Four Leading Stocks
An interview with Danton Goei
Portfolio Manager, Pan-Tribal Global Equity Fund
By Wallace Forbes
Danton Goei describes four stocks that he believes to be good value investments. Davis’s research process focuses on the elements that create a good, durable business, including first-class management, solid long-term earnings power and deep competitive moats; each of these stocks meet those criteria.
Danton Goei: Davis Funds has a tradition of investing with a global perspective. We built our long-term record in large part by investing in companies that do business both in the United States and abroad. As a research-focused investment firm specializing in equities since 1969, our mission has always been to focus first and foremost on finding the best risk/reward opportunities around the globe for our clients.
Davis Global Fund’s track record of outperforming over the long-term is a direct result of our investment process. Our research process focuses our analysis on the elements that create a good, durable business, including first-class management, solid long-term earnings power and deep competitive moats. And, we remain very disciplined about the prices we pay to buy them.
Davis Global Fund invests predominantly in leading U.S. companies, European multinationals and select businesses in Asia’s emerging markets. We consciously position the Fund as a diversified, all-weather portfolio.
We have identified a number of strong secular tailwinds that currently guide our investment choices, most notably: (1) the emergence of a global middle class, (2) favorable long-term demographics and (3) ongoing technological advances.
We are the largest investors in the Davis Global Fund. This alignment of interests shapes: our desire to generate returns and how we consider risk. It puts us in the same seat as the other shareholders in the Fund. We take the same risks and reap the same rewards as our clients.
Wallace Forbes: Very good. Discuss a few stocks that you like or think should be sold?
Goei: Absolutely. The first stock is Liberty Global (NASDAQ: LBTYA). Liberty Global is the largest European cable TV company. Its key markets are the U.K., Germany, Netherlands, Switzerland and Belgium. Liberty has lowered its operating, marketing and programming costs so it is in a very strong competitive position versus the public telephone companies.
We like that the average Liberty customer pays $68 a month versus the average cable customer in the U.S. pays $150 a month. This is important for two reasons. First, a big driver for the lower bill is that video is a much smaller business in Europe than it is in the U.S., which we like because video is at some risk from over-the-top video providers, such as Netflix.
Second, despite having the superior product in many markets, Liberty has been growing its share with a low-price strategy. In Germany, for instance, Liberty’s broadband offering is $20 less a month while offering three times the speed. This gives Liberty a lot of latent pricing power. Liberty is controlled by one of the all-time great capital allocators, John Malone.
Over the past eight years, Malone has made a number of smart acquisitions nearly tripling the revenue at Liberty Global, while also reducing the share count by 11%. That combination of strong growth and a lower share count is very powerful. Liberty’s global shares are attractively valued at 16 times 2015 and 13 times 2016 owner earnings.
The second stock is UnitedHealth Group (NYSE: UNH). UnitedHealth is the largest managed care organization in the U.S. Its large regional market shares give them the ability to get preferred pricing and network discounts, which they can pass on to customers and use to improve their profitability.
UnitedHealth’s scale, experience and brand have made it the leader in the hard-to-manage Medicare and Medicaid markets. Today, one-third of Medicare and Medicaid is outsourced. And this is growing as cost pressures push the government to turn towards the private sector to manage that spending.
UnitedHealth is also unique in that one-third of their business in not healthcare insurance at all. It is a very fast growing entity called, Optum. Optum has very well-run healthcare IT, pharmacy benefit manager and other services that together are growing over 20% per year.
We think the market is undervaluing Optum because it is overshadowed by the larger health insurance business. UnitedHealth has the deepest and most experienced management bench in the industry, led by CEO, Steve Hemsley. And UnitedHealth is attractively priced at 14.5 times 2015 owner earnings.
Forbes: That’s very interesting. Forbes is a UnitedHealth customer.
Goei: Is that right? We are as well. It’s a great company. We’ve followed it for a very long time.
The third stock I have is Encana (NASDAQ: ECA). Encana is Canada’s second largest natural gas producer with seven key properties in North America. Following the close of a recent acquisition, 70% of its production will be natural gas and 30% oil. And Encana has high-quality, dominant acreage in all seven of its core areas.
Three are emerging shale plays, the Duvernay and Montney shales in Canada. And the Tuscaloosa Marine Shale field in the U.S. Six of the seven areas are still in early stages of development. That means that production and cash flow growth will accelerate as Canada ramps up activity. In fact, we think production will grow in the mid-teens over the next five years. So very strong.
The CEO, Doug Suttles, joined in 2013 and quickly rationalized the company’s acreage portfolio from 28 territories to seven core ones, which has really increased focus and discipline. Encana is very attractively priced at nine times 2015 and seven times 2016 owner earnings.
Forbes: Sounds good.
Goei: Let’s discuss one more.
Berkshire was once known as mainly an insurance company and then for a portfolio of stocks picked by Warren Buffet and Charlie Munger. Today, it is really a collection of wonderful, wholly-owned businesses such as Burlington Northern Railroad and Mid-American Energy as well as the insurers such as GEICO and Gen Re. Under Warren Buffet’s strong leadership, the company has compounded book value at close to 20% per year on average, over the last 49 years.
Goei: We believe Berkshire is a financial powerhouse and well-positioned for continued, steady growth. Although it is somewhat slower paced, given its already large size, it is also one of the few companies that could create significant shareholder value should the economy and markets dramatically worsen by deploying its fortress balance sheet — like it did during the financial crisis.
Forbes: Do you think they have the management to take over when Warren Buffet, who’s no longer a kid, retires or otherwise leaves the picture?
Goei: They do. This has been one of the best management transitions I’ve ever seen, you know. They’ve been doing it over a long period of time. And they really have two wonderful portfolio managers in Ted Weschler and Todd Combs, to take over the portfolio side. And they have identified a CEO within the company to help manage the operations. And we think the culture that they’ve built is really going to last a long, long time. It’s a very strong culture that is more than any single person. And that’s going to provide a lot of continuity over the long term as well.
Forbes: Terrific. Danton, this has been extremely interesting. I appreciate you taking the time to share your thinking with us.