Kenneth Fisher is the founder and CEO of Fisher Investments. He has become a prestigious investor, not only for his strategy but also for writing articles in Forbes magazine and writing best sellers such as, The Only Three Questions That Count, The Ten Roads To Riches, How to Smell a Rat, and Debunkery. These books have been translated to Chinese, German, Indonesian, Japanese, Korean, Portuguese, Romanian and Thai. Furthermore, Ken was named one of the most influential people on Investment Advisor magazine's IA-30-30 list in 2010.
Furthermore, it has developed a tool that has become well known in the financial environment, the Price to Sales Ratio and now it is carrying out research on the field of behavioral finance. With his investment team it set up a school of equity style management, the domestic cap value equity, which is now important for institutional and retail investors.
According to Fisher's investment philosophy, the focus is on supply and demand because these two factors determine the price of securities. As Fisher puts it, "the way to add value is to identify information not widely known, or to interpret widely known information differently and correctly from other market participants."
I think it is interesting to analyze Kenneth Fisher's top holdings in order to generate seed investment ideas for further research. I consider that if a stock is top holding from a prominent portfolio manager such as Fisher, the company must have passed Fisher Investments high research standards, so my confidence level to invest goes higher.
Johnson & Johnson (JNJ) is one of the world's largest and most diverse health-care companies. It operates through three segments: pharmaceutical, medical devices and diagnostics, and consumer.
The pharmaceutical segment currently accounts for about 36% of the sales. However, the loss of certain patents and the acquisition of Synthes will probably drop the sale level to 27% in the years to come. Furthermore, the heath-care segments have enabled the company to face the downturns in the economy by offering growth opportunities.
Generally speaking, JNJ holds a diverse pipeline, which is led by drugs for pain, arthritis and cardiovascular disease. In terms of new drugs, Stelara will develop into a blockbuster by 2013 and will enable the company to strengthen its drug division. This is one of the reasons that Fisher is encouraged to keep his position.
In terms of quarter results, sales increased 3.9% in the quarter and 5.6% during the year. Revenue increased in the company's three segments given international growth. Drugs also boosted demand and Xarelto will expand in the quarters to come. Net earnings fell from $1.9 billion to $218 million and thus earnings per share dropped from $0.70 to $0.08. Net earnings came in at $3.1 billion, or $1.13 per share. Now based on these results, what can be expected for the future? Earnings per share are expected to be between $5.05 and $5.15 per share.
During Q4 selling, marketing and administrative expenses increased 50 basis points to 33.6%. Interest expense, net of interest income of $148 million was up $34 million and other expense net of other income was $2.9 billion. Excluding special items, taxes were 14.4% in the fourth quarter of 2011, bringing our annual effective tax rate to 20.1%.
I think one of the main reasons that Ken Fisher probably likes JNJ is that Remicade, the best selling drug at Johnson & Johnson, continues to outperform expectations, according to JNJ's 10-K. Contributing about 20.6% to pharmaceutical product revenues, the drug generated $5.5 billion sales in 2011, an increase of 19.1% compared to 2010. It is very interesting the deep possibilities that this drug has. Remicade has received approval for several indications including Crohn s disease, ankylosing spondylitis, psoriasis, psoriatic arthritis, ulcerative colitis and rheumatoid arthritis. Remicade growth is driven by strong demand in the rheumatoid arthritis market, as well as a significant unmet need in the Crohns disease and ulcerative colitis markets. Another point of growth for this drug is the approval for pediatric Crohns, psoriatic arthritis and chronic, severe plaque psoriasis.
Another interesting fact about JNJ is that several new products recorded strong growth during 2011. These include Prezista, Intelence, Velcade and Invega, with growth of 41.3%, 29.2%, 18% and 17.7%, respectively. In addition, drugs like Simponi and Stelara also hold promise of stellar success according to JNJ's last earnings conference call.
In terms of valuation, Johnson & Johnson's current P/E is 13.1, compared to the industry average of 12.7 and 13.9 for the S&P 500. Over the last five years, Johnson & Johnson's shares have traded in a range of 11.0x to 17x P/E earnings. If JNJ approaches a P/E of 13.5, which is not expensive, the shares could go to $69.
The story is solid because JNJ has been trying to offset the declining sales of some of its important products by bringing in new products through in-licensing deals and acquisitions. The diversity and strength of the company's underlying businesses is something that attracted Fisher Investments team.
BASF SE (BASFY.PK) is one of the world's largest chemical companies. Its portfolio is made up of chemicals, plastics, performance products, agricultural products, fine chemicals, oil and gas production and gas distribution. Now the company is changing its portfolio to include specialty chemicals and reduce commodity chemical exposure.
In the last period, BASF has made every endeavor to close acquisitions to improve the sale of its products. In addition, it has started making research work to outperform its peers as to product innovation in areas such as seed technology. I think Kenneth Fisher felt attracted by these innovation initiatives and its performance during the fiscal year.
In the second quarter sales increased by 30% amounting to 16.2 billion euros and EBIT before special items reached 2.2 billion euros, thus doubling the amount achieved in the year before. Chemical activities posted records in terms of sales and earnings. Management reported 1.2 billion euros in net income, a 15% increase from the prior quarter thanks to the higher income obtained from operations and a reduction in the tax rate.
