5. Transocean. No portfolio can be considered complete if it doesn’t have a driller, a company involved in the exploration of oil. Given how adamant I am about the importance of the long-term shortage of oil, especially without any real economic alternatives to crude, I want a driller that is worldwide and has expertise in finding oil in hard-to-get-to places, which is pretty much all that’s left in the world to explore. That’s why I have picked Transocean drilling, which is a combined entity that includes GlobalSanteFe. This company operates the largest fleet of deepwater drillers in the world. The company works in the sweet spot of the drilling market overseas, particularly in the 10,000-feet-down and deeper category, with experience in every kind of climate. While North America has seen a significant slowdown in drilling from the Gulf of Mexico to Canada, the worldwide picture is quite different, with furious drilling globally as countries and companies try to replenish dwindling reserves. The demand for Transocean’s rigs is so great that it has been able consistently to raise what are known as day rates—the rate it can charge for drilling each day—pretty much at will. Because of the long-term nature of Transocean’s contracts, the company produces very steady and predictable cash flows. These contracts don’t allow for a tremendous amount of upside, but I value the stocks I am picking here for their long-term consistency, and RIG (Transocean’s stock symbol) has much more than many drillers. The company has been extremely shareholder-friendly, buying back a tremendous amount of stock and awarding shareholders large cash payments, including a recent one of more than $30 a share.
6. Hologic. With the huge cohort of aging baby boomers, health care is too important for you not to have several positions in the field. This area will be growing regardless of the economy, which is a huge plus given our nation’s endless commitment to stopping inflation instead of worrying about growth. With that in mind, I think you should start a position in Hologic. This company recently merged with Cytyc, another health care company, to become the best of breed in women’s health, with a specialty in early and improved detection of cancers and less invasive treatments for illnesses. Hologic is the leader in diagnostic and medical imaging for mammography and osteoporosis applications to hospitals, imaging clinics, health care organizations, and pharmaceutical companies. Improving women’s health is a noble undertaking and a profitable one too. According to the company it should produce 2008 earnings of $2.35 to $2.45 a share, which means the stock sells for just a little above the price-to-earnings multiple of much slower-growing companies. What an opportunity given that this company will be able to grow its earnings at a 20 percent rate for the next several years and yield substantial cost savings from the merger with Cytyc. The company believes that there will be $75 million in revenue synergies because both companies sell to the same clients. This is the kind of company that is ideal for any environment, but will really excel in a slowdown.
7. Inverness Medical Innovations. Inverness is another health care diagnostics company, with both professional and home diagnostics. It is also a manufacturer of vitamins and nutritional supplements. The vitamin business provides the company with a stable revenue stream. But what excites me are the incredible opportunities for Inverness in the diagnostics field. (This is the single most important growth market in the world, so I am willing to have more than one of this kind of health care company in a portfolio for the long run.) In 2007, the company acquired Biosite and Cholestech, which have improved Inverness’s product portfolio and distribution capabilities, specifically in the fast-growing cardiology diagnostics market. The combined company offers incredible financial synergies from both a cost-cutting and a revenue perspective. I think analysts’ estimates are way too low for the coming years, and companies that beat estimates have stocks that go higher. The professional diagnostics side presents the greatest opportunity, but Inverness’s consumer diagnostics group, set up as a 50-50 joint venture with Procter & Gamble, is also compelling. The P&G transaction provides Inverness with a much-needed cash infusion of around $300 million to help offset the debt it took on to finance the buys it made. It also allows Inverness to leverage P&G’s substantial marketing and distribution capabilities. Look for a new digital pregnancy test under the Clearblue label, with a lot more to come, including the first over-the-counter strep test.
8. CVS Caremark. Rounding out my explosive health care choices is CVS Caremark, a fantastic retail and pharmaceutical sales company that was created in 2007 through the merger of the drugstore chain CVS and the pharmacy benefits manager Caremark. With the acquisition CVS has increased its growth rate to well beyond Walgreen, its principal competitor, but you pay much less for it than for Walgreen. We want to be in this business because the major pharmaceutical companies are facing an unbelievable challenge as more and more drugs come off patent between now and 2012, and no real replacements are coming because the pharmaceutical houses have bare pipelines. Why should we care? Because big companies use CVS to manage their pharmaceutical bills and CVS can switch to generics for drugs and capture some of the differential between the price of the generic and that of the patent drug.
You might ask why I am not suggesting owning any major pharmaceutical companies. It is precisely because we can’t trust their pipelines, with the possible exceptions of Schering-Plough and Celgene, the former because it just completed a European acquisition that gives it strong new drugs and the latter because it has a fantastic blood cancer (leukemia) franchise that keeps growing. Still, I would much rather play this segment with diagnostics and cost controllers because disease prevention and saving money on drugs are probably the two biggest growth opportunities for the next five years.
