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Independence is Key at Argus
03/23/2016 10:00 am EST
Argus Research is well-known for the excellence of its independent research. Here, we talk with Stephen Biggar who explains the firm’s strategy and highlights some of its analysts’ latest investment ideas.
Steve Halpern: We have a very special guest joining us today, Stephen Biggar, director of product strategy for Argus Research. How are you doing today, Stephen?
Stephen Biggar: Doing well today, Steve. Thanks for having me on.
Steve Halpern: Now, Argus Research is well known as a leading independent research and advisory firm. Could you explain to our listeners a little about how Argus differs for the more traditional advice found on Wall Street?
Stephen Biggar: Sure, so “independent” is clearly the key word there in that we do not do investment banking. We’re also not a broker dealer.
We don’t hold an inventory of stocks. The research, however, is a bit similar, in that it is institutional quality with in-depth analysis and commentary.
Also the research is wholly fundamental, meaning analysts are 100% responsible for the earnings estimates, the target prices and final ranking on the individual companies they cover.
We also have a terrific stock selection performance track record where Argus via recommendations have beaten the S&P 500 for the last two and three, four, five and six years -- so very strong performance there.
Steve Halpern: Now, the methodology employed at Argus involves what’s called a top-down strategy and your emphasis is on blue-chip stocks. Could you explain what a top-down strategy means, and why you’ve chosen to focus on blue chips?
Stephen Biggar: Sure. Our analysts know exactly where the Argus in-house economists and strategists are with respect to the direction of major economic metrics that affect the companies and industries that they cover, so that’s what we mean by that top-down strategy.
They have forecasts on oil prices and interest rates, GDP growth, foreign currency movements, housing starts, unemployment, retail sales. All those were as examples. Analysts use these views as they analyze companies.
And the blue-chip emphasis is that we want to get the story correct on the major players within the industry, and that’s because of the higher market cap that these companies have and their weighted influence on the major indices, it’s very important that we get that story correct.
We want to know who is gaining or losing market share to competitors or smaller companies, who is being innovative to keep their sales growth continuing, and if they’re being good stewards on the balance sheets and cash flow.
Our coverage of over 400 stocks is about 90% of the market cap of the S&P 500, and that addresses the vast majority of the holdings of our clients. That is why we have this emphasis on blue chips.
Steve Halpern: Now, each issue of the Argus Report begins with an update on the firm’s overall outlook for the market. Could you explain how a consensus viewpoint is reached among the various Argus analysts and perhaps share Argus’ current outlook for the stock market in general?
Stephen Biggar: Sure, it’s really a two-way street at our weekly staff meeting where the economists, the strategists and the director of research interact with the analysts in discussions of the economy, the stock market, global growth, and some of the metrics I mentioned: oil prices, retail sales, interest rates.
So really, what’s impacting the market and the economy right now, and then analysts talk about the significant trends among the sectors.
And also company news from the companies that they cover. Both have a very holistic view of the markets, and that’s how that interaction sort of takes place.
Our current stance on the equity markets is that they’re about 12% undervalued here, and that’s based on the expected level of interest rates, corporate earnings growth and valuations.
And, of course, at any given time, we’re going to be overweight, market weight, or underweight the 10 major economic specters, and right now, we have an overweight view on consumer discretionary, healthcare, technology and industrials.
Steve Halpern: Now, also you focus on current investment themes and trends in each issue of Argus Research. I’m always particularly intrigued by your coverage of insider trends. Could you share some examples of these trends and why you focus on insider activity?
Stephen Biggar: Sure, well you’re right we have many current investment themes and trends. We produce a lot of that type of research that revolves around these major trends that we think have staying power.
So millennials and their purchasing power for example, or activist investing, or dividend growers, or sustainable impact investing, to name a few.
Now insider trends leverage off the work that our sister company, Vickers, produces and looking to see where management teams are actively buying their own stocks.
In fact, insider sentiment has been bullish for the past 11 consecutive weeks now, and we think that that confirmed a tradable low in the equity markets and sort of coincided with that low.
And over the past several months, it was very common to see multiple insiders at a company stepping up to increase their holdings through open market purchases.
A few examples here that we’ve highlighted recently would be Martin Midstream Partners (MMLP). They added to their holdings inside management there. Purchasers were across the board included the CEO, the CFO, the chief operating officer, the secretary.
Also since the beginning of March, a number of insiders at Weight Watchers International (WTW) have also jumped in. They bought a total of a little over 277,000 shares at prices in the $12 to $13 range, so these are all themes that we highlight on a weekly basis in The Investment, our Argus newsletter.
Steve Halpern: Now, as you alluded to earlier, Argus has a number of analysts, so there’s a lot of research produced. But for subscribers of the Argus Research report, you highlight what are considered the “best” recommendations from that whole lot. Could you walk us through a couple of representative names of stocks that are currently favored by the Argus analysts?
Stephen Biggar: So that’s right, each week we highlight a handful of best recommendations. These are reports that have been updated in the past week.
Sometimes they are recently upgraded to a buy recommendation. That was the case with Deere & Company (DE). People know John Deere; we upgraded them to a buy in late February.
Deere is a global manufacturing company that’s been affected by trends and interest rates and commodities, and we think that currency and commodities have hit an inflection point here recently.
And after several quarters of declining earnings, that Deere’s margins from here will begin to rebound as their conditions improve. Our 12-month target price is $85.
We also upgraded Barrick Gold (ABX) to a buy, and this was now just before the Fed noted that it would not likely raise interest rates for a while.
They mentioned that earlier this week, and that resulted in the US dollar declining, and that’s usually good for the price of gold, one of their principal commodities, so our target there is $18.
We also upgraded Itron (ITRI) recently. This is a technology provider to the global energy and water industries, so they make handheld computer systems for collecting data from meters, for example.
And it continues to innovate by combining this high-end metering with advanced communications and software tools for utilities, in particular, and we think it will benefit from the low penetration rate of automatic meter - that automated meter infrastructure.
Utilities have automated only about 12% of all meters worldwide, so that market is still on the very early growth phase, especially outside North America, and our target price on that stock is $48.
Steve Halpern: Again, our guest is Stephen Biggar of Argus Research. Thank you so much for your time today.
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Stephen Biggar: Thank you, Steve.
By Stephen Biggar, Financial Services Research Director at Argus Research
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