Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Mike Jennings, investment manager of the Premier Global DSR Fund, Premier European Growth Fund, and Premier Managed Assets Fund.
Equity dividend yields currently exceed their sovereign benchmark bond yields in most pan-European equity markets. Other than during the post-Lehman’s panic in late 2008, this has not been the case since the late 1950s. In short, that means some great stocks are now cheap.
My global equity picks offer strong diversification both in terms of geography and industry. Each affords attractive growth opportunities yet trades on a compelling valuation with plenty of catalysts for change. I target companies with strong cash flow and/or strong balance sheets, plus the ability to enhance their valuations through share buy backs or attractive dividend distributions.
The first is leading US department store Macy’s (NYSE: M). It provides my only global retailing exposure – the pressure on the US consumer is less of a concern than that which faces British consumers. Macy’s, owner of the Bloomingdale’s brand, is undergoing a radical restructuring.
It has been trialling greater localisation of its stores – matching the products offered to local tastes. This has been phenomenally successful, with these stores substantially accelerating sales growth. This approach will be rolled out more widely in 2011, which should drive margin improvement across the group. The firm targets a 15% return on equity (for 2011) and trades on a massive free cash-flow yield of 15.7%, or 9.5 times 2011 expected earnings.
Sticking with the US, but targeting the global pharmaceutical sector, my second choice is Pfizer (NYSE: PFE). Being in a classically defensive sector, investors could have expected Pfizer to have provided a safe haven. In fact, over the last three years it has underperformed the US S&P Index by 9.7% and the Healthcare Index by 19.5%.
Overhanging the stock, and indeed much of the sector, has been concern about approaching patent expiries. In Pfizer’s case the cholesterol-lowering drug Lipitor is expected to come off patent in mid-2011. This concern is well known, however, and is the main cause of the underperformance to date. But second-quarter results show that, following its merger with Wyeth, Pfizer is now exceeding expectations on both sales growth and cost cutting. The firm has five new drugs reporting data before year-end, which may well allay fears of falling earnings in 2012. Pfizer is expected to generate something like $20bn of free cash flow, which could fund big future share buy-backs. The stock trades on 7.3 times consensus 2011 estimated earnings with a 4.3% expected gross dividend yield (versus US Treasuries at 2.7%).
My final stock is also a global leader, but this time it’s German-domiciled: Fresenius Medical Care (GR: FME). The firm is the world’s largest integrated provider of products and services for kidney dialysis – a market set to grow by 5%-6% per annum over the next decade. This stock plays into my ‘competitive advantage’ theme – effectively, its global market has only three major firms operating within it. Fresenius has a highly experienced management team and enjoys strong cost control from big economies of scale. Those factors should drive earnings growth of 13%-16% per year moving forward. Trading on approximately 15 times 2011 earnings, the stock is not one for pure value investors. However, the stability of the market, Fresenius’ strong position, and its history of consistent delivery makes this a core long-term growth holding.