Validea is an advisory service which assesses stocks based on the investing criteria of many of the ...
Ethical Trio: Autos, Biotech, and Coffee
12/03/2014 10:00 am EST
Fatima Iqbal employs a socially-responsible investing strategy at Azzad Asset Management; here, she looks at a trio of stocks that pass her ethical screening process, an auto sector idea, a biotechnology stock, and a coffee play.
Steven Halpern: Our guest today is Fatima Iqbal, Senior Investment Strategist of Azzad Asset Management and the Azzad Funds. How are you today, Fatima?
Fatima Iqbal: Good. Well. Thank you for having me.
Steven Halpern: Well, thank you for joining us. First, your funds fall under the category of socially responsible investing. Could you briefly explain that overall concept for our listeners?
Fatima Iqbal: Sure. So, at Azzad, we have a dual mission philosophy. Our mission is really to focus on generating competitive long-term financial returns, while also using that investment capital to promote a sustainable economy and positive societal impact.
For us, SRI investing (socially responsible investing) is really about going back to the basics; investing in quality companies and letting investors achieve financial performance without harming oneself or others.
We also view SRI investing as a response to the excesses and extremes that we go to as a society, so financial excess is still very rampant and we haven’t learned many of the lessons from the last Fed- and leverage-fueled crisis that ended not too long ago.
But what we're doing is trying to offer an alternative to a prevailing model for those who want one and we are basing it on possible virtues of prudence, thrift, and responsibility.
What that means for us is: we steer clear of investments that run afoul of certain ethical principles, so we avoid companies with impermissible lines of business like alcohol, pornography, weapons of mass destruction, financials, and the like, similar to many of our SRI peers. However, in one way that we are different, we also avoid gaining from interest-based lending and from the trading of debt. So, we add quantitative screens to screen out companies that are generating significant revenue from interest and those that are also holding significant debt.
Steven Halpern: Today, we are going to focus on the Azzad Ethical Fund (ADJEX), which has returned over 16% on an annualized five-year basis, beating both the category and the benchmark. Could you briefly give us an overview of the Azzad Ethical Fund's investment strategy and goals?
Fatima Iqbal: Sure, so the strategy, of course, first starts making sure that it's compliant with this ethical mandate. So, first of all, whenever we are building the portfolio we pre-qualified the investment process by starting with filtering for this investment philosophy and then also looking at our target market capitalization, which is between $2 billion and $15 billion.
We then go to a quantitative analysis, so using a proprietary screening process, we screen and rank the remaining companies for various metrics that, again, historically served as accurate predictors for a stock'sfuture success. And those include things like relative price to earnings, cash flow yield, relative strength, and low debt.
The companies then that are at the upper percentiles, we move into our next step for more in-depth coverage with our fundamental analysis. And the purpose of the fundamental analysis is for us to understand the company's business model and to assess its future growth potential.
We favor companies with quality products or services in growing industries, with distinct competitive advantage, quality management, and conservative financial practices.
And then putting together the portfolio, we use a top-down investment approach, so we are not really trying to mimic any index's allocation, but we are trying to use our macroeconomic research to identify an appropriate diversification strategy that we believe will enhance the Fund'sperformance.
Steven Halpern: Okay, so let's walk through a couple of ideas that meet theFund's criteria, in this case, the Azzad Ethical Fund, and one of those is Keurig Green Mountain (GMCR), the coffee outfit. What's the attraction here?
Fatima Iqbal: Well, initially, we bought this position in March of 2013. We bought this about a month after the new CEO issued some guidance that disappointed the Street, and the investment community thought that Starbucks would take a significant market share from them after unveiling their own single serving brewer.
But, we really saw Green Mountain as a quality name that would be producing free cash flow, but would also be aggressively investing in technology. And we felt that that would improve their market position.
In that time, we have seen that investment thesis being validated on several fronts. Rather than dealing with the hassle of working around the proprietary ink-basedpod identification technology, their new 2.0 version of their hot beverage system will have several household names we've seen have actually come to agreements with them.
We saw Keurig partner with Nestle (NSRGY) over the summer. We saw them license a deal with Kraft, which has brought on with it the largest unlicensed brand family that wasn't on the system.
Coca-Cola (KO) has also invested in the company, and they could take a stake up to 16% in Green Mountain, part of Coke and Green Mountain's 10-year partnership that will commence in 2015.
So, Coca-Cola is keenly interested in Keurig's ability in the cold beverage space, which is expected to be rolled out in 2015, and again, this is really a name that we'veseen as growing in the technology area.
Steven Halpern: Now, another stock that meets your criteria is O'Reilly Automotive (ORLY). Can you explain that situation for us?
Fatima Iqbal: Sure. So, O'Reilly Automotive is a name that we have had in our mid-cap model since the Fall of 2009. We identified at that time that the average age of a vehicle on the road was about ten and a half years.
It didn't look like that trend would be changing any time soon. Passenger vehicles are being built much better than they have been in the past, and the average age has been steadily moving higher since 1995.
We couple that with the fact that the Recession left many people at that time in a position where there really were not going to upgrade their car, maybe could not upgrade their car, and that vehicle aging trend really accelerated. Even as these vehicles are built much better, of course, there is still normal wear and tear. So, think about what happened to your car during the polar vortex last year.
Sooner or later, repairs have to happen and that's where we see O'Reilly coming in. Nearly 60% of revenues come from those who look at after-market repairs as a do-it-yourself proposition, but O'Reilly has had its background in the faster growing do-it-for-me market, which could drive growth in quarters to come. We've seen that the company continues to expand. We are seeing them expand into Florida and the northeast US market, which could also be a growth driver. This is another name that has been investing wisely in its business, another thing that we like to see.
Steven Halpern: Now finally, in the biotech sector, one stock you highlight is Alexion Pharmaceuticals (ALXN). What's the story there?
Fatima Iqbal: Yes, so investing in biotechs can, of course, be risky at times, but it can also be really rewarding. And this is the story we've seen with Alexion, which has been in our mid-cap growth Fund since the summer of 2009.
One of the themes that we have invested in in this area has been companies that specialize in rare orphan diseases. These are indications that affect typically a small subset of the population but don't get a lot of attention from the large biopharma names because of a lack of financial incentive. But Alexion fits this characterization.
Our initial investment in Alexion has gone up eight-fold in that time. We sold off some pieces of it until an opportune re-entry at the end of 2012, and the company has gone through product recalls and takeover rumors, but we've really seen it emerge as a nice high-growth name for our portfolio.
Steven Halpern: Well, we really appreciate you taking the time today. Thank you for joining us.
Fatima Iqbal: Great, thanks a lot for having me.
Related Articles on STRATEGIES
The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “T...
The Dow Theory was originally referred to as “Dow’s Theory,” since it was based on...
When stocks are selling at valuation extremes and consumer optimism is at one of the highest levels ...