Carter Henderson uses a century-old investing style inside the freshly painted walls of the investment management firm he founded just two years ago.
Henderson, chief investment officer of the Pittsburgh-based Henderson Capital Group, has adopted the value methodology of investment legends Benjamin Graham and Warren Buffett (Trades, Portfolio). But, as a next-generation value investor, Henderson said his practice has evolved into a stock-picking model known by his peers as GARP, which stands for “Growth at a Reasonable Price.”
It’s not always true anymore for value investors to seek out companies that are selling below their intrinsic value, Henderson said. Investors are looking for asset-light businesses. If they can’t buy for cheap, they will be happy to buy at a reasonable price as long as those companies pack a growth potential.
“Buffett himself has said that light-capital-intensive businesses are going to grow and beat the ones that require a lot of capital, as our economy has shifted from manufacturing to service,” Henderson said.
Using the GARP method, Henderson Capital has been able to zero in on companies that meet this criteria. The method has allowed him to zero in on New Jersey-based multinational tech company Cognizant Technology Solutions Corp. (CTSH, Financial), which has posted triple-digit growth in five years. In Wednesday afternoon trading, Cognizant stood at $78 a share amid a 52-week range of $65.60 to $85.10 a share.
Cognizant is also among GuruFocus’ coveted group of 4-star stocks, which pack an average gain of 9.8% a year. The metric is based on GuruFocus' business predictability ranking system that highlights high-quality companies whose underlying fundamentals drive stock prices.
“Warren Buffett is also taking larger stakes in companies like Apple (AAPL)… he’s even transitioning into that. Apple is not really growth at a reasonable price, but it’s a mix."
Out of favor companies
One value-oriented characteristic of Henderson’s investment style is that he does not run with the pack. He picks companies that are unpopular on Wall Street.
“You have to be a contrarian investor,’’ he said. “People say, sometimes, you got to catch a falling knife and that’s kind of our strategy, we look for companies that are great business but are out of favor with Wall Street.”
One good example of an unpopular pick is Buffett’s Kraft Heinz (KHC, Financial). Henderson has the stock in the firm’s flagship portfolio. While the stock has fallen to about $63 a share, Henderson likes its growth potential in markets outside the U.S., including Brazil and Asia. He also notes it is a sound company with a great core business.
On the other hand, Wall Street analysts are not supportive of the stock’s future profitability and growth potential, mostly because of consumer preferences, which are changing. The company is having trouble accessing the millennial population of consumers that is interested in healthier snack options.
“They still have great brands behind them, Kraft, Heinz ketchup, Planters,” Henderson said. “You look for a company like that, that has a great moat, as Buffett would say.”
Kraft Heinz
Warren Buffett (Trades, Portfolio)’s condiments and sauces company has jumped roughly 7% since June 1. Wednesday, it saw a hike of 1.38% to $63 a share compared to a 52-week low of $54.11.
The 52-week high for Kraft Heinz is $90.38 a share. It is trading at 6.97 times its earnings, or higher than over 80% of the 1,300 companies in the Global Packaged Food Industry. The industry median is 20.69 times.
The Peter Lynch chart suggests the stock is trading below market value, though it is an incomplete chart.
Kraft has been struggling with revenue per share, which GurusFocus data crunchers identified as its only apparent trouble spot. Revenue per share was reported at $30.11 a share in 2010, but was down to $23.33 a share in 2015 and has been in decline ever since.
In net income and revenue, it has seen revenue climb to over $26 billion over the trailing 12 months, mostly flat since December 2016. Its trailing 12 months of net income is $11 billion, up from $3.6 billion in December 2016. Long-term debt is $28.5 billion. It has $483 million in free cash flow.
The company highlights its strong operations, demonstrated by a Piotroski F-Score of 7, which shows robust fiscal conditions and expanding margins.
Kraft Heinz also pays a dividend yield of 4.07%, which is in the top 20% of more than 1,700 peers in the sector.
It has a financial strength rating of 5 out of 10 and a profitability and growth rating of 6 out of 10. It has a market cap of $75 billion.
Gurus who hold the stock include Buffett, Jim Simons (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Tom Russo (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Dodge & Cox, Mario Gabelli (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and David Rolfe (Trades, Portfolio).
The fundamentals
Henderson spent much of his career as a deep fundamentals analyst before becoming an asset manager at a pair of Pittsburgh-based diversified asset management firms, where he said he engaged in bottom-up research across multiple sectors.
He said his past jobs have taught him to have a proper respect for the 10-K.
“You can still find great companies just by reading (a company’s) 10-Ks and reading their financial statement,’’ Henderson said. “Big companies have a lot of this technology (to decipher stocks), but at the end of the day, it’s really about what’s in that 10-K.”
So when he looks for good picks, the fundamentals are front and center. He used fundamental analysis and GARP to identify Cognizant Technologies.
The stock has jumped 16% in the last year. Over the last five years, it is up 152%. The current price for a share of Cognizant Technologies is $78.48. Shares were trading down almost 1% in the afternoon on Wednesday.
The company has a market cap of $45.98 billion. GuruFocus ranks it 8 out of 10 in financial strength and 9 of 10 in profitability and growth. It is trading at 31.39 times earnings, or 58% lower than its peers in the Global Information Technology Services Sector. GuruFocus found a few severe warning signs that investors might want to heed. The company has seen gross and operating margins decline in recent years. It also seen asset growth outpace revenue growth, which may indicate it is becoming less efficient.
Gurus who hold Cognizant Technology include Gabelli, Cohen, Simons, Joel Greenblatt (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Ronald Muhlenkamp (Trades, Portfolio), Jeff Auxier (Trades, Portfolio), Ray Dalio (Trades, Portfolio), the Yacktman Fund (Trades, Portfolio) and Jerome Dodson (Trades, Portfolio).
