Companies have suggested growth in Europe and the US is likely to remain slow, and investors are uneasy about the pending fiscal cliff. But this is not the time to pull away from the markets; it’s time to hold fast to a strategy that will help weather financial hardships.
Looking for a starting point? Consider the following stock picking strategy employed by the Jensen Quality Growth Fund.
Strategy
In an interview with Kapitall, Jensen’s Co-Portfolio manager Rob McIver says companies that meet Jensen’s requirements have “fortress-like” balance sheets which shows “they are in control of their own destiny. By and large they tend to have the cash to do what they want to do.”
To be considered by Jensen Quality Growth Fund stocks must generate at least 15% ROE for 10 consecutive years at a minimum. ROE, or return on equity, is a metric that expresses a company’s profits as a percentage of shareholder’s equity, and is therefore a measure of a firm’s profitability. Jensen’s strict requirement creates a universe of strong performers with demonstrated ability to excel through good times and bad.
But as the fund’s name implies, there’s more to the fund’s strategy than profits — it requires quality. For Jensen, durable business models, competitive advantage, stellar management teams, and high levels of free cash flow characterize the elusive metric.
Industry Favorites
Of the 160 or so stocks that pass through the ROE growth screens Jensen invests in 29. These are selected for their adherence to quality guidelines largely related to cash flow, and if their analysts feel they are trading at a discount to their full value.
In an interview with Co-Portfolio Manager Rob McIver and Principal Dave Mertens we discussed some of Jensen’s stock picks that may fall under the radar of an average investor. Both co-portfolio managers believe these stocks are currently trading below fair value:
In Healthcare: In this sector the fund is taking some money off the table “We sold off C.R. Bard, Inc. (NYSE:BCR),” explains McIver. “It is a low cost provider but we had concerns about their execution as a business. We saw better growth opportunities elsewhere.” One top holding is Varian Medical Systems, Inc. (NYSE:VAR), a leading designer of radiation therapy services and equipment. Given the unfortunate rise of cancer, the firm has a real sweet spot as the market provider. Their business model also bodes well for its continued success: When a customer (hospital) buys a product they also purchase upkeep and training for its staff, providing annuity down the road.
Consumer Staples: There’s more opportunity here with brands and franchises, many of which are not new to the oversea markets. The Coca-Cola Company (NYSE:KO), remains a favorite in that sense. According to McIver “North Korea and Cuba are the only two countries in the world where you can’t buy a coke. The strength of the brand and franchise is strong. The stock has high return on equity, rewards shareholders, grows their dividend, and has strong cash flow. As an investor, would you buy a 10-year U.S bond, which yields 1.65%, or Coke, with a dividend of 2.69%? Coke is clearly more attractive.”
Technology: Amphenol Corporation (NYSE:APH) is a leading designer and manufacturer of electric connectors. It’s a commodity-like business but they have positioned themselves to work with customers like Apple Inc. (NASDAQ:AAPL), as well as bigger aerospace industries where they design connectors to improve efficiency. “We think it’s fairly priced to buy today. It tends to be more volatile because the market treats it so, but it has a lot of value and more growth to price in.”
Another technology stock in the fund is Waters Corporation (NYSE:WAT), the leader in mass spectrometry. This is a process that measures and breaks down a substance’s compounds to identify and calculate all of its components. Healthcare companies have a great need for this technology, as do oil and gas companies which require this analysis for research.
Lastly, Praxair, Inc. (NYSE:PX), a leading industrial atmospheric gases company. “This is a real interesting play,” says McIver. “The firm builds and operates plants near customers that requires their gas. The business model is typically long-term contracts (3-20 years) with customers, which gives them a lot of security, so even if the customers don’t take the product they still have to pay, otherwise it would be too risky for Praxair to engage. Furthermore, the primary cost of its goods (air) is free. The by-products are other gases that Praxair will bottle up and sell to another customer, while the first customer has essentially paid the industrial cost. Praxair plays on energy and the growing strength of the emerging markets, especially in Latin America where has seen a lot of success.”
Advice for New Investors
“Moving from one shiny thing to the next tends to be harmful to your financial health,” cautions McIver. “Risk is very much a word investors are concerned about. To us, risk is the permanent loss of capital. Our strategy is proven over time, with lower volatility and superior returns, but it takes patience. An investor must understand the strategy and stick with it because in the long term, it tends to be successful.”
Mertens adds: “People tend to look at near-term returns or headlines, but investors need to think about the long-term results. Look how the stock or fund performs over a full market cycle, and see how they add value.”
Business Section: Investing Ideas
Looking to emulate Jensen Quality Growth J (MUTF:JENSX) investing strategy?
We list the fund’s top 20 holdings below. The Jensen Quality Growth Fund is based in Lake Oswego, Oregon. Total assets under management for the firm, Jensen Investment Management, is $5.5 billion. Roughly $4 billion of that is in the Quality Growth Fund.
List sorted by % of portfolio.
