Murray Stahl is the Chairman of the Board of Horizon Kinetics. He was also a co-founder of the firm. He has over 30 years of investing experience and now oversees the Horizon Kinetics Research Team. Murray Stahl also works as chairman of the firm's Investment Committee, which is responsible for each and every portfolio management decision.
In the past, Murray Stahl had spent 16 years at Bankers Trust Company, serving as a senior portfolio manager and as a research analyst. As one of the senior fund managers, he had the responsibility to invest the Utility Mutual Fund, together with three of the bank's Common Trust Funds: The Utility Fund, the Special Opportunity Fund and the Tangible Assets Fund. Moreover, he was also a member of the Investment Strategy Group and the Equity Strategy Group, which created guidelines for asset allocation for the Private Bank. Around 1994, Mr. Stahl managed nearly $600 million in trust and fund assets and was considerably involved in product development.
Murray Stahl received his BA and MA from Brooklyn College as well as an MBA from Pace University. Furthermore, he has been rated as one of the smartest investors in the world. His excellent pickings of stock and investment have now established new rules for investors to follow in order to beat the market.
His holdings, which can be seen in the SEC Edgar website, evidence that he is now quite skeptical about the earning power of many U.S. companies. In addition, Mr. Stahl is unenthusiastic about emerging markets, mainly because he thinks that risk outweighs returns. Horizon Asset Management's investment philosophy is focused on mitigating risk and believes in locating, evaluating and prioritizing risks for clients. This course of action prevents an unfortunate impact to a considerable degree. Investment philosophy at Horizon does lay strong emphasis on the use of resources to address uncertainties in the financial markets.
In today's economic conditions, risks have become part of financial markets and investing. Horizon's methods are usually based on deep market research and employ resources that help to elude the risk or reduce the negative implications of a particular risk.
From the investor's perspective, I believe it is interesting to focus on stocks that are large holdings in Stahl's portfolio. By analyzing them, I found some reasons why Murray Stahl could have been convinced to invest. I usually look for companies that I can understand, especially companies with beneficial long-term prospects, operated by competent people and, most importantly, available at accessible prices.
Marsh & McLennan Companies Inc. (NYSE:MMC)
Based in New York, this company is a worldwide professional services firm providing risk consulting, risk and insurance services as well as employee benefits consulting services to clients around the world. MMC is a market leader and has a high brand recognition in all three of its business segments. Its quick growth is primarily attributed to its aggressive merger and acquisition strategies. This company conducts business mainly by means of two operating segments: Risk and Insurance Services (54%) as well as Consulting (46%).
One reason that leads me to believe that Murray Stahl invested in Marsh & McLennan is its constant earnings growth and enhanced operating cash flow keeps supporting debt reduction and capital deployment effectively. While operating a cash flow drastically escalated to $995 million in the first 9 months of 2011 from a mere $50 million in the previous year, the company's net debt has been reduced to $1.2 billion by the end of the third quarter of 2011 from $1.3 billion in the year-ago period. In addition, Marsh & McLennan has refinanced its debt portfolio in the second half of 2011 with the purpose of extending its maturity ladder and lowering its risk profile, while also reducing its annual interest expenses by approximately $45 million during 2010 and de-leveraging its balance sheet.
Murray Stahl must have also been attracted by the fact that, in August 2011, the company gave authorization for a share repurchase program amounting to $500 million, which thus expanded the previous share repurchase program of $500 million granted in September 2010 without any time limitations. While the company did repurchase 4.4 million shares for $126 million, it had about $553 million of stock available to be repurchased by September 2011.
Furthermore, stock buybacks are expected during 2011, since next near-term debt maturity is merely a $250 million note due in March 2012. In addition, the company's unutilized $1 billion 5-year revolving credit facility, which was renewed in October 2011, together with its expected tax benefits in the forthcoming quarters, is likely to provide a cushion for the company's liquidity, considering that its core operations are not capital-intensive. Even a 10%-dividend appreciation within a year has helped to boost its shareholders confidence.