I also considered including Allergan because of its strong anti-aging vanity portfolio, including Botox and artificial breasts and a device that combats obesity, but, again, the competition could become swift, so great are the opportunities in that field. I want my companies to have as little cutthroat competition as possible so I can own them for a very long time. Still, Allergan is a best of breed if you like that segment, and I update its progress all of the time on Mad Money.
9. McDonald’s. One of the most recognizable consumer brands in the world, McDonald’s has undergone an incredible makeover in the past few years. For many years at my old hedge fund I was short McDonald’s, because its food and service were both subpar. But the company has now refurbished its locations worldwide, added new items to the menu, made the food healthier, and serves premium coffee and popular snack wraps. It has also extended hours at many of its stores. McDonald’s has also taken significant strides to improve the financial side of the business by moving stores from the company to franchisees. Franchised stores require lower capital expenditure and generate higher returns and cash flow, which the company continues to return to shareholders at a rapid pace. McDonald’s has one of the biggest buybacks of all public companies—something I find to be quite important when you are buying an old-line business like this one—and is committed to paying a good dividend, which I expect it to hike this year as it has in the past.
Like many of the companies in this potential portfolio, McDonald’s is seeing its most robust growth overseas, where it derives about 60 percent of its revenues and 40 percent of its profits. I call it a “ROWer,” meaning it is a dominant Rest of World player, which is so important when you are based in a company that no longer has much growth left in it. Oddly, despite its long-term run over the years, McDonald’s sells at a much lower price, when you look at its price-to-earnings multiple, than its competitors Wendy’s and Burger King, even though I consider it a much better company. I expect McDonald’s to get to a much higher multiple and then a much higher price over time. This stock is an ideal stock in a portfolio where you might want to get your kids interested in the market, because everyone knows McDonald’s. I know a lot of people like to choose Disney for that reason, but Disney does not have the long-term growth profile that McDonald’s has and is hostage to old-line media, which I expect to be challenged for many ye
ars.
10. Freeport-McMoRan. This resource company is one of the world’s largest copper and gold miners, with the lowest cost of extraction for both precious and red metals. For a long time Freeport lagged other mineral stocks, but last year it stole Phelps Dodge, paying much less than it should have, making the company the world’s largest copper producer, a terrific place to be as more and more people worldwide can afford homes. FCX trades at less than nine times earnings despite a multiyear growth rate that I think will far exceed that of most of the companies in the S&P because of voracious demand for copper from China and for gold from India and China. There simply isn’t enough easily reached copper in the world, and FCX has access to much of the cheap supply. Plus, I like a portfolio that has a long-term inflation hedge in gold, as well as a hedge against geopolitical craziness. This stock, like the others, should be good for years to come.
11. Hewlett-Packard. I don’t like to have much technology in my portfolio. There are too many brilliant companies going tooth-and-nail at each other. Why own them when there are so many other companies in other sectors that don’t have much serious competition? But to overlook tech entirely is to lose some possibilities of explosive growth at times, and that’s why I like Hewlett-Packard. This company, run by Mark Hurd, has emerged as one of the biggest players in the PC market, which sells about 60 million computers a year. It is also the dominant printer company. It used to go neck-and-neck with IBM and Dell, but IBM gave up this market and Dell’s management troubles allowed HPQ to power ahead. For a long time I liked Intel as a PC play, but Advanced Micro wrecked its monopoly. I also like Microsoft, but the company has not been able to innovate away from its staid software business. All the other products that go into a PC, the components, are always losing value, as the competition among their manufacturers is some of the most intense in the world. You’re getting an opportunity here to own the dominant PC company, with sales around the world that dwarf its U.S. sales, at a price so much cheaper than the average company in the S&P in spite of its excellent growth, that the opportunity is too good to pass up.
I debated including Cisco, but the company, while best of breed in networking, is an expensive company that has made a major move off its bottom. If the stock were to sell off into the $20s again, I would consider it for my trust. I also debated including Apple because of all the special qualities it has aside from personal computers, but much of the upside has been taken away by speculators plowing into the stock. Finally, I considered Research in Motion, which is a terrific consumer gadget play. You might know it as the maker of the Black-Berry, an addictive product that is still growing like wildfire. But once again, it is an expensive company and my goal here is to provide you with a list of inexpensive companies with rapid growth rates. RIMM is an expensive company with a rapid growth rate and that’s too dicey in a book about staying mad for life. I don’t want you to stay mad at me for life!
12. Corning. This is a very inexpensive play on two of the best long-term trends out there, liquid crystal displays for TVs, of which it is the lowest-cost producer, and the much more exciting fiber optics business, where it has a hammerlock on the actual fibers. In 2008, it will begin to ship in volume the most exciting new product in the company’s history, a bendable fiber that allows telephone companies to string up clients for voice, data, and video. Verizon and AT&T are committed to becoming serious challengers to the cable companies over the next ten years, and they will all be using this product. You will need plenty of bandwidth in the future for the Internet’s growth, and Corning’s the way to play it.
