Maybe when your office is a mile high, you have a better view. We hope so, because when Carmel Wellso, director of research at Denver-based Janus Capital Group, looks out at the U.S. market and beyond, she likes what she sees.
“I’m surprised at how negative people are right now,” says Wellso. “When I look at the data and from what I hear from companies, my impression is that we’re actually going to see earnings upgrades and accelerating GDP through the end of the year.”
Though stocks are not screaming values, Wellso says there are still attractive sectors in the U.S. market, including health care and railroads. In particular she likes Biogen (ticker:BIIB ) and Canadian Pacific Railway ( CP ). Wellso also likes the view overseas, particularly in Japan and Europe. Conventional wisdom is that quantitative easing is driving market gains, but Wellso thinks a deeper change is underway. “The reality is there are some really deep fundamental things that are happening in those two markets that make them more interesting in the long term.”
Stock Values Created by Huge Global Changes Capitalism is spreading: Carmel Wellso, Research Director at Janus, tells Jack Otter of Barron’s that shareholder-friendly changes in Europe and Asia will boost stocks.
In Japan, new corporate governance laws have led companies to hike dividends, increase buybacks, and sell off underperforming businesses. Meanwhile, in Europe, companies with high exposure to the Continent’s weakened currency are enjoying higher demand for their products, which are suddenly cheaper for residents of stronger-currency nations. Additionally, smaller markets like Italy are becoming less risky thanks to reforms, but are still undervalued. “The risk premium should come down and the companies are generating bottom-line growth even though there’s very little economic growth.”
Wellso heads the Janus Research fund ( JRAAX ), a team-managed portfolio that seeks to bring together the best ideas of about 35 analysts divided into seven sector-focused groups. Wellso oversees the portfolio. In addition to keeping an eye on valuations and other metrics, the team pays close attention to return on invested capital and looks for companies with stable or expanding margins and a competitive advantage over peers.
The $4.7 billion fund has returned an average 21.33% annually over the past three years, outperforming the market and 90% of its category peers. Year-to-date the fund has returned 6.22%, more than double the return of the Standard & Poor’s 500.
Barrons.com asked Wellso to tell us about five stocks, both foreign and domestic, she likes right now. She did us one better, and shared six of her team’s best ideas.
Blackstone Group: The alternatives-focused asset manager continues to benefit from a low-interest-rate environment and, according to Wellso, is the prime beneficiary of government regulation of the finance industry. With bank holding companies limited in how much risk they can hold on their balance sheets (since bank deposits are government-insured), Blackstone ( BX ) has been handed a huge growth opportunity. “There is a secular shift in how liquidity is distributed in the financial services sector,” says Wellso. “Now Blackstone is the supplier of liquidity to the market and they’re not regulated in the same way. They have a huge advantage.” Barron’s recommended Blackstone last fall; it has gained 45% since then.
AIA Group: Wellso describes the Asian life insurance provider as a “secular growth story.” AIA ( 1299.Hong Kong ) was spun off from AIG ( AIG ) in 2009 and operates in 18 Asian countries. The company, which trades at just two times book value, stands to benefit from its emerging markets business. AIA is boosting new business premiums by more than 20% a year in emerging markets, where an improving consumer profile and gross domestic product growth will allow the company to increasingly offer more sophisticated and higher-margin products. “It’s a company I would expect to have top line growth in the 20% range for the next several years,“ says Wellso.
Air Products & Chemicals: “I don’t want to call them boring, but we’re shifting to a lot of old world products, like industrial gases,” says Wellso. Under new CEO Seifi Ghasemi, the company has been undergoing a major restructuring in an effort to bring its margins in line with peers. Air Products ( APD ) has focused on cutting costs, selling assets, and moving out of low-margin markets while expanding in its higher-margin regions. The company improved margins by more than two percentage points in the last quarter but is still lagging competitors. Wellso believes the market is underestimating Air Product’s growth potential and potential to further boost margins.
NGK Spark Plug: While overall the Japanese market is not expensive, many of the better-known companies there trade at lofty valuations. As a result Wellso says she and her team are focusing on lesser-known, cheaper companies. “We are looking at names that we haven’t looked at since I’ve been in the business,” she says. NGK Spark Plug (5334.Japan ) is one of those names. The world’s largest spark plug maker, NGK’s customers include a number of Formula 1 teams, including Scuderia Ferrari. Wellso likes the steady nature of the business: Its primary product needs to be replaced on a regular basis. The weak yen has allowed the company to offer very competitive pricing.
Biogen: Wellso is bullish on the health-care sector in general and believes revenue estimates are too low given the potential sales of drugs in the pipelines of biotech companies. “The biotech industry goes through step changes,” says Wellso. “You’ll see one product released, which then allows another range of products to come out.” She likes Biogen due to the potential size of the market for an Alzheimer’s treatment it is developing.
Canadian Pacific: Railroads are another industry Wellso likes right now, largely due to significant consolidation. “Because they have oligopolistic pricing, we think it has a long runway for growth.” Wellso adds that freight volumes are picking up, especially in oil. Specifically she likes Canadian Pacific because she says the management is the best in the business at allocating capital. The company’s return on invested capital is 20.5%, better than Union Pacific’s 18.8% as well as CSX’s and Norfolk Southern’s, at around 11% each.