Furthermore, Mr. Stahl must have contemplated that Marsh & McLennan focuses on cost-reduction and expense-management. Over the last years, it has been pursuing cost-saving efforts by divesting redundant units as well as acquisitions and moderating its expenses on compensation and benefits, among other operations. This, in turn, has helped the company to improve its organic growth and operating leverage. During 2009, it also retrenched thousands of employees and decided to sell the whole Kroll unit.
It has also right-sized its business through the sale of its Putnam and Kroll units, mainly in order to concentrate on its corporate restructuring, core insurance broking and reinsurance businesses. Stahl's decision to invest must have been based on the premise that such actions are expected to generate cost efficiencies that amount to $100 million. I think that the economic recovery is currently expected to be the main growth driver. However, an additional couple of positive quarters should raise the visibility of future earnings and dispel much of the uncertainty surrounding the stock for investors.
MMC's Current Net Profit Margin is 8.62, currently higher than its 2010 margin of 8.10. I like Companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Its Current Return on Equity is 16.99. It is lower than the 20% standard I look for in companies I invest in, and higher than its 2010 average return on equity of 14.70.
In terms of income and revenue growth, MMC has a 3-year average revenue growth of 0.02. Its Current Revenue Year over Year growth is 9.25, higher than its 2010 revenue growth of 7.31. The fact that revenue increased from last year shows me that the business is performing well. The current net income year over year growth is 16.14, lower than its 2010 average of 276.65. I do not like it when current net income growth is less than the past year. I look for Companies that increases both profits and revenues.
In terms of valuation ratios, MMC is trading at a Price/Book of 3.0x, a Price/Sales of 1.5x and a Price/Cash Flow of 10.4x in comparison to its industry averages of 2.4x Book, 1.4x Sales and 12.1x Cash Flow. It is essential to analyze the company's current valuation and check how it is trading in relation to its peer group.
In terms of valuation, I expect that Marsh & McLennan will benefit from its operational enhancement plans, including international expansion, organizational structure reorganization and continuation of disciplined expense management. Nonetheless, such positives are offset in part by higher expenses and lower margins from the consulting division on account of the slow market recovery.
The most recent acquisitions are consequently crucial for new business generation and client retention, which have faced considerable declines on account of the company's antitrust litigation charges, in addition to a soft pricing environment. However, its management seeks to produce long-term growth by keeping low capital requirements, generating high levels of cash as well as reducing the company's risk profile. Furthermore, healthy capital deployment by means of dividends as well as the share buyback program are expected to boost confidence among investors.
MMC does have a considerable amount of debt on its balance sheet, yet leverage is still reasonable, at 2.3 times at the end of 2010. Its cash position is in reality more than half of its debt load, while the business is comparatively stable, which serves to mute any concerns.
Rowe Price Group Inc. (NASDAQ:TROW)
T. Rowe Price Group Inc. is a worldwide investment management organization that offers a wide array of mutual funds, sub-advisory services as well as separate account management for institutional and individual investors, financial intermediaries and retirement plans. By means of its subsidiaries, TROW manages separate fixed income, client-focused equity and balanced portfolios together with mutual funds. Its client base includes defined contribution retirement plans, individual and institutional investors and third-party distributors, among a few others. It generates most of its revenue with two main segments: Administrative Services (13%) and Investment Advisory (87%).
Why did Mr. Stahl invest in T. Rowe Price? The company has remained debt-free with considerable liquidity including cash as well as mutual fund investment holdings of more than $1.7 billion. This has helped to strengthen its capital leverage and to generate a ROE that is significantly higher than the industry average. Such growth-drivers have also paved the way for an admirable industry-leading dividend yield, which has thus generated considerable investor confidence and a scope for investment as well as growth opportunities in the future.
