‘Chase’ for Growth: Three Outperformers
10/07/2015 10:00 am EST
Peter Tuz of Chase Investment Research combines fundamental and technical criteria to uncover outperformers. Here, he reviews his strategy and highlights a trio a favorites; a leader in life sciences, a play on the growth of data and video, and a beneficiary of expanded healthcare coverage.
Steven Halpern: How are you don’t today, Peter?
Peter Tuz: Doing fine, thanks.
Steven Halpern: Well, thank you for joining us. To select stocks for your funds, you focus on companies that are expected to have earnings growth greater than the economy as a whole. Could you expand on this approach and also discuss what type of investor should consider your funds?
Peter Tuz: Thank you, Steve. Yes, we think long-term investors should consider our funds. Basically, we are looking for companies that we believe will have substantial appreciation over the next three to five years.
As you said, we are looking for companies with above market earnings growth, selling for, we’ll call it, average price earnings multiples.
We also focus on companies with strong balance sheets, and companies that generate high profit margins, such as return on equity and just outright operating margin as a % of sales.
Steven Halpern: Now, once you’ve found stocks that meet your fundamental criteria, you then use several technical indicators to help with your timing of purchases and sales. Could you walk us through this procedure?
Peter Tuz: Sure, we have been one of the managers that has used technical indicators for at least the last few decades and they help us with timing purchases and later sales. I would largely quantify the technical indicators as momentum indicators.
We are looking for how a stock is doing in relationship to similar companies, and then, relative to the market as a whole. We want to find stocks that are starting to out-perform the market. We think we get on them.
We identify them in the early innings of out-performance and can own them through the later innings of out-performance.
A couple of the other indicators we use quite frequently are the moving averages, both 50- and 200-day moving averages. Basically, as tools, again, to help us time purchases and later sales.
Steven Halpern: Now, you mentioned relative strength in terms of purchasing, but if you see a weakness in those indicators, will you use that as an indication to perhaps sell?
Peter Tuz: Yes, good point. Each week we screen all our stocks by the fundamental and technical characteristics, and if we see the relative strength of one of our holdings start to weaken, first thing we’re going to try to do is find out why. If we can’t get a good reason why, which is often the case, we might reduce a position based on the technical indicators alone.
Steven Halpern: Let’s look at a few stocks that will help better describe your overall strategy and one idea you currently like is Danaher (DHR), which is a name that might not be familiar to many listeners. What’s the attraction here and what does the company do?
Peter Tuz: Danaher is a Washington DC-based conglomerate. It has about a $60 billion market cap and it operates in two main areas; testing and measurement is one and life sciences and diagnostics would be the other.
I could safely say that—whether they know it or not—many of your listeners have used Danaher products or had their products used on them many times along the way.
The company simply has a great record of growth, largely by acquisition. It just made a major acquisition this year of Pall Corp., a company in the filtration and fluid separation equipment business. Later this year, or early next year, will split into two separate publicly traded companies. The life sciences company and the testing and the measurement company.
The life sciences company should get a higher PE multiple because of its faster growth rate. The testing company should probably keep the same PE the overall company has right now, and as a result, we believe you’ll get a stock that moves higher despite what the overall market does for the rest of the year.
Steve Halpern: Now, in the technology sector you like a company called Ciena Corp. (CIEN). What’s the story with this?
Peter Tuz: Ciena is a $2.6 billion market capitalization company, so it is basically a mid-cap company. Ciena is a maker and marketer of optical networking equipment and services.
Its products allow for secure and fast transmission of voice data and video traffic across all sorts of communication networks, ranging both in the US and worldwide.
The use of—well, the transmission of—data and video over networks is growing considerably and Ciena’s one of the leading providers of equipment that helps move that data and video. We see a pretty good path to probably 20% growth in earnings for the next couple of years as a result.
Steve Halpern: Finally, another stock you favor is HCA (HCA), specialized healthcare play. Could you give us some background on this idea and the reasons for your bullishness?
Peter Tuz: Yeah, we bought HCA a couple months back. It’s a national based hospital chain. I think it owns close to 170 hospitals.
All but one of which is in the United States, I think they have one in London, 43,000 or so in hospital beds in total, mostly in, kind of, fast-growing urban and suburban markets.
We use a screening process to select stocks and one of the things that clearly came across earlier this year was that companies with domestic business—and not international business—were being looked upon more favorably by investors. HCA is virtually 100% a domestic company.
Its business has done well over the last couple of years, basically, because of Obamacare bringing more people into the healthcare system.
We think this will continue for two or three more years. The additional benefit of HCA is it has the ability to grow earnings by deleveraging its balance sheet over the next few years as well.
Steve Halpern: Again, our guest is Peter Tuz of Chase Investment Research. Thank you so much for talking with us today.
Peter Tuz: Thank you.