I think Fisher go attracted to invest in BASF because its businesses even in challenging conditions were able to grow faster than the market. The competitive advantage of BASF is its Verbund (integrated production) concept, which generates strong operational performance and it is an activity proprietary of BASF. Under this concept, BASF utilizes the byproducts of one process as raw materials for another process, thus resulting in cost savings. It also applies this interconnectivity concept in other fields such as R&D, purchasing, and managing customer relationships, enabling it to improve its productivity.
BASF has an expanding business in strong emerging markets such as Brazil and the CEO keeps that focus as the main growth engine of the Company. The company is witnessing robust demand across most product lines, with a considerable rise in new orders, as management noted in the last conference call. The rising demand has also restored some pricing power in the industry, enabling BASF to institute long-awaited price increases. In the Construction Chemical division, sales are expected to double by 2015, witnessing a growth of 7% 8% per year. Increased shipment volumes are resulting in higher capacity utilization and consequently, better absorption of fixed overheads.
Oracle Corporation (ORCL) is the top provider of database software. In the market, Oracle represents 45% while its more fierce competitors, IBM and Microsoft account for 21% each.
Oracle is considered a company with plenty of room to expand. It has solid cash flow that has remained in 31% for many years. Although based on revisions, EPS is expected to be at -2.7%, forecasts state that it will grow by 5.9% to $2.35 in 2012 and then by 9% and 10.5% more in the following two years. For 2013, EPS is expected to be at $3.55 and the stock at $36.60.
I think that Fisher invested in ORCL because the Company is the indisputable leader in the enterprise database market. The Company should be positively exposed to a recovery in enterprise demand. Oracle surely will benefit from the growth in the worldwide enterprise software market, which is expected to increase 9.5% year over year to $267.0 billion in calendar year 2011, according to research firm Gartner. This growth rate will likely be sustained in calendar year 2012 as well, given that the revenue forecast for the year is $288.0 billion, which is an increase of 8.0% from 2011. That growth is expected to be driven by increasing enterprise infrastructure software spending, with operating systems (OS) and database management systems being the fastest growing segments.
Moreover, worldwide enterprise application software spending is estimated to increase 10.2% year over year in 2011, with Enterprise resource planning (ERP) being the largest segment. I think that Fisher expects Oracle to sustain its growth in 2012 based on its superior industry offerings, data quality and integration tools, database customer relationship management, and supply chain management products. The Company has a superb management team that should drive innovation and growth.
Oracle shares are up 10.31% year to date compared to a 7.6% increase for the S&P 500. Oracle reported disappointing last quarter 2012 results, which dragged down the shares approximately 10.0% from the closing price of $28.62, as of December 19, 2011. Currently, Oracle shares are trading with a P/E of just 11.6x, a discount to the peer group average of 44.6x and S&P 500 average of 16.9x. In terms of valuation, ORCL is trading in the low end of the historical range of 10.5x to 22.2x earnings, so there is a possible undervaluation here.
The stock is trading at 11.2x Zack's 2012 EPS estimate, a 78.2% discount to the peer group average of 51.4x, much greater than the average discount of 59.6% historically, indicating the possibility of upward movement. ORCL could experience some earnings deceleration but the Company is solid and I think that Fisher made a good long term pick.
Amazon.com Inc (AMZN) is the highest-grossing online retailer in the world. Outside the United States, Amazon operates in many countries such as Canada, the U.K., Germany, France, Austria, Japan, and China.
As it has been said, Amazon is one of the most important e-commerce companies across the globe. Although its flagship is books, the company has diversified its portfolio to include other categories. A superior user experience, bargains and customer feedback have improved the company's position in this fast-growing market.
Amazon launched its Kindle, an e-book reader. This launch should bring incremental sales during the season. This is a good strategy, particularly to address those consumers who like this type of products but do not want to pay too much. Also, it keeps AMZN growing in the key segment of digital books.
In terms of international presence, the company is increasing its operations given the increasing demand of customers. The international segment is one of the strongest, with double-digit-growth year over year. The Electronics and General Merchandise segment has significantly helped the company with a growth rate of more than 50%. Furthermore, Amazon has introduced new products in international markets to boost demand. Media growth rates improved too.
Financially speaking, Amazon generates strong cash flows. Despite the economic recession that has affected every industry Amazon has been able to generate a double digit rate since 2008 and has been able to maintain its operating margins in a stable level. This ability to avoid severe fluctuation in gross margins can be attributed to a flexible operating cost structure which enables the company to cut expenses. Furthermore, the company holds a solid balance sheet with cash and short-term investments of $6.35 billion and no debt. Cash flows increased 94% in 2009 and another 6.1% in 2010.
In terms of valuation, Fisher is not picking the cheapest tech stock. AMZN P/E is 98.9x, compared to the 45x average for the comparable industry and 16.2x for the S&P 500. In other words, the company is currently trading at a significant premium to both the peer group and the S&P 500. Over the last five years, AMZN traded in a very wide range of 29x to 117x trailing P/E. The average discount for the historical period is 5%, which seems not to represent a solid margin of safety.
However, Amazon continues to see very strong demand and traffic to its sites remains very strong. I believe this has been made possible by the range of offerings and superior user experience it offers. As a result, Amazon s earnings power is higher than both the peer group and the S&P 500.
Disclosure: I am long JNJ, BASFY.PK, ORCL, AMZN.