Johnson & Johnson, Samsung and PepsiCo are three stocks with growth characteristics that global equity investors should consider for the long-term, according to Sanlam’s global equities head Pieter Fourie.
Fourie, lead manager on the five FE Crown-rated Sanlam Global High Quality fund, said he looks for stocks that have a high-quality focus, pay dividends and grow investors’ wealth over time.
He said this strategy, which is similar to that of renowned investor Warren Buffet, requires an investor to stay invested for between five-to-eight years to reap the benefits.
While admitting it is quite a boring strategy, he noted: “In terms of what we do, sometimes my existing investors refer to the strategy as quite boring.
“Now that’s good enough for me, Buffet says compounding should be boring.”
Fourie has managed the Sanlam Global High Quality since its launch in 2014 and over the past four years it has produced a top decile total return of 78.87 per cent. Its average IA Global peer has returned 55.53 per cent in that time and its benchmark, MSCI World, has returned 67.23 per cent.
Performance of fund vs sector and benchmark over 4yrs
Source: FE Analytics
However, the fund has struggled in the past year and underperformed its peer group and benchmark by roughly 5 per cent. Fourie attributed this weak performance to high yield bonds and certain stock specific issues.
The global equity manager is part of a team of six analysts who cover roughly 30 stocks each in the MSCI World index to build a concentrated portfolio of between 20-to-35 holdings.
One thing to note about their investment process is that they are benchmark-agnostic and currently have no exposure to telecoms, banks, utilities or industrials.
The fund, which Fourie manages alongside William Ball, is heavily weighted to the US and emerging markets and has a 43 per cent look-through exposure to the US, while having the maximum permissible exposure to emerging markets of about 30 per cent.
“So, on a look-through basis, our portfolio is geared towards those markets where there is long-term growth,” said Fourie.
Below Fourie highlights three global stocks within the Sanlam Global High Quality fund that fit his style of investment.
Johnson & Johnson
The first stock Fourie likes is the US-based multi-national medical devices, pharmaceutical and packaged goods company Johnson & Johnson.
Fourie said it is a compounder that, had you invested in it around 40 years ago and reinvested every dividend, you would have seen a total return of 240x your original investment.
He said: “The reason that Johnson & Johnson has compounded so well is not because it grew the way that Alphabet is growing today at 12 or 15 per cent per annum, it’s because it was able to grow organically at 4-5 per cent for 46 years.
Price return of Johnson & Johnson over 40yrs
Source: Google Finance
The Sanlam manager added that there are very few businesses that can demonstrate similar levels of growth, but some examples include Diageo, Nestle and Automatic Data Processing.
He said these companies are often not cheap and Johnson & Johnson is at 15x earnings today. However Fourie said that, by offering a yield of 3 per cent, it is “a very slow grower but a very consistent grower.”
“That’s the concept of how we compound returns: invest in growth businesses and let the business compound those returns for us,” said Fourie.
Samsung
The Sanlam global equities head said he tries to pair compounders like Johnson & Johnson with stocks that are “short-term out of favour”. One such company is Samsung, with which Fourie said he has had an on/off love affair during the past decade.
“It’s still a great quality business. It is a much more cyclical business, but semi-conductor businesses have turned the corner about five years ago through a process of consolidation,” he explained.
“The stock offers a 13 per cent free cash flow yield. So, for every cash flow dollar that’s available, I’m only paying about 7x that value today for a business that has about $70bn of cash on the balance sheet and trades at about 8x earnings.”
One reason why the Sanlam team likes Samsung is because it has either a strong or market-leading position in every market it operates in.
Sanlam noted that Samsung is “the only vertically integrated company in the mobile sector” and therefore it has a lot of leverage and a very low-cost base.
Finally, Samsung gives investors exposure to emerging markets through their “sales exposure, distribution opportunities, and their offering of a broader priced range of products”, according to the Sanlam team.
PepsiCo
Lastly, PespiCo is another stock held by Fourie in the Sanlam Global High Quality fund, which he said is a compounder that has reasonable value.
“This is a business where we use a very conservative forecast: 2 per cent revenue growth,” said Fourie. “But it’s a great cash machine and I’ve got great respect for the chief executive officer (CEO) as well.”
PepsiCo is one of the few Nasdaq companies that has a female CEO, Indra Nooyi, who Fourie said is unwavering in her desire to keep the business from breaking up.
He said one thing that’s interesting about PepsiCo is that it only derives around 40 per cent of its revenue from beverages, despite many people considering it a beverage business.
“The big driver is their Frito-Lay business, which is going great and has a good pricing power which is something that some of their competitors like Nestle struggle with at the moment,” the Sanlam manager explained.
Price return of PepsiCo over 5yrs
Source: Google Finance
Noting that the stock is now trading at long-term average levels, Fourie said: “Deep value investors don’t really get interested at 18x earnings, but as compounders and people interested in high-quality businesses that typically is a good entry point for these names.”