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(A Top Pick June 19, 2017. Up 39%). This continues to be one of his topic picks. It builds instrumentation used in the development and deployment of wireless networks and to test consumer, industrial and defense electronics. They are one of only a few companies that can do this. This is the original Hewlett-Packard business separated from all the other stuff that we now consider part of HP. He thinks the move to 5G brings a great cyclical opportunity.
They make the big iron of medical practice, such as MRI machines and CT machines. This is not where the big growth has been, or will be. This company has a tremendous bureaucracy and its unions are very powerful. In emerging markets, it’s likely in lower end machines which will not help growth. Philips also talks a lot about consumer products, like toothbrushes. He thinks these are great products, with great returns, but he suspects that their main business is supplying old technology equipment to hospitals.
Comment on Gold. He has little sympathy for paper gold and less for cyber-gold. He was an adherent to using physical gold as a hedge, but he thinks it is not a good choice right now. He has a bullish medium-to-long-term view of the U.S. dollar and he thinks that real interest rates will get positive, making gold less attractive. The scholarly work done on using gold to reduce portfolio volatility has been done on bullion, not on gold equities or gold paper. The impact of gold price on gold miners was much greater when gold was $500 or $700. He does not think that rising gold prices has as great an impact on company value now that gold is over $1000.
He compared it to Deutsche Bank, which he also does not recommend. He thinks they rely on lines of business that will do worse in the future. They were a leading distributor and manufacturer of mortgage-backed securities. “We’re really talking here about Lehman Brothers.” The way the MBS works, conforming MBS doesn’t offer much margin. Subprime and Alt-A were so important because they attract a lot of margin, but those are now out of the mix. He likes the people who work at Barclays, but he would rather put his money in JP Morgan. All the non-American banks are subject to base erosion tax, which raises their costs. JP Morgan and other American banks are not. Brexit also puts the larger American banks into a good position to take share in the European market.
This is very much a Dutch bank. Insurance has been separated from it. To like it, you have to have a positive view of the Dutch mortgage market. He used to own it but sold out after housing prices stabilized, which means that there’s not a lot of upside in that business. Their electronic bank was a potential catalyst, but they did significant business in the former Soviet Union and in energy infrastructure. As his view got more negative about the price of energy and as sanctions got put on Russia, he backed away.
He prefers Northrup to Raytheon because Northrup’s entire backlog is in classified projects, which is where there is the most growth (Cyber, hypersonics, and space). Raytheon is number 2 and is well-exposed to those spaces. Northrup’s products are younger, which means their margins on them will grow for a longer period. Defense is the best idea he has in general. The defense cycle is 7-10 years long, it is recession-proof, and it this cycle started only a few years ago.
He is not involved in this company because of its holdings in iron ore and nickel. The iron ore cycle from the 2000’s has played out the same way that it did in the cycle in the 70’s. A lot of capacity has been added. It’s a capital-intensive business. Once the capacity was added, that was the end of the cycle, and these cycles don’t come back for 20 years. He should be more positive about nickel but he feels that the Chinese have ruined the business. There are no labor or environmental laws to increase the cost of mining for nickel in China and this has put a lid on the price of nickel. When mining goes on hold, it does so for a very long time. On average, down cycles last about 20 years.
This is a Japanese corporation. They literally allow robots to see. They also make different kinds of sensors. Their value proposition is that their products pay back for their clients, very frequently in under 12 months. He doesn’t believe they’ve had a down year, because the products provide such strong payback to clients. (Analysts’ price target is 71,577¥)
This company detects low levels of light and radiation. They make things like photomultipliers. Companies use their products in blood analyzers and gene sequencers and when analyzing semiconductors. Their type of equipment plays a role in anything going on in high energy physics. For example, photomultipliers provide the only way to visualize subatomic particles. This company is in a gatekeeper position for leading photonic technologies. (Analysts’ price target is 4450¥)