When deciding whether to invest, Stahl must also have considered that, while the worldwide financial crisis has led to a fall in growth metrics, the company has been able to maintain positive earnings during the most critical period. Such positive operating leverage was assisted by a robust brand, a solid investment track record and high business volumes. Going forward, in addition, the combination shift toward international growth funds is expected to help raise both the revenue and investment management margins of this company.
The Current Net Profit Margin of TROW is 28.02, currently lower than its 2010 margin of 28.28. I do not like it when companies have lower profit margins than the past. That could be a reason to analyze why that happened. Its Current Return on Equity is 22.92. It is higher than the 20% standard I look for in companies I invest in, and higher than its 2010 average return on equity of 21.67.
In terms of income and revenue growth, TROW has a 3-year average revenue growth of 9.09 and a 3-year net income average growth of 16.36. Its Current Revenue Year over Year growth is 16.05, lower than its 2010 revenue growth of 26.76. I do not like it when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. The current net income year over year growth is 15.03, lower than its 2010 average of 55.03. I do not like it when current net income growth is less than the past year. I look for Companies that increases both profits and revenues.
In terms of valuation ratios, TROW is trading at a Price/Book of 4.6x, a Price/Sales of 5.9x and a Price/Cash Flow of 17.2x in comparison to its industry averages of 1.4x Book, 2.7x Sales and 11.7x Cash Flow.
With no debt, nearly $1 billion in cash as well as cash equivalents and another $765 million being invested in sponsored mutual funds by the end of the fourth quarter in 2011, the company is in a strong financial shape. It spent $480 million in 2011 to repurchase 8.7 million shares of common stock. Furthermore, it paid out more than $325 million in dividends. Therefore, I expect the firm to continue returning a significant portion of earnings to shareholders by means of common stock repurchases and dividends.
Affymetrics Inc. (NASDAQ:AFFX)
Affymetrix is one of the leading providers of microarray-based products and services to the worldwide research community. This company uses its DNA-chip technology in gene expression, clinical application and analysis and to assist in the treatment of cancer, infectious diseases, and other illneses.
Affymetrix can offer an extensive suite of products mainly targeted at two applications: gene expression and genotyping. The company's product revenues encompass consumables as well as instrument sales. It can offer instrument systems under three different product families: GeneTitan, GeneChip and GeneAtlas. In addition, Affymetrix provides a series of gene expression assays (which are targeted at low-to-mid multiplex markets) as well as reagent kits.
I think that Murray Stahl trusted in Affymetrix's stock because it pursues certain strategies (which include expansion into new high-growth markets) with a view to expanding its top-line products. It is now shifting its R&D focus from exploration and markets to the faster-growing routine testing and validation markets, which are expected to assist in future revenue growth. The company expects revenues from routine testing and validation markets to grow from an estimated 25% of its total sales in 2011 to a 45% during the next three years.
In addition, it recognizes cancer and cytogenetics research as areas that are promising for expansion, since they represent market opportunities of nearly $500 million and $200 million, respectively. Affymetrix has also made efforts to bring stability to its expression business, which amounts to nearly 45% of its sales. Furthermore, this company estimates that its genetic analysis and clinical diagnostic business (35% of its sales) will rise at least 20% during 2012, driven by its cytogenetics efforts as well as increased traction of the company's Axiom genotyping platform.
Also, I believe that Murray Stahl was allured by the reality that, in an important move, Affymetrix embarked into a specific agreement with Fischer Scientific Inc, a unit belonging to Thermo Fisher Scientific (NYSE:TMO), in order to face the distribution of the GeneAtlas system, its premium microarray solution, in the United States and Canada. This agreement allows Affymetrix to leverage Fisher Scientific's leadership in such life-sciences industry so as to expand sales in its research markets.
