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James Li
James Li
Articles (791)  | Author's Website |

MS Global Franchise Fund’s Top 5 High-Conviction Trades as of 1st Quarter

Fund’s top buys include Microsoft and Lysol parent Reckitt Benckiser

According to current portfolio statistics, the MS Global Franchise Fund (Trades, Portfolio)’s six high-conviction trades with the largest equity portfolio weight as of March 31 are in Reckitt Benckiser Group PLC (LSE:RB), Microsoft Inc. (NASDAQ:MSFT), Philip Morris International Inc. (NYSE:PM), SAP SE (XTER:SAP) and Unilever PLC (LSE:ULVR).

The fund seeks long-term capital appreciation through a distinct, disciplined investment process that selects stocks with financial metrics associated with strong franchise businesses. Such metrics include high returns on invested capital, strong revenues, high gross margins and low capital intensity.

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As of first-quarter-end, the $1.57 billion equity portfolio contains 31 stocks, with 42.10% exposure to the consumer staples sector and 17.78% exposure to the technology sector.

Reckitt Benckiser

Having purchased 189,565 shares during third-quarter 2018 and 133,526 shares during fourth-quarter 2018, the fund purchased 209,843 shares of Reckitt Benckiser during the most recent quarter, increasing the holding 14.39% and the equity portfolio 1.11%. The shares, which occupy 8.83% of the portfolio, averaged 60.38 pounds ($75.62) during the March quarter.

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U.K.-based Reckitt Benckiser manufactures household and personal care products through well-known brands like Lysol and Mucinex. GuruFocus ranks the company’s profitability 8 out of 10 on several positive signs, which include expanding profit margins, a four-star business predictability rank and a return on invested capital of 10.68%, approximately 5% higher than its weighted average cost of capital.

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Reckitt Benckiser’s profit margins are outperforming over 90% of global competitors, suggesting high profitability potential.

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Microsoft

The fund purchased 52,775 shares of Microsoft, increasing the weight of the position to 7.43% of the equity portfolio. Shares of the company founded by Bill Gates (Trades, Portfolio) averaged $108.95 during the March quarter.

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GuruFocus ranks Microsoft’s profitability 9 out of 10 on several strong signs, which include a 4.5-star business predictability rank, an excellent Piotroski F-score of 8 and operating margins that are outperforming 92.05% of global competitors despite contracting approximately 1.6% per year over the past five years.

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Microsoft has a 93.94% three-month return on invested capital and a 114.37% trailing 12-month return on invested capital, both significantly higher than its weighted cost of capital of 7.97%.

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Other gurus riding Microsoft’s strong profitability include PRIMECAP Management (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).

Philip Morris

The fund purchased 480,873 shares of Philip Morris, increasing the holding 63.07% and its equity portfolio 2.70%. The shares, which occupy 6.99% of the portfolio, averaged $80.26 during the March quarter.

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GuruFocus ranks the New York-based company’s profitability 6 out of 10: Although the operating margin outperforms 76.92% of global competitors, Phillip Morris’ three-year revenue growth of 3.40% underperforms 89.47% of global tobacco manufacturers.

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SAP

The fund purchased 162,869 shares of SAP, increasing the position 29% and its equity portfolio 1.20%. The shares, which occupy 5.32% of the portfolio, averaged 93.48 euros ($105.20) during the March quarter.

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The Walldorf, Germany-based company provides solutions for enterprise resource planning, database management, business intelligence and vertical-specific software. GuruFocus ranks SAP’s profitability 8 out of 10: Even though the company’s three-year revenue growth rate of 5.90% underperforms 78.75% of global competitors, it still has a four-star predictability rank on consistent revenue and earnings growth over the past 10 years.

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Unilever

The fund purchased 83,157 shares of Unilever, increasing the weight of the position to 5.20% of the equity portfolio. Shares averaged 41.48 pounds during the March quarter.

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The U.K.-based company manufactures products like Lipton tea and Hellmann’s mayonnaise. GuruFocus ranks Unilever’s profitability 8 out of 10 on several positive signs, which include operating margins that have increased approximately 7.60% per year over the past five years and are outperforming 94% of global competitors.

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Disclosure: No positions.

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About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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