With the stock market displaying continued resilience and spirited strength, most investors are having difficulty picking stocks that still exhibit attractive value — and the capacity to stay ahead of the competition. And with the market undergoing the usual rotation in leadership, spotting sectors with staying power to advance have become even more challenging.
In previous months, buying into technology wasn’t only a safe bet but provided a big win. No longer. The group suddenly lost wind last week and pulled back due to many investors shifting gear to take profits from the leading tech sector and jumped into the sectors that had been lagging. How long the rotation will last is anybody’s guess, so it has added to investor confusion.
In the meantime, some savvy market analysts have come up with strategies to find winners in the currently tough market environment.
Stephen Leeb, president of Leeb Asset Management and editor of the market newsletter, The Complete Investor, believes in “thinking big” — that is, investing in the "giants that underpin the market.” He chooses to invest in shares of companies that he beieves are "dominant within their market," and whose "outsized heft,”offers reassurance that the market has a strong underpinning that will support it through all but the most drastic shocks.”
So Leeb has selected six stocks that, together, he says, constitute more than 14% of the S&P 500’s market capitalization: Google (GOOGL), a subsidiary of Alphabet; Apple (AAPL); Amazon.com (AMZN); Berkshire Hathaway (BRK.B); Facebook (FB); and Microsoft (MSFT).
On the other hand, Karen Wallace, equity analyst and close market watcher at Morningstar, has been focusing on the so-called Wide Moat stocks, which have strong competitive advantages — and trading at a discount to the fair-value estimates by Morningstar analysts.
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“Four of the 10 cheapest stocks in the Morningstar Wide Moat Focus Index are currently among our analysts’ highest-conviction picks,” said Wallace. They are Stericycle (SRCL), Walt Disney (DIS), Allergan (AGN), and Express Script (ESRX).
Stericycle, an integrated specialty waste hauler in the medical industry, is currently trading at $75 a share, which is about a 30% discount to Morningstar’s fair value estimate, noted Wallace. “It’s wide moat owes to its unmatched scale in medical waste collection, treatment, and disposal assets, which combine to create cost advantage and customer switching costs,” said Wallace in a recent note to clients Stericycle’s ability "to manage the entire disposal process has attracted a dense network of over 500,000 customers with an annual retention rate of over 90%,” she added.
Disney, the vast media conglomerate, operates "two distinct yet complementary businesses rolled into one,” noted Wallace. Its media network business, she pointed out, includes ESPN and ABC, while the Disney branded businesses include parks, filmed entertainment, and consumer products. Both segments have demonstrated “strong pricing power in the past few years,” said Wallace. Currently trading at $105 a share, Disney is trading at around a 20% discount to Morningstar’s fair value estimate.
Allergan, a specialty pharmaceutical company, owes its wide moat to an industry-leading portfolio of opthalmology and aesthetics, according to Wallace. These markets enjoy much higher barriers to entry, and lower risk of generic competition than most pharmaceutical products. Wallace pointed out that Allergan’s product portfolio is also broadly diversified, with only two products exceeding $1 billion in revenue: Botox and Restasis. Currently trading at around $244 a share, the stock isn’t far from its 52-week high of $261.27, but it still is selling at about a 20% discount to Morningstar’s fair value estimate.
Express Scripts is the largest pharmacy benefit manager with unparalleled supplier pricing power and scale advantages. “Due to the large number of adjusted claims processed, Express Scripts can negotiate favorable drug pricing with suppliers, which allows it to expand its client base by providing low-cost products, while at the same time preserving its gross margins,” said Wallace. Currently trading at around $63 a share, the stock is trading at about 24% below Morningstar analysts’ fair value estimate.
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