In the most recent quarter, Affymetrix also signed a Memorandum of Understanding with BGI, a leading genomics center, to develop jointly and commercialize microarrays related to genotyping analysis. Such cooperation seeks to develop and market a series of plant, crop, and livestock microarrays with a view to broadening the use of molecular tools in agriculture. Furthermore, Affymetrix has inked an exclusive licensing agreement with Genisphere to utilize Genisphere's proprietary FlashTag reagents together with its miRNA GeneChip arrays.
The Current Net Profit Margin of AFFX is -10.53, currently lower than its 2010 margin of -3.29. I do not like it when companies have lower profit margins than the past. That could be a reason to analyze why that happened. Its Current Return on Equity is -9.91. It is lower than the 20% standard I look for in companies I invest in, and lower than its 2010 average return on equity of -3.46.
In terms of income and revenue growth, AFFX has a 3-year average revenue growth of -13.29. There is no information on its 3-year net income average growth. Its Current Revenue Year over Year growth is -13.93, lower than its 2010 revenue growth of -5.00. I do not like it when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. There is no information on its current net income year over year growth.
In terms of valuation ratios, AFFX is trading at a Price/Book of 1.1x, a Price/Sales of 1.1x and a Price/Cash Flow of 7.5x in comparison to its industry averages of 2.7x Book, 1.9x Sales and 13.7x Cash Flow. It is essential to analyze the company's current valuation and check how it is trading in relation to its peer group.
As regards valuation, Affymetrix leads the field in gene-expression technologies. I believe that the company's strategic cooperation, new products as well as shift of focus towards high-growth markets do represent positive steps for a future revenue growth. Nevertheless, Affymetrix operates now in a highly competitive industry and is facing risks related to lower R&D spending by the company's customers, mostly in Europe and North America. Although the company is in fact diversifying by means of acquisitions, this strategy inherently has execution and integration risks.
Alkermes plc (NASDAQ:ALKS)
Alkermes is a completely integrated global biopharmaceutical company with a well diversified product portfolio (including more than 20 products) as well as a robust pipeline. The company is mainly focused on developing therapies in order to treat disorders like schizophrenia, addiction and depression, all of which attack the central nervous system. The most important marketed products by Alkermes include Xeplion (schizophrenia), Risperdal Consta (bipolar disorder and schizophrenia), Vivitrol (opioid and alcohol dependence), Bydureon (type II diabetes) and Ampyra/Fampyra (enhancing walking ability for multiple-sclerosis patients).
It is my belief that Murray Stahl researched the fact that, following the company's merger with Elan's EDT unit during September 2011, Alkermes has managed to strengthen its product portfolio and its pipeline. Alkermes' revenues have risen 185.7% in the third quarter of fiscal 2012 by reason of its larger product portfolio, which has caused management to raise its 2012 revenue projection. Revenues are estimated at $370-$400 million, up from $350-$380 million. On account of the larger product portfolio, I believe the company will accomplish this increased guidance. Therefore, the average analyst estimate of $385 million is well above the company's guidance range.
In Murray Stahl's investment thesis, he must have contemplated that the company's pipeline has expanded considerably after the merger. Candidates at Alkermes include ALKS-33 (phase II) for multiple indications, ALKS-37 (phase IIb data expected around mid 2012) for opioid-induced constipation, ALKS-5461 (a mix of ALKS-33 and buprenorphine) for cocaine dependence (phase II) and major depressive disorder (phase II, data expected in the first half of 2013) ALKS-9070 (phase III initiated in December 2011 with data expected in expected mid 2013) for treating schizophrenia and Zohydro (a new drug expected to be filed soon with the FDA). The development and marketing of these candidates should boost the company's top line considerably.
The Current Net Profit Margin of ALKS is -24.40, currently lower than its 2010 margin of -22.23. I do not like it when companies have lower profit margins than the past. That could be a reason to analyze why that happened. Its Current Return on Equity is -11.32. It is lower than the 20% standard I look for in companies I invest in, and lower than its 2010 average return on equity of -9.35.
