(The opinions expressed here are those of the author, a columnist for Reuters.)
By Conrad de Aenlle
LONG BEACH, Calif., April 23 You've been on offense with your global stock portfolio for five years, running up the score in sectors like consumer discretionary and technology stocks that have outperformed the broad market.
With those sectors starting to show weakness, it could be time to play defense and shift some money into more stable areas such as healthcare, telecommunications or consumer staples.
Jamie Doyle, co-manager of the Causeway Global Value Fund , is not ready to make a wholesale switch into defensive plays. But he takes offense at the prices he has to pay for many stocks.
"We're value investors," Doyle says. "We're concerned that the equity markets have been so strong for five years. You have to ask yourself 'What can take the market higher and where valuations are.'"
Whichever direction the market goes, he likes the prospects of SK Telecom Co. Ltd.. The dominant South Korean phone company is one of the larger holdings in his portfolio, which ranks in the top 5 percent of world stock funds over five years.
SK benefits from a virtuous circle driven by its 50 percent market share. That gives it economies of scale to enhance return on capital and profit margins, Doyle says. In turn, the company can spend more aggressively to build its network, which makes its services more attractive to customers. Even with such an edge, the stock, which has a 4.2 percent dividend yield, trades at just 8.6 times trailing earnings.
Doyle also sees opportunities in big pharma, in particular European drug makers like Sanofi SA of France and its Swiss counterpart Roche Holding AG. Both have changed chief executives in recent years amid concerns about profitable drugs going off patent, he notes. He's especially impressed with the new boss at Sanofi, Chris Viehbacher, who was hired away from GlaxoSmithKline PLC despite having what Sanofi must have considered a serious flaw.
"They brought in someone who wasn't French," Doyle notes. "He came from Glaxo, which is better at managing. He's done a good job refocusing the company and talking about things like cost control and looking outside its own four walls for access to innovative medicines."
Sanofi trades at a modest 13 times analysts' consensus estimate of 2014 earnings and has a 3.7 percent yield. Doyle considers it, along with SK, the most undervalued of the holdings he mentioned, although he declined to offer concrete price targets.
Roche's appeal is its Genentech subsidiary, which Doyle calls "a very successful research and development engine" that has helped Roche to surpass its competitors in creating new drugs. The company should have fewer patent issues, too, in his view, because its drugs tend to be biologically based - derived from "the ovaries of Chinese hamsters," as he puts it - and not chemically based, making them harder for generic manufacturers to knock off.
Big pharma, which has undergone a recent spate of mergers and acquisitions, is widely seen as a defensive group. Little pharma has the opposite reputation, mainly because the most conspicuous examples are involved in biotechnology, an industry that generates much excitement and little money. But Murali Balaraman, co-manager of the BlackRock Global SmallCap Fund , which has performed in the top 5 percent of world stock funds over 10 years, contends that one small healthcare company that he owns, Edwards Lifesciences Corp., has ample defensive characteristics.
Edwards manufactures heart valves installed through minimally invasive procedures, making them state of the art, Balaraman notes. He expects continued strong demand for them as the population ages, providing an auspicious growth outlook.
BAKING IN GROWTH
Another of Balaraman's holdings, Aryzta AG, is an Irish-Swiss company and the world's largest baker. If you've eaten a McDonald's burger or a Starbucks sandwich, chances are you've patronized Aryzta, he says.
"It's a very solid defensive business with growth," Balaraman says, noting that the company has improved its production technology, so it should start throwing out free cash flow.
Doyle is generally wary of companies that produce food and other consumer staples because of pricey valuations, although he owns two American tobacco producers, Altria Group Inc. and Lorillard Inc.. The stocks have performed poorly on worries about e-cigarettes cutting into profitability and regulatory pressure on makers of menthol cigarettes, respectively, but he believes that current valuations overestimate potential risks.
"The staples that will kill you are some of the best" investments, he says. Of greater concern for him are segments of the stock market that have grown too expensive and could be hazardous to shareholders' financial health.
"It's hard to think that earnings will improve much, and the macro backdrop isn't the greatest, yet equities are valued as if it were," Doyle says. "You have to be careful where you get exposure." (Follow us @ReutersMoney or here; Editing by Lauren Young and Dan Grebler)