Blue Chip Gems: Apple and Gilead
02/06/2015 9:50 am EST
Bret Jensen has just launched a new advisory service focused on high quality, large-cap stocks. Here, he discusses his new Blue Chip Gems newsletter and highlights some of his favorite recommendations for long-term investors.
Steven Halpern: Our guest today is Bret Jensen, editor of the newly launched newsletter Blue Chip Gems. How are you doing today, Bret?
Bret Jensen: Excellent; sunny day down here in Miami.
Steven Halpern: Thank you for joining us. Your longstanding newsletter has been Small Cap Gems and now you've decided to launch Blue Chip Gems, a companion service. Could you tell our listeners about the new newsletter and discuss the reasons behind your decision to launch a service focused on large-caps?
Bret Jensen: Absolutely. The decision partly was based on inquiries from readers that are more interested in the large-cap growth space, which, I believe, most investors should have a higher weighting towards than small-caps, because-although I love small-caps and there's nothing better than finding a home run-it's a very volatile space and most investors are not traders.
They want to go ahead and invest in a diversified portfolio of consistently growing enterprises that are there for the long-term, so more of a buy and hold type portfolio. It's also something I write about very frequently on Real Money Pro, as well as Seeking Alpha.
The audience is there and our plan was always to go ahead and open up a blue chip service since there's so much demand out there from investors to find that great large-cap growth company that they can go ahead and put in their portfolio for the next three to five years and not worry about it.
Steven Halpern: Are they any particular sectors within the large-cap space that you intend to focus on or is more broadly just the entire large-cap arena?
Bret Jensen: Well, there are some very core parts of the market where you like to go ahead and focus on and there are some that we go ahead and eliminate. Obviously, you're not going to find anything along the long lines of utilities. Utilities are not a growth sector.
We also exclude things that are depending on commodity prices because then you have to get the stock right and the commodity price right, so you won't see energy services or production companies in there or gold mining stocks.
We do like the tech sector, the biotech, leisure, and the media sectors of the market to find these large-cap growth winners over time.
Steven Halpern: Perhaps you could give us some background on the specific methodology that you plan to use on selecting stocks for the newsletter's ongoing recommendations.
Bret Jensen: Absolutely. We're looking for companies with wonderful franchises, market leaders in their state, with consistent revenue, earnings, and free cash flow growth that are rewarding shareholders by increasing dividends over time, increasing cash flow uses, stock buybacks, growing the franchise, where you can see a sustainable business model over time, and, of course, they have to be reasonably valued compared to the market.
Steven Halpern: Could you walk us through a few of your current recommendations to help highlight the methodology you'll use?
Bret Jensen: Absolutely. Let's start with the easiest single stock decision in the market right now-Apple (AAPL)-which reported probably the best quarter in recorded mankind yesterday, with $18 billion worth of profit; $74 million iPhones sold, which is an amazing 34,000 phones an hour throughout the quarter.
The company last year returned $65 billion to the shareholders via dividends and stock buybacks and still had $125 billion plus in that cash and marketable securities on the balance sheet.
The last quarter, they grew over 18% on a revenue basis, and despite the rally in the shares over the last year and a half, if you subtract the cash, the stock is selling just over 10-1/2 times forward earnings, which is a third off the current discount in the market.
They are just winning the smartphone space completely. Samsung is on the ropes. They can't compete against Apple in the high end. Can't compete on low end against some of the other Asian manufacturers.
You got Apple Pay that's really starting to get traction, and although they won't make any money on that, it expands the ecosystem and people want that functionality and it gives you one more reason to buy a new iPad or a new iPhone to go ahead and get that capability.
Another stock that we've recommended and I've held for at least two years, and even though it was up 150% since then, still plan to hold for a long time, is a biotech juggernaut called Gilead Sciences (GILD).
Gilead really came on the radar years and years ago, where they really became the first player to make HIV a livable condition.
They since have launched-last year-two hepatitis C products, Sovaldi and Harvoni, that are on the way to becoming the best-selling drugs in their first years sales ever and should be the largest selling drug on the market by the end of this year.
Earnings have increased from like $2.04 last fiscal year and they report earnings next week, they should have about $7.90 worth of earnings this fiscal year. They are going to slow down next year. They'll probably only make $9 to $10 worth of earnings.
But the stock is selling for 10, 11 times forward earnings despite that great growth. Also got a very deep pipeline, impressive free cash flow growth, they should throw off $10 billion to $15 billion worth of free cash flow this fiscal year and increasing amount of that is going to stock buybacks.
They bought back $1.7 billion worth of stock in the last completed quarter and they should continue to go ahead and escalate that, which, of course, will drive earnings per share.
Steven Halpern: I'm assuming these are not stocks-both Apple and Gilead Sciences are not the kinds of stocks you need to worry about on a week-to-week basis, but rather these are the types of stocks you would put in a portfolio and allow to grow over years to come.
Bret Jensen: Absolutely, and really with the market being so volatility in January so far, it's nice to have a couple of stocks that don't care about where the dollar is going, where oil prices are going, the problems in Europe, they do not affect.
They have core franchises. These are a few stocks that I've had for years and plan to have for years in the future as well.
Steven Halpern: Congratulations again on the launch of the new Blue Chip Gems newsletter. We appreciate you taking the time to join us, today.
Bret Jensen: Appreciate you having me on, Steve.