Jennifer Radman is Portfolio Manager at Caldwell Investment Management. Her focus is U.S. equities.
ShawCor is a global leader in pipeline coating and benefits from the development of new oil and gas fields. 2013 will be a peak earnings year as two big projects in Asia come to an end. While liking the story beyond the short term, analysts are reluctant to put a “buy” on the stock given a declining backlog. We think this creates a buying opportunity as bidding activity is strong, which creates potential for the company to reach their record 2013 earnings in 2015. ShawCor is well-positioned to win large contracts in the growing deep-water pipeline segment as these projects are complex in nature and ShawCor has the reputation and experience to get the job done. Additionally, existing pipeline infrastructure is aging and will need to be replaced. Our cycle analysis suggests downside is limited using conservative assumptions for 2014, and shows compelling upside to the stock price should current bidding materialize into orders.
Varian Medical Systems
Varian Medical is the world’s leading provider of radiation therapy equipment, mainly used in cancer treatment. Revenue growth in the U.S. has been tepid, stemming from uncertainty in reimbursement rates and Obamacare, which have put investment spending by hospitals on hold. We think this is a temporary issue and creates a buying opportunity, as cancer rates continue to climb and a product refresh cycle looms. Outside of the U.S., growth is very strong and will likely continue as radiation equipment per capita is well below U.S. levels. A high ROE reflects the company's leadership position and competitive moat, and we like the fact that both revenue and earnings continued to grow throughout the recent recession.
ANN is a U.S. retailer that operates under the ANN Taylor and LOFT brands. Retail is a competitive industry and recent bad weather is creating additional challenges; the stock has come off on this and we see this as a good entry point. We like ANN as one of the more reasonably valued retailers. Merchandising is improving and seems to be in a good position for spring. We think the company is capable of stringing together a few good quarters of merchandising wins, which would increase the multiple/stock price. Good cash flow and a strong balance sheet supports the share price in the meantime.
Past Picks: January 11, 2013 (all figures in U.S. dollars)
Then: $42.02; Now: $56.98; Total return: +39.33 per cent
KKR & Co. L.P.
Then: $15.98; Now: $26.01; Total return: +76.78 per cent
Cisco Systems Inc.
Then: $20.48; Now: $22.23; Total return: +11.85 per cent
Total return average: +42.65 per cent
Many in our industry spend vast amounts of time and money trying to predict the future, often with limited success. The reality is that it is very difficult to predict, with consistency, which events will cause confidence to leave markets, and when. The best protection is to pay reasonable valuations for well-managed companies with strong balance sheets, as these are the companies that can withstand losses of confidence and are likely to emerge even stronger once confidence returns. Valuations are a big driver of investment returns and set the stage for how markets respond to stressful events. While market valuations still seem reasonable and unlikely to cause significant and permanent capital loss, the strong performance in markets has made it harder to find good opportunities. This speaks to the importance of having an investment process that allows us to focus on areas of the market where opportunities still exist. We do this through more concentrated portfolios and simply buying the best opportunities (versus using the benchmark as a starting point). Valuations/opportunities continue to look more compelling in more economically tied companies (especially versus yield plays) and we continue to see the U.S. market offering good value.