13. Google. As a dot-commer from way back, having started TheStreet.com in 1996, I am acutely aware that having Internet plays is the way of the future. Unfortunately for just about everyone else on the Internet, there is really only one dominant company: Google. This company is considered too expensive by many who say its price is high, meaning you have to pay a large dollar amount to buy one share. That’s nonsense. Google is actually cheaper than most of the companies that I track when you look at its growth rate. It sells at less than thirty times earnings but grows at 33 percent, and in my book that’s a great deal. Why do I like Google? Simple: it is an advertising play, the best one in the world. The advertising market is a $600 billion market and I think that GOOG will take close to 10 percent of that in the next five years. That’s phenomenal growth, just phenomenal. The management is exceptional; it is pulling away from all of the other Internet plays; it can pretty much buy any company it wants, since everyone wants Google currency—better than the U.S. Mint’s—and I believe that it can own the phone market in a few years’ time, which is one of the reasons why I am not recommending two of my near-term favorites, AT&T and Verizon. I just trust Google to stop them at their own game through a wireless handheld device. GOOG is the quintessential growth stock from the point of view of its user base, as the next generations regard it as their newspaper, their reference, their TV, and, soon, their way of communication. I am willing to bet that by 2012 it will have the programming that youth watches, which is why I can’t possibly pick any media company for the long term. Google’s stock will always cost a high dollar amount; you might want to buy just one share to get started.
14. International Game Technology. Gambling is a worldwide addiction, and every country suffers from it. We make no judgments here in Stay Mad, which is why for a long time, before it split up, I liked Altria. IGT is the largest manufacturer of computerized gaming equipment and systems, including slot machines and video poker. The company is benefiting from the massive explosion of gambling worldwide, most notably in Asia. While Las Vegas has long boomed for IGT and state governments nationwide are encouraging the construction of casinos to stimulate jobs and taxes—all of which need IGT machines—it is the Macau opportunity, where the number of slot machines is expected to quadruple in the next four years to 50,000, that will be the best source of IGT’s growth. That’s in addition to the 114,000 gaming machines that I expect to be added in the United States, although that’s a number that is already expected and factored into earnings estimates. There’s much more upside in Macau, and also from a partnership IGT has with China LotSynergy, which gives it access to the Chinese video lottery market. I expect big orders for the rest of the decade from Japan too, where it sells pachislot, a hybrid slot machine that is immensely popular in that country. If everything goes as planned, I believe that IGT should double by the end of the decade.
15. Pepsi. For many of you, this soft drink and snack company may seem too boring. Not for me. This is a play on the person I believe may be the smartest CEO in the world, Indra Nooyi, who took over recently and wants to make this consumer company into the world’s best beverage and healthy snack business. It’s with the latter that I think she’ll make the most strides, as Frito-Lay is the true driver of the company. I am a passionate believer that in four or five years’ time there will be only a handful of food and beverage companies. One of them will be Pepsi.
There are three great franchises here: Pepsi, which, while not growing that well in the United States because of an endless price war with Coca-Cola, is growing in the teens in the rest of the world; Gatorade, which is a fantastic double-digit grower worldwide; and Frito-Lay, which under Nooyi has begun to break out from its low-single-digit growth to something far more spectacular. I normally do not want to own too many pure defensive stocks like this, as the growth in health care and minerals and oil should be far superior and the price tag for safety is often too high. But this company sells right in the middle of the pack of the defensive names—ones that grow regardless of the strength of economies worldwide—and it might be the only one trading domestically that has accelerating growth. (Nestlé, from Switzerland, might be the other.) Pepsi is also the company I follow that is most concerned with the environment and energy efficiency; it rates number one on the latter in many surveys, which I believe will allow it to have a premium multiple over time, much the way Starbucks and Whole Foods have, although their gro
wth rates are slowing and PEP’s is moving faster. Nooyi believes; she is taking as much cash as she can and buying back stock. This is and has always been a very pro-shareholder company.
16. Procter & Gamble. Besides Pepsi, there is one other consumer products company that is innovating and growing and attempting to be a dominant worldwide player, particularly in the less-developed nations: Procter & Gamble. I don’t know if anyone who is outside of the business of consumer products recognizes that this is one of the most aggressive companies in the world, routinely trimming brands, cutting staff, and making sure that its businesses are all number one in their category. I preach homework, telling you to get on the conference calls of companies to hear how things are doing and how companies are able to fend off competition to keep their franchises intact. If you listen to only one company’s call, I suggest you pick P&G’s. After the company bought Gillette a few years ago, there was a sense that it had misstepped and perhaps had lost its ability to integrate large-scale acquisitions and wrench out costs and synergies. It is amazing to me that anyone would doubt these guys, because they are their own toughest critics. They cut and cut and cut the costs of Gillette until it became one of P&G’s most lucrative properties. Still, the analyst community was reluctant to believe, so finally P&G announced one of the two or three largest buybacks in history. It has been lapping up stock ever since.
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