With last week's tumultuous events, volatility is back with a vengeance in the markets. But Karl Mills, president and chief investment officer of Jurika, Mills & Keifer, says he thinks the selling seems overdone for a number of good companies.
As such, Mills, who manages the Counterpoint Select fund, which has a four-star rating from Morningstar, says that last week's pullback could be a good time for investors to upgrade their portfolios. "Go from small to large, go from lower quality to higher quality, and focus on companies that are going to be less economically sensitive and should be able to generate good organic growth," he said in an interview.
Favorite sectors and companies
Right now, Mills says he favors the technology and health-care sectors.
"Although we're known as contrarians, our favorite sector is still technology," he said. Mills says the sector is in the midst of a big wave of innovation that creates a tailwind. Companies have repressed spending on technology for the past two years and need to catch up now. Technology also allows companies to increase productivity at lower costs without hiring people.
What's more, tech companies are tremendously well- capitalized. "Many of them are sitting on enormous piles of cash, and can weather any kind of credit storm," Mills said. They're also not under a regulatory cloud, like financial services and health care. And key to the investment thesis is that they're not that expensive. "They're selling at 14 to 15 times [next year's] earnings -- sometimes less than that, which is cheaper than most of the stock market. They also have better growth."
"So, you have companies that are actually growing faster, with better balance sheets, selling at more attractive valuation," Mills added.
Mills says he thinks the biggest value player in technology right now is Qualcomm (Nasdaq: QCOM). The digital wireless telecommunications company has, in Mills' words, "destroyed" investor confidence through poorly managed investor relations in which management constantly raises and lowers guidance. However, he maintains the company owns a large amount of third-generation intellectual property and 3G and 4G technology. "They're right in the epicenter of this wave of smartphones and smart devices. They get paid some amount no matter what device you buy. ... [W]e think there's a lot of value at this price ... and they really should have the ability to grow double digits."
Cisco (Nasdaq: CSCO) is his next pick. The company reported about $40 billion in cash and short-term investments back in January, and Mills calculates that data consumption is growing 100% per year. For instance, as consumers move from using their phone for talking to using their phone for taking and uploading videos, there will be greater and greater amounts of data needed for transfer. That means more advanced technological infrastructures will be needed to process that data.
That's where Cisco comes in. As more companies invest in technological infrastructure, Cisco should benefit from that build-out that is expected to play out over the near to longer term.
Mills also favors Microsoft and Google. Microsoft is a value play. Mills also points to the current software upgrade cycle with Windows 7, which greatly benefits Microsoft.
Google has come down in value, Mills says, to trade around 16 times next year's earnings. As with many of the other tech companies, he favors Google's hefty cash stockpile. "All these companies have unique franchises," Mills said. "It's very hard to duplicate what they do in their space. They're benefiting from the trend of advertising, which is going from print to electronic form. I think if anybody's going to provide the antidote to Apple (Nasdaq: AAPL), it'll probably be Google."
Speaking of Apple, Mills says he does not think it's overvalued. Analysts' consensus is for Apple to earn $15 per share next year, meaning that shares trade around 16 times next year's earnings based on Friday's close. Back out the cash on Apple's balance sheet, Mills argues, and "the company is actually selling at a pretty attractive valuation for its potential growth rate. It's not the cheapest stock in the drawer, but it's [cheap] for the quality of the franchise."
Health-care picks
While this sector has been submerged under a cloud because of the recent health-care bill, Mills says he thinks the cloud is lifting now that reform has passed. His largest holding in this space is Israeli generics company Teva Pharmaceutical (Nasdaq: TEVA). "We think that they're uniquely well positioned because of the pressure on bringing health care prices down, and because a lot of major drugs are coming off patents," Mills said. "There's a global growth story -- the demand for health care is only going to increase."
Mills also owns Pfizer (NYSE: PFE). "It's kind of a turnaround story," he said. The company closed its merger with Wyeth late last year, which should improve Pfizer's pipeline, which is vital since the company's blockbuster drug Lipitor is set to go off patent next year. "You have a company that now has the ability to achieve pretty good cost savings, has improved their pipeline, and is selling at seven and half times [next year's] earnings with over a 4% dividend yield," he said. "That is pretty attractive to us."
He also owns out-of-favor biotech company Amgen (Nasdaq: AMGN). The stock has been pushed down on concerns about its anemia drugs. Also, a lot is riding on its new osteoporosis drug Prolia, on which the Food and Drug Administration expects to complete its review later this year. However, Mills says, he thinks a lot of the downside is reflected in the price of the stock.
Another beaten-down company Mills likes is Baxter (NYSE: BAX), which is having difficulties with one of its infusion pumps. "It's an example of a company that actually has a lot of economic power relative to the size of the issue because the actual pump remediation issue is probably a pretty small event in terms of the numbers," he said. Mills says the company should have the ability to earn $4 to $5 per share for the fiscal year in the next few years and that Baxter has an improving pipeline. "It's a stock that's likely to be a long-term patience holding."
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