1 Brand Name Company To "Buy", And 1 Company To Aggressively "Buy"
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has been well reported that 4 out of 5 mutual funds underperform the market. I believe that this says a lot about the legitimacy of those who claim to have master "stock picking" abilities. Here is an instance where an organization is operated so that each member of the team carefully reviews an industry and a few companies to determine whether or not the portfolio should be "buying", "selling", or "holding". It sounds like a meeting of the experts and a perfect way to maximize efficiency. But if the results are simply not there then what does that say about the market? In my view, the efficient markets hypothesis largely explains why there is a lot of guesswork in stock picking. Much evidence points to stocks moving in a random walk. At the same time, I strongly believe that investors can back value plays along the edges and generate substantial returns. Below, I review the fundamentals of 1 brand name company that I believe you should have a small position in and 1 brand name company that I believe you sould have a large position in.
Kraft (NASDAQ: KRFT)
Over the last 12 months, this food producer has beaten the Dow Jones by nearly 1,200 basis points with a 13.9% return. The company offers a dividend yield of 2.9% while forecasted for solid 10.8% annual EPS growth over the next 5 years. At a forward earnings of 14.5x, Kraft falls somewhere between a light value investment and a defensive play. Analysts thus rate the stock a 1.8 out of 5 where 5 is a "sell", according to FINVIZ.com.
The company has started to shift its focus to the Middle East and China in order to revitalize interest in its snacks division. The Nabisco Arabia plant, which produces Oreo cookies and Ritz crackers, will be expanded in order to accommodate growing demand. It is, in a way, a supply-push measure to create demand. Management continues to attempt to try new launches in the Middle East - a trial and error method that has led to successful results. Cake-flavored Oreo cookies in China have, for example, demonstrated a willingness to experiment that many more conservative peers would steer away from. In the long term, I believe this is the chief way for a food business to develop its catalysts.
Assuming growth expectations are met and the company trades at a 17x multiple, the value of the stock in 2016 would be $64.12. Discounting backwards by 8% yields a present value slightly higher than the current valuation. Thus, I recommend only buying a light position.
Bristol-Myers (NYSE: BMY)
Unlike Kraft, Bristol is a very attractively priced stock with an impressive moat. While multiples are high at 15.9x forward earnings, the brand name firm offers a generous dividend yield of 4.1% and less than half of the volatility of the broader market. Analysts only anticipate 1.1% over the next half decade, which sets a very low bar for a firm that has taken off like a rocket over the past half-decade.
What is the reason for the pessimism? Just like other BioPharma players, Bristol will face a wave of patent cliffs. The first of which are exclusivity losses for Plavix and Avapro in 2012. This will be followed by exclusivity losses for Abilify and anti-infectives between 2014 and 2015. While Bristol comes across as a safe investment, it isn't clear how undervalued it is. Ultimately, if it grows 5% annually from the expected $1.87 EPS trough in 2013 and trades at a 15x multiple, the stock should be worth $30.90 in 2016. It is currently worth $34.73, so there will be downward pressure on the stock unless earnings momentum materializes.
There are several reasons to be optimistic about the fundamentals. Pipeline products, particularly cancer drug Yervoy and atrial fibrillation drug Eliquis, will offset generic competition. The company is also exploring the high-risk STD market, which will attract investors away from Gilead (NASDAQ: GILD). Onglyza, Yervoy, Sprycel, and Orencia provide a compelling lineup that few companies match. Speculation over each of their success will keep valuation elevated and allow for steady dividend income streams to come rolling in. Accordingly, I recommend buying a substantial amount of shares.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.