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Fool Favorites and the "Awesomeness Continuum"
09/14/2015 9:07 am EST
David Meier, portfolio manager at Motley Fool Asset Management, uses a proprietary system—the "Awesomeness Continuum"—based on such factors as management quality, financial strength, and a firm's competitive advantage. Here, he discusses several current favorites, ranging from sport apparel to lasers.
Steven Halpern: Our guest today is David Meier of Motley Fool Asset Management. How are you doing today, David?
David Meier: Fantastic Steven and thank you very much for the opportunity to speak with you.
Steven Halpern: Well, thank you for joining us. At the Motley Fool Great America Fund (TMFGX) you focus on high quality domestic stocks. Could you walk us through some of the criteria you consider when selecting stocks for this portfolio?
David Meier: Sure thing, and I will say, you described the Great America Fund perfectly. We do want to invest in high quality businesses that are domiciled in the United States and we want to try to do so at reasonable prices.
And so, what we do, our selection, our research, and our selection process revolves around what we affectionately call the “Awesomeness Continuum.”
We’re bottoms-up investors and we try to rate the quality of the companies based on management and their culture, the economics of the business, the strength of the company’s competitive advantage and the sustainability of a company’s growth.
And then from there we want to assess, "Hey, is this stock attractive on a risk:reward profile in order to give it the proper allocation within the portfolio?"
Steven Halpern: Now I guess with the name Great America you’ve got an underlying confidence in the long-term prospects for our domestic economy.
David Meier: Yes. We definitely see the United States having a strong economy over the long-term. Probably won’t grow as fast as it has in the past as she gets bigger; however, the other thing that is in our favor is the creation of new businesses.
There is always some sort of innovation, plenty of entrepreneurship, and in some cases, a lot of disruption that goes on in the markets over time. We’re looking for companies like that within the context of a growing American economy.
Steven Halpern: Now you also manage the Motley Fool Independence Fund (FOOLX), which expands the investment universe to include both US and global markets. Could you walk us through your overall global outlook and perhaps highlight some particular areas where you’re finding good value?
David Meier: Sure. I will say, we don’t necessarily have a unified global outlook, like here’s what we think the world economy is going to grow at or anything like that.
However, we are looking at one particular trend that we see happening around the globe and that is, we believe over the long-term the middle classes of many, many countries across the world will continue to grow and to continue to drive more consumerism.
And so with that as our guide, we’re looking—just like in the Great America Fund—we’re looking for high quality or awesome companies that will benefit from more consumer spending over time and again, this is not a phenomenon that’s just happening in the United States.
These high quality companies can be anywhere, so we’re looking all across the world for them. I will say, once we find that intersection of the rise of the global consumer with high quality companies, that’s exactly where we look to invest.
An example would be HDFC Bank (HDB). This is a very well run Indian bank that again is benefitting that country and its middle class getting wealthier over time and needing the services of a high quality bank.
Steven Halpern: Now is this growing middle class primarily in Asia or are you seeing the same opportunities throughout other areas of Latin America or even in Europe?
David Meier: No, we think this is a truly global trend and it doesn’t have to necessarily just be in emerging markets, it can also be in developed markets.
To give you another example of where we see this in terms of a developed market is a company called Zooplus AG in Germany (ZO1:GR) and it is an online pet food retailing company.
Now, it’s very small, but it is an incredibly well run business that serves those constituents in Germany extremely well.
And what we’re finding is when you give consumers a high quality product or service at a reasonable price, you tend to deal with their growth faster than the market and earn higher returns in the market and that’s a long-term strategy towards exceptional returns.
Steven Halpern: Let’s look at a few additional stocks to help highlight this overall investment strategy and one of those is IPG Photonics (IPGP). What’s the story here?
David Meier: The story is one of innovation and disruption. As I mentioned before, we have our rating system called the "Awesomeness Continuum" and we rate this one a five, which is our highest rating.
And what IPG Photonics has done is, basically, it has developed a better mousetrap and that is the fiber laser, so I won’t get into the physics of lasers. I don’t think that’s what everybody wants to hear.
It’s something that fascinates me as a former engineer, but basically IPG Photonics has created a laser that has better performance characteristics and lower life cycle cost than traditional lasers, and over time, they have been able to market this product, demonstrate it with customers who were early adopters, and the market has just taken notice.
Wow. These products that the company is putting out are phenomenal and the company has been able to grow its market shares significantly faster than the overall rate of growth of the market, and as a result, it's been able to generate higher cash flows and take those cash flows and reinvest them back into the business at very high rates of return, in terms of new products being introduced, new solutions, using laser products.
It's expanded its manufacturing capacity in just leaps and bounds, so it’s a phenomenal business. It has a great management team. We think it has a sustainable competitive advantage over the rest of the market and we've looked forward to owning this for many, many years, if not a decade or so.
Steven Halpern: You know, another name that might not be familiar with many investors is Infinera (INFN). What’s the attraction in this situation?
David Meier: Infinera is about three things, data, data, and data. So, what I mean is, I think it’s very well known that Internet usage continues to grow at an expediential rate.
We are not becoming less digital, we’re becoming more digital over time and what Infinera has done, is it has developed a disruptive technology that enables network owner/operators to expand the capacity of their networks quickly and cost effectively.
In addition, they are able to take components out of the networks and make them a little simpler, so that is a win-win-win, if you will, for the customers, because those network owner/operators need to figure out how to get more data through those pipes efficiently, as well as reliably.
And Infinera has developed what it's called a photonic integrated circuit, that basically allows more data to travel through at a higher rate with higher reliability.
That means more revenue generating capabilities for its customers, again, at some lower costs—even though you have to make a new investment—and what’s interesting is the latest upgrade cycle is really just starting and this is, over time, what we have seen is the upgrade cycle for networks, it happens over about somewhere between eight and ten years and we’re maybe in year one.
Infinera, which was a complete dog for us for many, many years, has now started to gain traction. The market has noticed and it’s actually become one of our best performing positions, but we think there is still eight to ten more years of growth and good returns left in the stock, that’s why we look forward to owning this one as well.
Steven Halpern: Now, you also find opportunity in some well-known names, for example, you like Under Armour (UA). What makes you bullish on the company’s long-term prospects?
David Meier: I think, if I was going to summarize Under Armour—its story—I would do it this way. Under Armour continues to do what no one thought it could do and that is to create another world-class athletic apparel brand.
And, given the quality of this company's products—they're savvy—and energy from this company’s management team, we don’t think this is likely to happen.
If we go back to the Independence Fund, which is trying to take advantage of high quality companies in both the United States and internationally, believe it or not this is actually a perfect illustration of what we’re trying to do in the Independence Fund.
There are still plenty of channels—both on the physical retail side and on the online side—for this company to grow in the United States, but what’s just happening now is the company, we’re starting to see many, many more Under Armour logos in places all around the world, so it’s still a great domestic growth story.
But there’s this enormous catalyst sitting in front of it, as, again, the rise of the global consumer comes, they want to be associated with brands like Under Armour.
And even though the company may look expensive on traditional metrics, PE, price to sales, whatever that may be, that tailwind behind it is so strong, and again, we rate it very highly on our "Awesomeness Continuum."
We think that’s enough to propel the stock forward and one of the things we have learned at the Motley Fool and Motley Fool Asset Management is that the market doesn’t actually do a very good job of assessing high quality companies over long periods of time and this is another situation where even today we think that Under Armour—which has been a great performer for us—is going to continue to be a great performer for us over the next decade.
Steven Halpern: Again, our guest is David Maier of Motley Fool Asset Management. Thank you so much for your time today.
David Meier: Thank you, Steven.
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