It's no surprise investors are having a hard time finding strong stocks to buy.
That's why I was talking to fund manager George Fraise of SGA Global Growth (MUTF: SGAGX) the other day, to find out where the growth – and potential for profit – is in the global market.
Fraise said he's very bullish on global value stocks, and outlined his strategy for picking the right ones.
Factors for Picking Global Value Stocks to Buy Now
Fraise's recipe for finding the right value stocks to buy comes down to five characteristics:
- A high degree of pricing power. He's looking for companies that have a lot of control over the prices they set.
- A high degree of repeat revenue. He wants companies whose products and services are used frequently and need to be replaced regularly.
- Global opportunity. This brings long periods of growth that in turn give investors the confidence to stay with investments for long periods. Fraise stays with companies he invests in for an average of three to five years.
- Financial strength. He looks for companies that generate a lot of free cash flow, because they can then return that cash to shareholders in the form of higher dividends or share repurchases.
- Good management teams. That means finding management teams that have demonstrated they're good stewards of shareholder capital.
I asked Fraise if he had any criteria for finding stocks to buy that are outside the slow-growth, mature markets of the United States and Europe – say, for example, companies for which 50% of revenues are generated outside the United States or Europe.
Fraise said picking companies based on these five characteristics might lead to a list of 60 to 70 companies, of which SGA would hold 25 to 30 at any given time. Those companies generate more than 50% of their revenue outside the United States, even the U.S.-based companies.
And the markets where many of these companies are finding growth are – you guessed it – in Asia, particularly China, whose gross domestic product, even with a slowdown, is still growing nearly 8% annually.
Right now, China's economic drivers are transitioning from export growth – i.e., selling to outside markets - to internal growth focusing on the country's growing middle class.
Two companies that embody Fraise's philosophy are U.S.-based YUM! Brands Inc. (NYSE: YUM), the parent company of KFC, Taco Bell and Pizza Hut, and Chinese medical device maker Shandong Weigao Group Medical Polymer Co.
YUM has 4,500 restaurants in China now. Rival McDonald's Corp. (NYSE: MCD) has only 1,500. And Fraise is confident YUM can easily expand its franchise units to a total ranging from 10,000 to 15,000 in China.
Shandong is a government-backed favorite to serve the growing need for medical services and devices as the nation's population climbs the economic ladder and expects more access to healthcare services.
Don't Overlook These Mid-Cap Stocks to Buy
Value is also evident in U.S. mid-cap stocks in two converging sectors – tech and healthcare.
Mid-caps have the advantage of being small enough to grow faster than large-cap stocks, yet big enough that they're more stable than small-caps. In this kind of market, mid-caps have been overlooked by large-cap investors looking for safety and by small-cap investors looking for adventure.
That's where the value comes in. And it's also where the smart money is starting to look for stocks to buy.
In particular, U.S. President Barack Obama's mandate to modernize healthcare records has brought a boon to electronic records companies. But just as the rally was getting going, "Obamacare" was before the Supreme Court, members of Congress were predicting its demise and healthcare stocks got locked in a state of suspended animation.
And once the court ruled, we were in the midst of a presidential election and Obamacare was once again a straw man.
One company in this sector that has fallen victim to these gyrations and a few internal missteps is Quality Systems Inc. (Nasdaq: QSII). It didn't stop growing; its growth simply fell below expectations in the last quarter, a fairly sour quarter even for many blue chips.
But QSII has a good long-term outlook and has been taken down beyond justification.
When you install a software system, you have to pay maintenance fees on it, so it's difficult to switch providers once you have a large electronic health-records system in your hospital.
The maintenance fees go on, almost forever, which makes for great consistent cash flow. It's a balancing act between landing contracts in a tough environment and having the long-term maintenance contracts to build that bottom line. QSII is well-positioned and well-priced in this cycle, making it among stocks to buy now.
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