By Philip van Doorn, MarketWatch
Michael Kagan of ClearBridge Investments outlines quality retail, medical and packaging companies
The COVID-19 pandemic has taken the U.S. economy from near-record-low unemployment to mass layoffs and firings.
It's too soon to predict a rebound, but there are quality companies available now at discounted prices, setting up money-making opportunities for patient investors. Michael Kagan of ClearBridge Investments provided three examples.
Kagan co-manages the $5.1 billion ClearBridge Appreciation Fund . The fund's Class A shares are rated four stars (of five) by Morningstar. ClearBridge is a subsidiary of Legg Mason based in New York with $155 billion in assets under management.
Here are the three companies Kagan discussed in detail during an interview on April 3:
Company Ticker Total return - 2020 through April 2 Total return - 2019 Total return - 3 years
TJX Cos. US:TJX -33% 39% 10%
Medtronic PLC US:MDT -24% 27% 14%
Ball Corp. US:BLL -4% 42% 74%
Kagan was quick to say he thought investors were going to see another significant decline for stocks.
"Compared with previous recessions, this is a mild decline for the stock market," he said. If you look back to the end of 2018, the S&P 500 Index is up slightly, with reinvested dividends. "Given the implications for small business, color me skeptical about us being at a bottom," Kagan added.
Here are his comments about the three companies listed above:
TJX (TJX) operates T.J. Maxx stores, along with Marshalls and Home Goods. It is the largest off-price retailer and "is the only one of the top 10 retailers that has been adding footage in recent years," according to Kagan. "It's one of those companies that gets expensive when everyone is enthusiastic about it. Every so often the market gives you and opportunity to buy it, and this is one of them."
Getting back to TJX, Kagan said the company turns over its retail merchandise 11 times a year, "unlike most traditionally retailers, who change inventory twice a year." He added that TJX's buyers are "fantastic" at making selections that bring customers back frequently to see what's new. "You can get great brands like Prada there," he said.
The obvious question for any retailer, while stores are closed, is how long can the company survive? According to ClearBridge's retail industry analyst, TJX has a strong enough balance sheet to operate for 14 months "without selling anything," Kagan said.
Once the stores reopen, Kagan sees TJX as "recession-proof," because the "comparable items on the internet are going to be more expensive."
Medtronic (MDT) makes medical devices, including pacemakers, surgical devices, implants and diabetes pumps. The stock is down 24% this year, in part because these products are expensive, "and you don't use their products unless you need to," Kagan said. So the recessionary environment, the delay in elective surgeries as health-care providers focus on COVID-19 and fear of going to a hospital are all combining to hurt sales.
So Kagan sees another buying opportunity in Medtronic. "They have a 2.5% dividend yield, and that they will not cut," he said.
Ball Corp. (BLL) is one of the largest manufacturers of aluminum packaging. Kagan said: "The stock is up from its bottom, but if it goes down again, I would add [to holdings]."
Here's a 12-month price chart through April 3:
"Demand for [aluminum] has cratered, but if you are a can maker, not so much. Ball Corp. is "a big player in the elimination of plastic bottles," Kagan said. He went on to tell a story of a trip in November, where he noticed that at San Francisco International Airport, "when we bought bottles, we could only buy aluminum."
California is phasing in a ban on single-use plastic bottles, and Kagan expects other states to follow. "You are going to see the category convert. Single-use will go to aluminum," he said, because recycling aluminum is easy and profitable.
Kagan said Ball Corp. has a "rock solid balance sheet, with net debt to equity of 20%," and that he expects compounded annual earnings growth of 15% over the next five years, with sales "increasing in the high single digits."
Kagan said it was clear that "business models that are based on the internet have demonstrated that they work," and that the coronavirus crisis means "a company like Amazon.com (AMZN), as dominant as they were before, becomes more dominant."
ClearBridge holds shares of Amazon in its Appreciation Fund, and Kagan said he and colleagues were "happy to play" along with the cloud business trend, even though shares of many of the companies are expensive and the fund is "conservative." The Appreciation Fund also holds shares of other cloud players, including Microsoft (MSFT), its largest holding, Adobe (ADBE) (described as "another big bet" by Kagan) and Salesforce.com (CRM).
Here are the top 10 holdings of the ClearBridge Appreciation Fund as of Dec. 31:
-Philip van Doorn; 415-439-6400; AskNewswires@dowjones.com
Company Ticker Share of portfolio Total return - 2020 through April 3 Total return - 2019 Total return - 3 years
Microsoft Corp. US:MSFT 6.8% -2% 58% 147%
Apple Inc. US:AAPL 4.1% -18% 89% 76%
J.P. Morgan Chase & Co. US:JPM 3.8% -39% 47% 5%
Berkshire Hathaway Inc. Class B US:BRK.B 3.4% -21% 11% 7%
Comcast Corp. Class A US:CMCSA 3.1% -24% 34% -4%
Visa Inc. Class A US:V 2.9% -19% 43% 73%
Facebook Inc. Class A US:FB 2.7% -25% 57% 8%
Home Depot Inc. US:HD 2.4% -18% 31% 31%
Alphabet Inc. Class A US:GOOGL 2.4% -18% 28% 28%
Merck & Co. Inc. US:MRK 2.4% -15% 22% 31%
Sources: ClearBridge Investments, FactSet
(END) Dow Jones Newswires
April 11, 2020 13:51 ET (17:51 GMT)
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