View the Market Like a Value Fund Manager
10/05/2011 7:00 am EST
There's upside potential in the pharmaceuticals sector, says Templeton Global Equity Group EVP Norm Boersma, whose Templeton Growth Fund is heavily invested there. He also believes there are opportunities in Europe, where some competitive companies are being punished because of the regional debt crisis.
Kate Stalter: I am very pleased today to be speaking with Norm Boersma. He’s the manager of the Templeton Growth Fund.
Norm, I want to just jump right in and ask the first question, in the context of what retail investors should be doing now. I noticed that regarding the sector breakdown of your fund, that pharmaceutical, energy, and telecommunications all have large representations. What is your take on that currently, with regards to individual investors?
Norm Boersma: Well, as everyone knows, it’s a pretty difficult time in the viewpoint of the markets.
The focus has been very much on the macro-level concerns, whether it’s Europe or recessionary fears in the developed world, and now even China’s on the radar screen. Stock valuations have plummeted because of that, and what we’re seeing around the world is really a series of valuations that you really haven’t seen for a while.
We’re back, in a lot of cases, to sort of early 2009 in terms of valuations. I think arguably the banking sector, the world economy as a whole, is in much better shape than it was at that point, so we think there are some pretty good opportunities in the equity markets.
Kate Stalter: What about some of the particular sectors where you are pretty heavily invested, such as pharmaceuticals or energy, for instance?
Norm Boersma: Yeah, they’re really very different things in terms of what’s driving them.
Pharmaceuticals tend to be a more stable sector. It’s one where people have been worried for, it seems like a decade now, about the growth prospects of the industry.
The ratings on the companies, if we go back ten years, they were probably trading at 30 times earnings. Today, most of them are trading at ten or less. They’ve started returning lots of cash to shareholders—the dividend yields are anywhere between 4% and 6% for the major pharmaceutical companies.
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The real worry out there is the near-term patent concerns. That’s been, for of a couple years, the focus of the markets, and it’s starting to happen now. And as we’re working our way through, a lot of those companies actually start to grow again on the other side of that.
So the market’s starting to recognize that, and the stocks are starting to act a little better. While we still like them, they not as cheap as they were at the very bottom.
Kate Stalter: How about the energy sector?
Norm Boersma: Well, the energy sector is getting beaten up a little bit by all the macro concerns. We had a fair bit in the oil-services area at one point, and pulled that back when oil prices were quite a bit higher. That sector’s really been under pressure as well as the integrated, so we’ve been kind of nibbling away a little bit at the sector as a whole.
It will bounce up and down with oil price of course, and there’s the risk that in the short term, the oil price weakens a little bit further even, but the valuations, we think, are attractive.
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Dividends, especially on the integrated side, are sitting in the 4% to 5% range. A pretty attractive income stream. We think longer term, oil prices stay high.
Kate Stalter: I was looking in the most recent prospectus, Norm, and I did notice that in pharmaceutical, a couple of the top holdings were Amgen (AMGN) and Pfizer (PFE). Anything you can say about either of those stocks right now?
Norm Boersma: Amgen we’ve owned for a while. They’ve got a new drug out on the market that we think adds an element of growth to the story again, and it got re-rated because basically their three major drugs were maturing. It’s a drug for osteoporosis, so it’s a new category, new drug, just starting to be introduced, so we think there’s some growth behind that.
Again, as with most of the major pharmaceutical companies, lots of cash-flow generation. Great balance sheet and they started paying a dividend, as well, so that’s sort of recognition that maybe they’re not as high a growth company as maybe historically, and the management is starting to realize that returning some of that cash to the shareholders is a good idea. Which usually is a pretty good catalyst for stock-price performance.
Kate Stalter: And how about Pfizer?
Norm Boersma: Pfizer is in a lot of ways a similar story. Great free-cash generation. Nice dividend yields. They have Lipitor going off patent this year, which is definitely a head wind. They have a number of new drugs coming on, so as they work their way through the Lipitor expiry, you basically start resuming growth again.
The stock is trading still below ten times earnings, and that is pretty cheap for any stock and especially for a stock with the sort of stability of a Pfizer. It’s trading at around eight times earnings right now. So still a pretty good deal.|pagebreak|
Kate Stalter: Just to take a step back here for a moment, Norm. Given your perspective as a fund manager, what would be your advice to retail investors in this current market volatility, where a lot of people are pretty nervous and not quite understanding what the best course is?
Norm Boersma: I think it’s always difficult to do the things that you keep reading about, as sort of the bad things to do.
In this environment, being in the equity markets is the thing that’s being questioned. I think within the equity markets, everything has been hit, but the areas that have been hardest hit are, of course, the ones that are the most economically sensitive.
If you take a look at regions, the regions where people worry the most, right now that would be Europe. When you look at valuations, typically what happens then, is everyone knows that, and they flee those areas, and you get the best opportunities in those areas.
If you take a look at valuations globally right now, Europe is trading kind of eight, nine times earnings. US, the S&P’s trading at 11, eleven-and-a-half times, and Asia’s come off quite a ways, but in general, still trading at a bit of a premium to that. Japan is about 16 times. China’s at 12, 13 times. So they’ve come off as well.
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Europe kind of stands out in that valuation matrix...and then you start drilling down, and what we’ve been finding is that there are a lot of multinationals in Europe that compete with the US guys, compete with the Japanese guys, globally. They’re getting penalized in terms of valuation points, because they happen to be in the area people are most negative on.
Earnings prospects, growth prospects going forward are comparable to the guys in Europe or in the US and in Japan. So we naturally gravitate towards those stocks, realizing that in the short term, you’ve got some Euro concerns, but longer term, they should be in pretty good shape and you’re paying a lot less for that.
You know, even the banking sector in Europe is starting to look very, very interesting. You’ve got a lot of stocks that are trading at 0.3, 0.4 times book value, and big, big discounts in the equities sitting there.
So people are essentially saying that, you know, Italy, Spain, etc., are going to go the path of Greece, which we think is just a kind of a stretch, at the minimum. So we’re starting to nibble away at some of those things as well. So when you look at the portfolio, there’s a pretty good weight in Europe.
I think that’s really the lesson for the retail investor. When you start thinking about what’s going on, and you start looking at valuations, the real question you want to ask yourself, “Is the world, or is the market so negative that it’s more than reflecting the worst-case scenario, and/or at least a very bad scenario?”
If that’s the case, then that’s usually a pretty good time to be stepping into the markets, as opposed to running the other way.
I guess it’s a little bit of a Sir John [Templeton] cliche that it’s best to invest when there’s blood in the streets. I don’t see any blood necessarily, but certainly there’s lots of negative sentiment.
Kate Stalter: Let me just follow up on that, Norm, with one last question for you. Do you believe that now is a good time for individuals to be re-evaluating what’s in their portfolio?
Norm Boersma: Yeah, I think from our perspective, interest rates are pretty low, and they look destined to stay low for a while. Governments are trying to keep them there to make things easier, and equity valuations are extremely low.
Typically the multiples would be higher, given where interest rates are, but there’s an awful lot of concern out there.
You know, when we look at the companies—we talk to them all of the time—there isn’t the sign of great distress, in terms of earnings and the underlying businesses, that you would expect to see, given where valuations are. I think that companies are concerned, and they’re concerned for the same reason people are, as if they’re reading the same papers and listening to the same news forecasts.
That adds uncertainty, but there isn’t at this point a sign that the world is coming to an end, and I think that’s a little bit what’s being baked into things here.