Earlier this morning the Rafael Resendes, Co-Founder of The Applied Finance Group and co-manager for the Toreador Large Cap Fund: TORLX, appeared on CNBC’s Squawk on the Street alongside Roger Ibbotson, Yale Professor of Finance. In the interview Mr. Resendes provided three stocks that he believes are attractive investment opportunities.
After the CNBC interview we caught up with Mr. Resendes to elaborate a little more on his recommendations and provide his view on the current market conditions.
We will begin by providing some details on Mr. Resendes’ stock recommendations and some key reasons he finds them attractive.
Mr. Resendes’ Stock Picks
At Toreador we constantly look to see what the market is giving us in term of quality companies trading at significant discount to their intrinsic value. From 2009 until summer 2010, we were buying higher beta companies and commodity oriented firms that had been overly discounted. Since June 2010, we have shifted towards classic “High Quality” firms trading significantly below their intrinsic value.
Large Cap Buy Ideas - All owned by the Toreador Large Cap Fund: TORLX
• Cisco, Medtronic, and Bank of America
Two No Brainers – Cisco Systems (NASDAQ:CSCO) and Medtronic, Inc. (NYSE:MDT)
• Both priced to grow well below future analyst expectations and achieved past results.
• Excellent, well run companies that have consistently invested at returns above their cost of capital to create shareholder value
• Excellent long-term holdings
Cisco Systems (NASDAQ:CSCO) - During its sell off in the Fall, CSCO was priced to at zero future sales growth, versus a consistent past growth of 10%+, presenting an amazing opportunity. Today, CSCO is priced at 2% to 3% future sales growth, while most analysts expect 8% to 10%, which still provides a significant margin of safety given its key position in cloud and mobility markets. Lastly, CSCO has $30 Billion of net Cash, allowing for corporate governance friendly actions in the future. 20%+ upside
Medtronic, Inc. (NYSE:MDT) – Tainted by its membership in the healthcare group, MDT is an extraordinarily well run, shareholder friendly firm. Over the past 10 years, it has consistently invested above its cost of capital, while growing its top line 5 % to 8%. Currently, the market is pricing MDT to shrink its sales by over 30% over the next 5 years – an unlikely proposition given the growing demand for quality health care products domestically and abroad. 20%+upside
Bank of America Corp. (NYSE:BAC) - Special Situation
• We believe BAC was over penalized due to mortgage gate, and as clarity regarding the settlements improves the stock will likely react positively.
• More importantly, BAC has very high bad loan provision expenses, 2.7% in 2010, versus 1% long-term - as economy normalizes over 3 to 5 moving to 1% bad loan expense provisions will add approximately $10billion to net income, or doubling it, resulting in a 8 P/E.
• Essentially getting the growth opportunities of a great franchise free.
• 20%+ upside
(Toreador Investment Process: The Toreador Difference, download here. )
Mr. Resendes’ View on the Market
With 10% implied sales growth for the S&P 500, versus an 8% long term average, Mr. Resendes views the overall market as “toppy”. Current valuations are not as crazy as the 17% priced in during the tech boom, but nowhere near the generational cheapness of -5% from October 2008 to February 2009.
Related Article: To view the current expectations priced in to the 400 of the largest industrial service companies in the US, click here.