Companies have suggested growth in Europe and the US is likely to remain slow, and investors are uneasy about the pending fiscal cliff. But this is not the time to pull away from the markets; it’s time to hold fast to a strategy that will help weather financial hardships.
Looking for a starting point? Consider the following stock picking strategy employed by the Jensen Quality Growth Fund.
In an interview with Kapitall, Jensen’s Co-Portfolio manager Rob McIver says companies that meet Jensen’s requirements have “fortress-like” balance sheets which shows “they are in control of their own destiny. By and large they tend to have the cash to do what they want to do.”
To be considered by Jensen Quality Growth Fund stocks must generate at least 15% ROE for 10 consecutive years at a minimum. ROE, or return on equity, is a metric that expresses a company’s profits as a percentage of shareholder’s equity, and is therefore a measure of a firm’s profitability. Jensen’s strict requirement creates a universe of strong performers with demonstrated ability to excel through good times and bad.
But as the fund’s name implies, there’s more to the fund’s strategy than profits — it requires quality. For Jensen, durable business models, competitive advantage, stellar management teams, and high levels of free cash flow characterize the elusive metric.
Of the 160 or so stocks that pass through the ROE growth screens Jensen invests in 29. These are selected for their adherence to quality guidelines largely related to cash flow, and if their analysts feel they are trading at a discount to their full value.
In an interview with Co-Portfolio Manager Rob McIver and Principal Dave Mertens we discussed some of Jensen’s stock picks that may fall under the radar of an average investor. Both co-portfolio managers believe these stocks are currently trading below fair value:
In Healthcare: In this sector the fund is taking some money off the table “We sold off C.R. Bard, Inc. (NYSE:BCR),” explains McIver. “It is a low cost provider but we had concerns about their execution as a business. We saw better growth opportunities elsewhere.” One top holding is Varian Medical Systems, Inc. (NYSE:VAR), a leading designer of radiation therapy services and equipment. Given the unfortunate rise of cancer, the firm has a real sweet spot as the market provider. Their business model also bodes well for its continued success: When a customer (hospital) buys a product they also purchase upkeep and training for its staff, providing annuity down the road.