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
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
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."
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
Mills also owns Pfizer
He also owns out-of-favor biotech company Amgen
Another beaten-down company Mills likes is Baxter
For more from Karl Mills:
Fool contributor Jennifer Schonberger owns shares of Microsoft, but does not own shares in any of the other companies mentioned in this article. You can follow her on Twitter. Microsoft and Pfizer are Motley Fool Inside Value recommendations. Google is a Rule Breakers choice. Morningstar and Apple are Stock Advisor recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool has a disclosure policy.