Heavy government and consumer debt will slow economic growth to a crawl over the next few years, meaning only those companies that exhibit the following strengths make attractive investments.
Only a handful make the grade, says Financial Advantage.
Few companies will show robust growth because heavy government and consumer debt will probably slow economic growth to a crawl over the next few years, says Curtis R. Gross, CFA, director of investment research at Financial Advantage, Inc. in suburban Baltimore.
Gross joined Financial Advantage in September 2009 after serving as senior VP and director of global equity research and portfolio manager at Federated Investors, the mutual fund family.
Financial Advantage owns only 15 US companies, and Gross expects to add about eight more names over the next few months. His stringent criteria include:
Ability to gain market share
Since the overall economy won’t grow a lot, “taking market share is the only real way to show top-line growth that’s otherwise hard to come by,” Gross says. He looks for companies that have outstanding products and services that provide a competitive advantage.
A strong balance sheet
With the financial system in disarray, only the strongest companies can get all the financing they need.
Higher operating margins than competitors and strong markets abroad.
Gross points to two companies that exemplify the firm’s investment approach:
Gross doesn’t like most other retailers because nearly all have to compete with Walmart. TJ Maxx, which sells brand-name apparel at discount prices, doesn’t. With hard-pressed consumers looking to save a buck, it’s perfectly positioned, he says.
In 27 of last 28 years, it’s had same-store sales growth. The cash-rich company has been upping its dividend and buying back stock. And as strong as the story is in North America, where TJ Maxx has 2,500 stores, what really excites Gross is growth potential in Europe, where it has just 250 stores and is expanding rapidly.
The company has gotten a bad rap because its price collapsed when the Internet bubble burst. The fundamentals tell a different story. It has a 40% to 70% share in a majority of its product lines, which is a huge competitive advantage. It is very profitable and is sitting on $25 billion in net cash, which alone is worth about $4 per share out of $27.
Cisco doesn’t pay a dividend. Instead, it uses its growing hoard of cash to frequently buy back shares. Gross figures that’s like getting a 4% dividend without a tax on it.
Financial Advantage, in Columbia, Md., provides personal financial planning and investment-management services to retirees and aspiring retirees on a fee-only basis. Wealth Manager has named Financial Advantage as one of the top 250 independent financial advisory firms in the country.