Identifying What You Own and Don't Own: Now is the Time to Understand Your Holdings

March 13, 2020

Spurred by fears of the Coronavirus and exacerbated by the precipitous drop in energy prices, stock prices experienced dramatic declines over the past few weeks.

It is easy to talk about thinking logically rather than emotionally but accomplishing this task during times of market stress can be difficult. It is difficult to watch portfolio values decline - we get it as we invest personally in our own strategies (as you may recall, we eat our own cooking).As noted in last week’s commentary, wild gyrations in the stock market are caused more by emotion and algorithmic trading than logic. As is typical in large market declines, there seems to be a disconnect between underlying fundamentals and stock prices. Clearly, the coronavirus will undoubtedly take a toll on the global economy, very likely pushing many countries into a recession, but we are skeptical as to whether this slow down warrants the steep market decline that we are currently experiencing.

As we have stated for some time, we believe our portfolios are positioned for a slow-growth economy and are therefore weighted toward consumer staples, healthcare and telecom. These industries have historically provided somewhat of a refuge during trying economic times. This time, however,investors appear to be indiscriminately selling stocks, essentially “throwing the baby out with the bathwater.” Now more than ever, we encourage our clients to examine the companies they own in their portfolios and to ask yourself whether ownership is justified in the current environment.

For your review, we highlight seven stocks from our Balanced and Global Equity strategies, in each instance summarizing why we feel strongly about their valuations and prospects, as well as why we believe their stock price declines are unwarranted.

Consumer Staples

Bunge Limited is a global agribusiness and food company. The shares trade at a very attractive 12.6 times trailing twelve-month earnings per share,8.3 times 2021 earnings per share, EV/EBITDA of 8.0 times, price to sales of 0.17 times, and price to book of 1.32 times. The stock pays an attractive 5.01%dividend. While the Coronavirus pandemic could negatively impact some of the company’s businesses, such as its Sugar and Bioengineering segment, these segments are much smaller when compared to their larger, and more stable,Agriculture and Milling divisions. Additionally, the company has taken many steps over the years to right-size the Sugar business for variations in demand.While we cannot estimate the impact the virus may have on the company in the near-term, over the long-term one thing we can be certain: The world needs food and access to the products and services that Bunge supplies.

Cloetta AB is a large confectionery company that serves the Nordic Region. Cloetta has two primary business segments: branded products and"pick and mix." Cloetta has strong market positions (#1 or #2) in Denmark, Finland, the Netherlands, Norway, and Sweden. With a P/E of 14 and a price to sales of 1.1, Cloetta’s valuation is modest. Furthermore, the company has a relatively clean balance sheet and an attractive 4.06% dividend yield.Not only is Cloetta’s valuation trading on the low end of food peers, but it seems especially low given the acquisition multiples that other confectionery companies have recently sold at in this space. For example, Ferrero SPA recently acquired a division of Nestle for 3x sales. We view Coletta as a good target as we see further consolidation in the space. Finally, Cloetta is attractive to us because it has strong insider holdings and a management team that is focused on boosting returns. While it is difficult to assess all risks from the recent outbreak of COVID-19 on their business, we do not feel long-term risks are prevalent, and believe that the pullback in the name is unwarranted.

PT HM Sampoerna is the largest tobacco/kretek (clove cigarette)manufacturer in Indonesia. Though located in an emerging market, Sampoerna is controlled by Philip Morris International (holding 92.5% of the shares outstanding). Sampoerna offers an attractive dividend yield of 7.56%, trades with low a P/E of 12, has a solid double-digit ROE of 44.4% and ROA of 28.7%.Additionally, the company has an excellent balance sheet. We feel Sampoerna’s valuation, yield, Philip Morris’ control and strong balance sheet, along with relatively inelastic demand for tobacco, lessen the risks from the Coronavirus.

Health Care

Novartis is a large, global drug manufacturer, with a leading presence in oncology and cardiology. The shares trade at 11.8 times 2021 earnings per share and a 2021 EV/EBITDA of 10.7 times. The shares offer an attractive 3.8%dividend yield and a projected 2021 free cash yield of 6.9%. The company has a manageable balance sheet and generates strong operating cash flow ($13.6 billion in the most recent trailing twelve-month period). Free cash flow is an impressive $11.44 billion. The company is a leader in research and development;in fact, Novartis spends more on research than almost any other pharmaceutical company. This has provided the company with a compelling pipeline of potential new products that should it benefit from over the long-term.

