Gains and Pain
We’ve mentioned or profiled more than 150 companies over the past year and, though we’ve had our fair share of gains and losses, the winners take the day almost three to one. On the following two pages, associate editor Peter Staas and I will look at our successes and failures over the past 12 months.
In 2008 and the beginning of 2009 sustainable earnings growth appeared to be a pipe dream as revenues plunged across the board. And government meddling wasn’t helping the situation.
Congress continues to wrangle over changes to the health care system, but one thing is certain: The health care names we’ve covered this year remain buys–many trade at their most attractive valuations in years.
The pending legislation poses more risk to some businesses, and back in March I penned an article highlighting health care companies that would be unaffected by the worst case scenario–or, in some cases, might even benefit from reform. Since then Stericycle (NSDQ: SRCL) and Laboratory Corp of America (NYSE: LH) have returned 15.9 percent and 34 percent, respectively.
Shares of Stericycle, which manages medical waste on a contract basis for a wide variety of medical service providers, had remained relatively flat until mid-October, when it received approval from the Department of Justice to complete its acquisition of MedServe. The deal closed at a lower cost than initially anticipated because the Justice Dept required Stericycle to divest some assets, but the acquisition still deepens the company’s market in the Midwest.
Shares of Laboratory Corporation of America, on the other hand, have appreciated steadily because the company continues to execute. Despite softening volumes due to a sharp drop in employers’ drug testing programs, Lab Corp’s other business lines have continued to grow. For example, volumes in the company’s genetic testing operations, which specialize in genetic testing, grew 9.2 percent.
But shares of Greatbatch (NYSE: GB), the third company highlighted in that article, haven’t performed as well, gaining just 2 percent. The stock has struggled to regain its momentum after the firm lost an important lawsuit in which one of its competitors alleged that Greatbatch had misappropriated some of its battery technologies.
While we continue to recommend Stericycle and Laboratory Corp of America, both of which should continue to thrive regardless of what happens in Washington, we no longer have the same confidence in Greatbatch–the legal setback will present some major headwinds over the next couple of years.
In July Peter Staas spoke to Whitney Tilson, manager of Tilson Focus (TILFX) for the Rukeyser Interview. Tilson touched on a number of value plays, including American Express (NYSE: AXP), Huntsman (NYSE: HUN) and Winn- Dixie Stores (NSDQ: WINN).
All three picks still feature in the fund’s portfolio, but Tilson has scaled back his positions in these names. Shares of American Express and Huntsman have gained over 80 percent, and Tilson’s investment theses have been borne out.
American Express has generated enough profits to more than cover losses, even as credit quality has held up better than expected. Meanwhile, Huntsman has benefited from the slight turnaround in industrial activity. Price appreciation has brought both names closer to fair value, which we suspect prompted Tilson to take profits.
In contrast, Winn-Dixie has continued to disappoint on the earnings front, falling short of analysts’ consensus estimates for the past two quarters. Although management continues to cut costs and exit unprofitable markets in the wake of its bankruptcy, these measures just haven’t been enough to surmount a tough economy.
We would follow Tilson’s lead on American Express and Winn-Dixie Stores; there are more problems to come for credit card companies, and Winn-Dixie will be a prolonged turnaround story. That being said, we see a lot more upside for Huntsman as the economy continues to recover.
Finally, in February I spoke with Neil Hennessy, president of Hennessy Advisors, about some of his favorite plays and the virtue of patience. Patient investors who focus on quality stock often win the day, and Neil focuses on names that produce the things we use day in and day out.
Arguing as the markets dived that consumers will continue to buy the things they need, albeit at a discount when possible, two of his best performing picks were Rent-A-Center (NSDQ: RCII) and Ross Stores (NSDQ: ROST). Both benefited as consumers have shifted down (or up, depending on your perspective) the value chain to discounters.
This trend should continue into 2010 because, even as the economy recovers, shoppers will continue to stretch every dollar until the employment situation improves. Rent-A-Center and Ross Stores should continue to offer solid growth prospects in the months to come.
Real estate is likely to be another growth area over not only the next year but also the next decade. As mentioned on p. 7, shifting demographics and tightened mortgage available will significantly swell the ranks of renters in coming years.
That will be a major tailwind for Mid-America Apartments (NYSE: MAA), one of the real estate investment trusts mentioned in the November Rukeyser Interview. Ventas (NYSE: VTR), another REIT mentioned by Paul Curbo, is also an excellent play on the other end of the equation–the aging baby boomer generation.
All together, many of the themes we covered last year will hold true through this year and beyond with these just being a few of our favorites.
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