Sandy Sanders is senior managing director and senior portfolio manager at Manulife Asset Management in Boston, Mass.
He is the co-leader of the U.S. Core Value Equity team, which manages large-cap-value, large-cap-core and all-cap-core strategies. He is focused on the technology, consumer staples and industrials sectors.
What is your investment process?
We use a seven-step, bottom-up research process. It involves a full month of research on a single company, done by a team of eight people. We:
- Identify companies with sustainable competitive advantages.
- Identify the company’s growth drivers. We want to understand what’s going to grow a business over a minimum of five years. We take a long-term view, so the timeframe is sometimes 10 years.
- An industry analysis. This involves looking at the company’s competition, its market share, and whether returns on invested capital are good at the industry level.
- A financial analysis. We look at the company’s 10Q and 10K filings (quarterly and annual reports to the SEC) and its past return on invested capital (ROIC). We also project what its ROIC will be going forward. We also look at balance sheet quality.
- Assessing the management team. We want to know what incentives are built into their compensation. Are they compensated for improving returns on invested capital, or focusing on earnings growth over the short-term? We also want to see insider ownership.
- Our range of values analysis. We do four discounted cash flow models: Best case; Base case; Bear case; and Worst case. We use our own sales margins assumptions for these models.
- Risk assessment. We look at the sensitivity to our base-case value when making small changes to our key assumptions. Then we buy the stock when it’s at the bear or worst case values. That’s 70 cents or less on the dollar.
We have fully vetted more than 150 companies using this seven-step process, and we follow them on an ongoing basis.
The best way we can control risk is to pay the right price for the stock to begin with.
What’s your short-term outlook?
U.S. equities look attractive — they’re selling at 13 times earnings versus the historical average of 16 times. And the U.S. economy is recovering.
Housing starts are structurally too low — they need to double to get back to normal. Each year 1.5 million homes are formed, through population growth, immigration, or people graduating from school and needing a place to live. But construction is not keeping pace — it’s only in the 800,000 range. So while the housing market is recovering, it still has a long way to go to meet normal supply and demand.
Banks have good balance sheets. Companies like Bank of America and JPMorgan are in much better positions to provide capital to people who want to start businesses or build homes. And that creates jobs.
What’s your long-term outlook?
U.S. equities have historically delivered about 10% total return per year, including a 3% dividend yield. There’s no reason it should deviate from that level.
What are people ignoring that they should be paying attention to?
The large U.S. banks have historically traded at premiums to book value. Bank of America is particularly attractive because it’s selling below its tangible book value. This means if you sold all the branches, loans, real estate, the Merrill Lynch franchise, and everything else, it would be around $14 a share. The stock is currently around $11.50, so that’s a substantial discount.
People are too concerned about the crisis we’ve gone through. The U.S. economy is recovering, and Bank of America is in a prime position to benefit from that trend.
Our two favourite names are Amazon and Qualcomm. Amazon is in a very good position to benefit from e-commerce penetration doubling over the next 10 years. Its stock looks undervalued, and will have sustainable growth.
Qualcomm is going to benefit from smartphone penetration tripling over the next decade. They are a dominant franchise within the wireless space, collecting a royalty on every smartphone sold.
Do you see any dangers lurking in the investment landscape?
Not in the U.S. economy. There will always be short-term bumps in the road. The debt ceiling negotiations will cause some volatility, but I don’t see any potential for a double-dip recession.
Dean DiSpalatro is senior editor at Advisor Group.