In light of rekindling trade concerns between the U.S. and China, four U.S. stocks with the financial strength and profitability to weather the storm are Apple Inc. (AAPL, Financial), Novo Nordisk A/S (NVO, Financial), Manhattan Associates Inc. (MANH, Financial) and Paychex Inc. (PAYX, Financial).
Dow tumbles as White House mulls investment ban on China
On Friday, the Dow Jones Industrial Average closed at 26,820.25, down 70.87 from Thursday’s close of 26,891.12 and 192.29 from the intraday high of 27,012.54. CNBC columnists Eamon Javers and Yun Li reported that sources familiar with the matter said the White House is “weighing some curbs on U.S. investments in China.” While such talks are preliminary and nothing has been decided yet, the discussion includes blocking U.S. financial investments in Chinese companies.
The investment ban on China rekindled fears of worsening relations between the U.S. and China even though trade talks are expected to resume Oct. 10 according to a CNBC article from Thursday.
Brief discussion of high-quality companies and our Screener
GuruFocus’ All-in-One Screener, one of the most popular Premium features, allows users to customize their own value investing strategy or begin with one of our built-in templates. Figure 1 illustrates a screen shot of the Screener with the “GuruFocus Screens” drop-down menu displayed.
Figure 1
The built-in screeners include the “High Quality” screen, which lists the companies that have strong financial strength, high profitability and predictable revenue and earnings growth over the past 10 years. Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) co-managers Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) have underscored several times the importance of investing in good companies at fair prices instead of fair companies at good prices.
Users can set screening filters either by selecting the desired value from the drop-down menu or by directly entering the desired value into the cell. Figure 2 illustrates an example where one wishes to require a 10-year median return on equity of at least 35%.
Figure 2
Top Berkshire Holding Apple makes high-quality list
Although the third quarter ends on Monday, Berkshire is not required to release its third-quarter portfolio until 45 days after the quarter ends, per Securities and Exchange Commission regulations. As of second-quarter-end, Buffett’s conglomerate owns 249,589,329 shares, giving the holding 23.74% equity portfolio weight, the highest portfolio weight among Berkshire’s holdings.
The Cupertino, California-based tech giant launched its new lineup of products on Sept. 20, which include the iPhone 11, 11 Pro and 11 Pro Max. GuruFocus ranks Apple’s profitability 9 out of 10 on several positive investing signs, which include a strong Piotroski F-score of 7 and operating margins that are outperforming 95.59% of global competitors despite contracting approximately 1.9% per year over the past five years. Additionally, Apple’s return on equity is near a 10-year high of 51.35% and outperforms 98.77% of global consumer electronics companies.
Apple’s business predictability of 4.5 stars reflects strong and consistent revenue and earnings growth over the past 10 years, further boosting its profitability potential. Other gurus riding Apple’s strong profitability potential include Ken Fisher (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Spiros Segalas (Trades, Portfolio).
Novo Nordisk
With a 10-year median return on equity of 62.23%, Novo Nordisk is one of the top high-quality stocks on the list.
The Denmark-based biotech company manufactures and markets a variety of human and modern insulins, as well as oral antidiabetic agents. GuruFocus ranks Novo Nordisk’s profitability 9 out of 10 on several positive investing signs, which include operating margins that have increased approximately 2.60% per year over the past five years and are outperforming 97.32% of global competitors. Additionally, the company’s business predictability ranks a perfect five stars.
Gurus with large holdings in Novo Nordisk include Fisher and Jim Simons (Trades, Portfolio)’ Renaissance Technologies.
Manhattan
Atlanta-based Manhattan Associates provides software solutions to manage supply chains, inventory and omnichannel operations for retailers, wholesalers and manufacturers. GuruFocus ranks the company’s profitability 8 out of 10 on several positive investing signs, which include a four-star business predictability rank, a return on equity near a 10-year high of 68.10% and outperforming 98.20% of global competitors and an operating margin that has increased approximately 1.80% per year over the past five years.
2019 GuruFocus Value Conference Speaker Chuck Royce (Trades, Portfolio) has one of the largest holdings in Manhattan.
Paychex
Rochester, New York-based Paychex provides payroll outsourcing services. GuruFocus ranks the company’s profitability 8 out of 10 on several positive investing signs, which include expanding profit margins and returns that outperform over 92% of global competitors.
Joel Greenblatt (Trades, Portfolio), developer of the Magic Formula, has one of the largest holdings in Paychex. The company’s return on capital based on Greenblatt’s definition outperforms 92.36% of global competitors, while the company’s Greenblatt earnings yield outperforms just 51.97% of global business services companies.
Disclosure: No positions.
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