By John Elam
As the market continues to follow the unsure hand of European leaders, investors interested in more stability may consider trading on American indexes. While there may be more separation on this side of the pond from decisions by the European central bank, finding winners in today’s marketplace is anything but simple. Today, we will focus on the picks available to the public from legendary picker John Paulson, focusing on an Oil and Gas company, a discount retailer and three firms involved in the medical and healthcare professions. I received the data from Paulson’s 13F which shows these holdings.
Starting off with black gold, a perennial favorite of mine, TransOcean LTD (RIG) appears to offer investors significant potential returns on investment. While the stock has dropped to just below $42.00, from its peak at just below $60.00 in late October, investors were likely responding to the issue of new notes to repurchase previously issued commercial paper. The notes were issued in three stages, 5, 10 and 30 years, with rates ranging respectively from 5.07%, 6.382%, to 7.35%. While continued borrowing by the firm makes it appear dependent on the market for capital to operate, it appears that the market is willing to do so at a sustainable rate. Besides being involved within an industry with a demand curve that has historically been considered flat, the best thing that RIG offers investors is cash. As a dividend fan, investments that pay out significant sums quarterly, especially when alone they produce annual returns in excess of 7.5%, I become increasingly interested. While debt issues, and issues of regional and market stability plague many companies, and oil gas firms are certainly no exception, this firm has worked to mitigate some of these threats by investing in infrastructure around the world. While debt issues do continue to pester the firm, the value of its assets remain high, and substantial annual cash returns to investors make this firm a serious option in almost anyone’s portfolio.
After a significant sell-off at the end of July, Baxter International Inc. (BAX) has continued to experience substantial fluctuations, hitting its 52 week low at $47.69 in late November, only to pop back up over $52.00 a week later. With the fall in share value, investors interested in filling the healthcare quadrant of their portfolio might be interested in the dividend yield, currently at 2.69%. This figure is not jaw dropping, but it must be noted that the board of directors at BAX recently raised annual dividends by $.10, up to $1.34 per annum. Focusing on the most recent balance sheet, BAX shows substantial cash levels and significant inventory and current receivables, totaling its current assets at over $8 billion dollars. Beyond cash, net income was up a whopping 70% during the same 9 month period, from just over $1billion to $1.7billion. While other changes in cash flows during these periods lessen the total change in cash flow from operations, this is largely a result of a one time surcharge during the previous period, causing the costs to be displaced going forward. While potentially risky, I see value remaining in BAX, as its currently depressed stock price and willingness to pay dividends offer investors quarterly returns of some kind and a significant potential upside.
With the U.S. economy failing to demonstrate continued growth, and with unemployment remaining above 8.5%, more and more consumers may be forced to shop at discount retailers such as Family Dollar Stores Inc. (FDO). The 2010 fiscal year demonstrated some exiting changes and developments for FDO, especially in regard to store renovation and expansion. Specifically the chain aims to expand stores an average of 7%, and expects this goal to be reached in fiscal 2012, a full year ahead of its initial goal of 2013. Additionally the development and increase in sales of private brands increased 22%, a good sign, as the retailer's profitability is higher on these goods.
Looking at competitors in the industry, firms such as Dollar General Corporation (DG), Dollar Tree, Inc.(DLTR), and the behemoth Wal-Mart Stores Inc. (WMT) are all trading at or near their 52 week highs, an indication that investors have already made this move. While FDO offers an acceptable 1.3% annual return through dividends, there are other options with competitors and in other industries that are less priced out. If investors are looking for returns, WMT offers a dividend rate that is twice that of FDO, 2.5%, and while its size may mean there is less potential upside, all of the stocks mentioned are already pushing their 52 week highs. While certainly not a guarantee that the stocks are overvalued, it is a sign that in the last year, investors have not valued them at this level, a sign that I take to mean look elsewhere.
Trading just below its 52 week average at $35.52, Minneapolis based Medtronic, Inc. (MDT) is a heal science technology firm that appears to have some life itself. Financially, one of the upsides that is immediately obvious is that while revenue increased from $3.9 billion to $4.13 billion, total costs and expenses dropped from $3.15 billion to $3.08 billion year over year. While this $70 million difference is not insignificant, it is a result of litigation fees paid in 2010, totaling almost $280million, meaning that costs this increase during the quarter are almost equal to the total increase in revenue. The current dividend quarterly payout of $.24 cents per share totals an annual dividend yield of 2.73%, and is a significant upside to investors interested in cash flows from investments. The prospects for MDT appear positive.
Another global firm involved in the development and implementation of scientific devices aimed at human health is Life Technologies Corp. (LIFE). This firm has recently experienced some significant fluctuations, even as their fundamentals, while not overly exciting, remained balanced. According to the most recent balance sheet posted by LIFE, the firm is spending its cash reserves at a potentially alarming rate, $219 million in the nine months prior, and is down to just below 600 million in cash reserves. On the upside, the firm has worked to reduce its long-term debt stranglehold, from $2.7 billion to just below $2.3 during the same period. In recent news, new sequencing technology, Ion Personal Genome Machine, developed by LIFE, was recognized at the Connect award ceremony in San Diego CA as the most innovative new product. This is a good recognition to receive, however, this recognition does not guarantee new sales, something that LIFE desperately needs. While not fully convinced by LIFE, its current valuation, just above its 52 week low, at $38.74, does more than just casually interest me. While a dramatic increase in stock value seems unlikely at this point, the fundamentals behind LIFE are strong enough to likely prevent it from falling too much farther.