Sanofi SA is a large global drug manufacturer. The shares trade at 15 times trailing 12-times earnings per share, 10.6 times 2021 earnings per share,7.5 times EV/EBITDA, 2.98 times sales per share and 1.9 times book value. The shares offer an attractive dividend yield of 3.86% as well as a free cash flow yield of 5.3% (9.5% on projected 2021 cash flows). The company has a manageable balance sheet and generates strong operating cash flow ($8.6 B USD in the most recent trailing twelve-month period). In addition to its prescription drug business, Sanofi offers a viable vaccine business. Sanofi recently announced it will use its recombinant DNA platform to produce a 2019 novel coronavirus vaccine candidate. The recombinant technology produces an exact genetic match to proteins found on the surface of the virus. In doing so, it is leveraging its previous work for a SARS vaccine; it turns out that COVID-19’s molecular structure is similar to that of SARS. Apart from the coronavirus, the company is actively taking steps to shift its business away from the price competitive diabetes market and into the cancer arena, as well as considering splitting off its consumer business. We believe the company is well-positioned to weather today’s uncertain environment and benefit shareholders over the long-term.

Telco/Communication Equipment

With one of the larger net cash positions in the legacy technology industry ($11.07 B), we feel confident with in Cisco Systems. The American multinational technology conglomerate has a fortress-like balance sheet. Cisco generates large, sustainable cash flows. Last year alone, Cisco generated $14.9B in cash with a CapEx budget of only $909 Million. Even during the financial crisis of 2008-09, they generated $8.8B in free cash flow. We believe Cisco to be a very healthy company that should not experience any sort of liquidity concerns due to the Coronavirus. From a historical valuation standpoint, the stock is attractively priced. Cisco currently has a 10.5 P/E versus a five-year average of 13.7, and an EV/EBITDA multiple of 7.7x versus a three-year average of 9.7x. In addition to the low multiples, the company has a safe dividend with a forward yield of 4.1%, its highest ever. From a business standpoint, while we don’t expect the company to be shielded from a slowdown in technology spending, we believe that as companies begin to examine their policies on how to handle workloads with more employees working from home, both small and large corporations are going to have to retool their systems. These are all business segments that Cisco serves as a market leader. Looking past the virus, we believe there will be pent up demand for Cisco’s products, and view Cisco as a strong investment during these uncertain times.

Like Cisco, Verizon’s business should benefit from the coronavirus. Large corporations are going to have to re-engineer their networks to accommodate the needs of suppliers, employers, and customers all over the world working remotely. These corporations will need to work directly with telecom companies to properly structure these networks. Even if you remove the possibility that they directly benefit from the coronavirus outbreak, wireless service has become just as much a consumer staple as anything else in a person’s budget outside of food and water. As such, we believe that cellular service will be one of the last things a consumer cuts out of their budgets. The predictive nature of Verizon’s business means steady cash flows which easily supports the stock’s attractive 4.8% dividend yield. The company steadily generates operating cash flows north of $30 billion, with CapEx around $17B, leaving $13B in free cash flow. The shares are attractively valued, trading at a P/E of 12.3 times and an EV/EBITDA of 8.31 times.

Similarly to Verizon, Orange S.A. is a French multinationaltelecommunications corporation, with operations in Europe, Africa, and theMiddle East. The company offers mobile services, such as voice, SMS, and data,fixed broadband and narrowband services, as well as fixed network businesssolutions. It also sells mobile phones, broadband equipment, and connectedobjects and accessories. The company also provides IT and integration, hosting,and infrastructure services, including cloud computing; customer relationsmanagement and other applications services; security services; and videoconferencing, as well as sells related equipment. While some of its businesswill see an impact from lower business spending, many of its offerings offersolutions to address the needs of the current environment. The shares tradewith a P/E of 12.09 times, an EV/EBITDA multiple of 5.4 times, a price to salesratio of 0.78 times, and trades at just slightly over book value. The sharesoffer an attractive 6.53% dividend yield, and a payout ratio of less than 70%.The dividend is supported by stable cash flows of over $10 billion for mostrecent trailing twelve-month period.

Interest rates around the world are at historically low levels. Today,yields on 30-year Treasury bonds are approximately 1.35%, while 10-year Treasuries are around 0.75% (up from 0.4% just a few days ago). Negative interest rates are common throughout Europe and Japan. As such, we would not be surprised to see negative rates in the U.S., especially if economic conditions weaken materially. In a negative interest rate environment, banks would actually charge (as opposed to paying) depositors to hold cash.

It is in such low interest rate environments that we believe a well-diversified portfolio of dividend-paying stocks makes a lot of sense. Once rationality returns to the marketplace, we believe the shares of such companies should respond favorably.

Clearly the last several weeks have demonstrated that investing in stocks involves risk. However, in today’s uncertain environment, it should be remembered that owning a diversified portfolio of stocks at attractive prices has proven to be one of the best vehicles to build long-term wealth. We believe this trend will continue once the markets become more rational.

Should you have any specific questions or concerns, please contact your MAP representative.

 

Kindest regards,

Managed Asset Portfolios Investment Team

Michael Dzialo, Karen Culver, Peter Swan, JohnDalton, and Zack Fellows

March 13, 2020

Certain statements made by us may be forward-looking statements and projections which describe our strategies,goals, outlook, expectations, or projections. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those expressed or implied by such forward-looking statements. Data has been obtained from sources which we deem reliable but are in no way guaranteed by us as to their accuracy.

*All data courtesy of Bloomberg on 3/12/2020