-after by investors.
While maintaining my tight criteria on quality and balance sheets, my final example is less defensive. Esprit Holdings (HKG:330) is a Hong Kong-listed clothing retailer with a historic bias to the German and Benelux markets. As the economic cycle heads towards its lowest point, consumer discretionary stocks are often the first to recover. The problem for investors is that many of these are often poorly capitalised and low margin. Esprit, on the other hand, has 14% of its market value in cash and trades on a historic dividend yield in excess of 11%. Being Hong Kong-listed, it is valued at a fraction of its European competitors’ level. While this may still be too early to buy in, the firm will be a survivor in a tough retail market and investors who do buy will have substantial protection while they wait. Those who wait too long – until the recovery is upon us – will miss substantial gains in this stock.