Electronic Q&A
Mach's Favorites: Strong, Growing and Cheap
Updated Nov. 12, 2002 5:16 pm ET / Original July 15, 2019 3:55 pm ET
Q: What's your first stock pick, Mike?
A: Washington Mutual , (WM) which has a market cap of over $35 billion.
Q: The stock's come up a bit lately from the high-20s to the low-30s. What's to like here?
A: They have done a nice job of diversifying their business and creating new platforms for growth; it used to have a California focus, and most of its business was mortgage-related. It has broadened that out to have more of a national presence, and its mortgage business is still important, but other aspects of retail banking are also important.
Q: How does the valuation look?
A: We really like the valuation and the expected earnings growth here. We think that over the next five years it will be somewhere in the 10% to 12% area.
Q: And what is it trading at?
A: It trades at around eight times next year's earnings.
Q: What do you think the stock is worth? It's at 35 and change right now.
A: I think the stock could move up towards 48.
Q: Is this a long-term holding?
A: I can't tell you exactly how long, but this has been one of the longer-term holdings in the fund.
Q: What's your next pick?
A: FPL Group . (FPL) It's an electric utility with a market cap of about $10 billion.
Q: Where are they based, and what's their market?
A: In the Southeast United States.
Q: What's to like about their story?
A: It's a relatively conservatively managed utility with over 85% of their earnings coming from regulated business. They operate in an area where there's a fairly constructive regulatory environment. The Southeast is a high-growth market. For example, usage per customer is increasing at a little over 1% a year. And the customer growth is increasing at a little over 2% a year.
Q: And how does the valuation look?
A: We think the valuation is compelling. First, it offers a dividend yield of a little over 4%. Second, it's trading at about 11 times expected 2003 earnings, which is a nice discount vs. the average stock in the S&P 500.
Q: What kind of a grower is this company -- 5%, 6%?
A: We think it can grow at 6% to 7% a year.
Q: Is this a case of multiple expansion, or is it if you get that growth, plus the dividend, it's a nice return right there?
A: Exactly. And I think you could get a little kick in the multiple because the electric utility arena has been under some pressure this year. Some of the more aggressive companies have suffered huge price declines, and it's made people nervous about the whole area.
Q: Is this a long-time holding?
A: I'd say this has been a relatively long-time holding.
Q: What do you think the stock's worth?
A: The other thing I like about this company, by the way, is that here's a case where you can see the dividend growth actually being somewhat higher than the earnings growth because the utility has a relatively low payout ratio. (Editor's note: A payout ratio is a dividend divided by earnings.) The stock is trading at around 55, and we think it could trade into the mid-to-upper-60s.
Q: One more pick, please.
A: Let me use Sara Lee (SLE), because I really like cheesecake.
Q: That's bad for you, Mike, what with all of the cholesterol.
A: It is bad for me, and I should get away from it. Sara Lee has got strong brand name recognition; it is a strong business franchise.
Q: How is the stock performing?
A: Over the last 12 months the S&P 500 [is] down 15%, and Sara Lee is up 4%. They've been reorganizing the company, putting more of a focus on brand-name companies where they've got a strong market position, and it is starting to pay off. They've had a surprisingly strong third quarter. And until their third quarter was reported, the stock was performing about in line with the market. But with that strong third quarter, the stock has had a nice pop, and now it is in that position of strong relative performance for the last 12 months.
Q: And what does the valuation look like?
A: It is trading at about a 10% discount to the market, using earnings per share estimates. And we are looking forward to growth somewhere in the high single digits, and it gives us a dividend yield of almost 3%.
Q: And what's the catalyst? Better execution?
A: Exactly. Sara Lee is something I would call a low-P/E, low-expectations stock. It is one of the cheapest stocks in the food group. It is one of the few large-cap stocks in the food group to trade at a discount valuation. And I think you have got this combination of low expectations and a low valuation vs. the market and vs. its group. And what you saw in the third quarter when they reported that positive quarter was nice spike in the stock price. It's a nice strong relative performance, and we could see more of that going forward.
Q: Thanks a lot, Mike
Mach's Favorite Stocks
Company Ticker Recent Price
FPL Group FPL 55.39
Washington Mutual WM 34.90
Sara Lee SLE 13.02
Favorite Stocks