1. PepsiCo Inc (PEP, Earnings, Analysts, Financials): Engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. Market cap at $108.6B, most recent closing price at $70.21. Represents 5.30% of fund’s portfolio
2. Procter & Gamble Co (PG, Earnings, Analysts, Financials): Provides consumer packaged goods in the United States and internationally. Market cap at $192.B, most recent closing price at $70.22. Represents 5.25% of fund’s portfolio.
3. Oracle Corp (ORCL, Earnings, Analysts, Financials): Develops, manufactures, markets, distributes, and services database and middleware software, applications software, and hardware systems worldwide. Market cap at $154.55B, most recent closing price at $32.07. Represents 5.12% of fund’s portfolio.
4. 3M Co (MMM, Earnings, Analysts, Financials): Operates as a diversified technology company worldwide. Market cap at $64.39B, most recent closing price at $91.87. Represents 4.85% of fund’s portfolio.
5. United Technologies Corp (UTX, Earnings, Analysts, Financials): Provides technology products and services to the building systems and aerospace industries worldwide. Market cap at $74.25B, most recent closing price at $81.01. Represents 4.56% of fund’s portfolio.
6. Abbott Labs (ABT, Earnings, Analysts, Financials): Engages in the discovery, development, manufacture, and sale of health care products worldwide. Market cap at $103.27B, most recent closing price at $65.33. Represents 4.33% of fund’s portfolio.
7. Colgate Palmolive Co (CL, Earnings, Analysts, Financials): Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. Market cap at $50.46B, most recent closing price at $106.79. Represents 4.02% of fund’s portfolio.
8. Adobe Sys Inc (ADBE, Earnings, Analysts, Financials): Operates as a diversified software company in the Americas, Europe, the Middle East, Africa, and Asia. Market cap at $17.7B, most recent closing price at $35.75. Represents 3.80% of fund’s portfolio.
9. Microsoft Corp (MSFT, Earnings, Analysts, Financials): Develops, licenses, and supports a range of software products and services for various computing devices worldwide. Market cap at $226.74B, most recent closing price at $26.94. Represents 3.79% of fund’s portfolio.
10. Automatic Data Processing Inc (ADP, Earnings, Analysts, Financials): Provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers worldwide. Market cap at $27.83B, most recent closing price at $57.33. Represents 3.79% of fund’s portfolio.
11. Omnicom Group (OMC, Earnings, Analysts, Financials): Omnicom Group Inc. and its subsidiaries provide advertising, marketing, and corporate communications services. Market cap at $13.05B, most recent closing price at $49.41. Represents 3.75% of fund’s portfolio.
12. Accenture PLC (ACN, Earnings, Analysts, Financials): Operates as a management consulting, technology services, and outsourcing company. Market cap at $55.91B, most recent closing price at $69.51. Represents 3.50% of fund’s portfolio.
13. T. Rowe Price Group Inc (TROW, Earnings, Analysts, Financials): T. Rowe Price Group, Inc. is a publicly owned asset management holding company. Market cap at $16.33B, most recent closing price at $64.06. Represents 3.49% of fund’s portfolio.
14. Emerson Electric Co (EMR, Earnings, Analysts, Financials): Operates as a diversified manufacturing and technology company. Market cap at $37.1B, most recent closing price at $51.23. Represents 3.46% of fund’s portfolio.
15. Waters Corp (WAT, Earnings, Analysts, Financials): Designs, manufactures, sells, and services high performance liquid chromatography, ultra performance liquid chromatography, and mass spectrometry (MS) instrument systems and support products primarily in the United States, Europe, Japan, and Asia. Market cap at $7.48B, most recent closing price at $86.0. Represents 3.34% of fund’s portfolio.
16. Cognizant Technology Solutions (CTSH, Earnings, Analysts, Financials): Provides information technology consulting and technology services in North America, Europe, and Asia. Market cap at $21.3B, most recent closing price at $70.97. Represents 3.33% of fund’s portfolio.
17. Praxair Inc (PX, Earnings, Analysts, Financials): Engages in the production, sale, and distribution of industrial gases primarily in North America, South America, Europe, and Asia. Market cap at $32.04B, most recent closing price at $107.84. Represents 3.05% of fund’s portfolio.
18. United Parcel Service Inc (UPS, Earnings, Analysts, Financials): Provides transportation, logistics, and financial services in the United States and internationally. Market cap at $70.29B, most recent closing price at $73.68. Represents 3.04% of fund’s portfolio.
19. Amphenol Corp (APH, Earnings, Analysts, Financials): Engages in the design, manufacture, and marketing of electrical, electronic, and fiber optic connectors; interconnect systems; and coaxial and specialty cables worldwide. Market cap at $9.93B, most recent closing price at $61.90. Represents 2.85% of fund’s portfolio.
20. Equifax, Inc (EFX, Earnings, Analysts, Financials): Equifax Inc. collects, organizes, and manages various financial, demographic, employment, and marketing information solutions for businesses and consumers. Market cap at $6.48B, most recent closing price at $54.20. Represents 2.83% of fund’s portfolio.
Compare changes in 1-year return, over the past 2 years, for the first 9 companies on this list. Click through for more tools and data.
This article was originally written by Rebecca Lipman, and posted on Kapitall.
