Tech and Healthcare Offer Growth at a Discount - Barron's Interview

Includes: GOOG, HD, LOW, LUV, MDT, UAL
by: SA Eli Hoffmann

Barron's interviews boutique money manager Jeff Coons, Co-director of Research at life-cycle portfolio firm Manning & Napier Advisors. Coons says he focuses on absolute value, comparing stocks returns as a premium to risk-free bonds, rather than the popular stance of finding stocks that trade at a relative bargain to peers.

Barron's asks Coons: How does this market look in terms of investment opportunities?

When we look at stocks, especially in the U.S., and compare them to the alternative of a 4.5%-5% bond yield, we really see a lot of value out there. We never buy the market, so we don't have to worry about whether the market is cheap or expensive. But we are certainly finding individual companies trading at discounts of 30%, 40%, 50% of their fair value. That's very compelling when the alternative is a 4.5%-5% bond yield.

He says his firm is heavy in tech and healthcare, which both offer high-quality growth, without a premium to more cyclical companies. Here are some of his picks:

  • Google (NASDAQ:GOOG): "A great growth company is one that sells into a growing consumer market with a dominant brand." He sees long-term growth of 30%, and says shares trade at a 40-50% discount even using the most conservative assumptions.
  • Medtronic (NYSE:MDT) is the 800-pound gorilla of the medical-devices market - one that's not tied to discretionary spending. Earnings growth should be 15-17%. Great pipeline and free cash flow. Shares trade at a 30-40% discount to fair value.
  • Southwest Airlines (NYSE:LUV) and Continental (NYSE:CAL): Focus on companies that are "well down the line in terms of bankruptcy risk" that, if they survive, will emerge much, much stronger.
  • Lowe's (NYSE:LOW) and Home Depot (NYSE:HD): The two will gain market share from local retailers as a result of the housing downturn. ROE tends to be high-teens to low-20s, and they trade at 1.5-2x book value.