In terms of income and revenue growth, ALKS has a 3-year average revenue growth of -8.13. Its Current Revenue Year over Year growth is 4.69, higher than its 2010 revenue growth of -45.45. The fact that revenue increased from last year shows me that the business is performing well. There is no information on its current net income year over year growth.
In terms of valuation ratios, ALKS is trading at a Price/Book of 2.5x, a Price/Sales of 5.9x and a Price/Cash Flow of -192.3x in comparison to its industry averages of 4.8x Book, 5.4x Sales and 26.28x Cash Flow. It is essential to analyze the company's current valuation and check how it is trading in relation to its peer group.
One point Murray Stahl found in the valuation is that Alkermes' revenues have risen 185.7% in its first full quarter after the EDT merger on account of its larger portfolio. I am also impressed by the FDA's approval and the launch of type II diabetes treatment Bydureon at the beginning of this year. This drug does offer a considerable market potential. Going forward, I expect that investor focus will be on its performance seen in the United States. I find a limited upside potential until more visibility is attained as regards Bydureon's performance in the US.
Cubist Pharmaceuticals Inc. (CBST)
Cubist Pharmaceuticals, Inc. is a bio-pharmaceutical company that is focused on the research, commercialization and development of pharma products that tackle unmet medical needs in an acute care environment. In the U.S., Cubist commercializes CUBICIN, the first antibiotic of a new class of anti-infectives that are called 'lipopeptides'. The Cubist product pipeline encompasses the lipopeptide program as well as the natural products screening program. The company's headquarters are in Lexington, MA.
I am positive that Mr. Stahl had to bear in consideration that Cubicin, which is the firm's only commercialized product, has managed to drive revenue growth for the past six years. This intravenous antibiotic primarily targets methicillin-resistant infections of staphylococcus aureus, recently spread considerably throughout hospitals and communities. Cubicin has certain advantages over its competitors. Vancomycin, today's standard of care, requires drug-level monitoring as well as twice the dosage of Cubicin. Zyvox, another first-in-class agent, merely inhibits bacterial growth, whereas Cubicin obliterates bacteria. Such attributes allow Cubicin to conquer portions of the inpatient and the outpatient market.
Another factor that is likely to have convinced Murray Stahl is that Cubicin has dispelled some uncertainty on its Cubicin franchise with the settlement of its patents with the generic drug giant Teva, which will protect such franchise until 2018. Although the Federal Trade Commission could in fact sue or another generic firm could decide to challenge Cubist, this company will still enjoy several more years of cash flow thanks to Cubicin.
The Current Net Profit Margin of CBST is 4.38, currently lower than its 2010 margin of 14.82. I do not like it when companies have lower profit margins than the past. That could be a reason to analyze why that happened. Its Current Return on Equity is 4.51. It is lower than the 20% standard I look for in companies I invest in, and lower than its 2010 average return on equity of 16.63.
In terms of income and revenue growth, CBST has a 3-year average revenue growth of 20.25 and a 3-year net income average growth of -36.32. Its Current Revenue Year over Year growth is 18.46, higher than its 2010 revenue growth of 13.22. The fact that revenue increased from last year shows me that the business is performing well. The current net income year over year growth is -64.99, lower than its 2010 average of 18.50. I do not like it when current net income growth is less than the past year. I look for Companies that increases both profits and revenues.
In terms of valuation ratios, CBST is trading at a Price/Book of 3.4x, a Price/Sales of 3.6x and a Price/Cash Flow of 13.4x in comparison to its industry averages of 4.8x Book, 5.4x Sales and 26.8x Cash Flow.
This company has remained in a decent financial health. At the last count, Cubist had around $910 million in cash and cash equivalents as well as $559 million of convertible long-term debt. I do not expect the company's notes to convert by their due dates.
For investors interested in Horizon Kinetics portfolio, here is the link to the appropiate SEC fillings to review this information.
Disclosure: I am long CBST.