By Philip van Doorn, MarketWatch
Wall Street and the financial media are fixated on the short term. But investors who look past the “noise” can take advantage of long-term opportunities created when the stock market temporarily undervalues well-run companies, according to George Maris of Janus Henderson Investors.
Maris took over as the lead manager for the Janus Henderson Overseas Fund /zigman2/quotes/201541610/realtime JAIGX +0.30% and the Janus Henderson Global Select Fund /zigman2/quotes/205984077/realtime JORFX +0.26% in January 2016. The co-managers of the funds are Julian McManus and Garth Yettick.
The two funds have essentially the same strategy, except that the Overseas Fund is limited to companies outside the U.S., while the Global Select Fund includes U.S. companies.
During an interview April 1, Maris said he, the funds’ co-managers and Janus Henderson’s internal proprietary equity-research team focus on “identifying the companies whose free cash flow growth is underestimated by the market.” The analysts “eliminate any accounting conventions and artificialities” in financial statements to normalize the numbers to better understand actual “cash-on-cash” returns. The team also emphasizes free cash flow growth. “We are not interested in buying declining annuities,” he said.
‘We understand that the world will evolve in ways that will be different from what we predict. When we are wrong, we need to accept that and move on. That is part of behavioral analysis.’
George Maris, co-head of equities, Americas, at Janus Henderson Investors
A company’s free cash flow is its remaining cash flow after planned capital expenditures. This is money that can be used to fund organic expansion or acquisitions, repurchase shares or increase dividends.
In addition to the bottom-up analysis used to value prospective companies for investment, Maris and the team seek an edge by doing more analysis when the overall market’s view of a stock differs from theirs.
“We think the market is smart,” Maris said, so his big question is: “What is the behavioral anomaly that is permitting the arbitrage?”
Janus Henderson Investors
Either Maris and his team are missing something or the market is incorrect — temporarily.
“We are focused on the spread identified by our fundamental and behavioral analysis,” he said.
Three stock opportunities presented by the market
Maris discussed three stocks held by the Janus Henderson Overseas Fund and the Janus Henderson Global Select Fund that illustrate how he has been able to take advantage of special circumstances when the market is temporarily undervaluing companies:
The semiconductor-manufacturing subsector has been lucrative for long-term investors, but also difficult for short-term investors with bad timing or a lack of patience.
Here’s a three-year price chart for the iShares PHLX Semiconductor ETF /zigman2/quotes/209255350/composite SOXX -0.66% , which tracks the PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX -0.55% :
The total return for SOXX over the past three years has been 118%. However, it was down 15% in the fourth quarter. For all of 2018, SOXX fell 6.5%, as hypersensitive investors worried about an economic slowdown.
Sell-side analysts’ ratings are based on 12-month price targets and media headlines scream panic every single day. The action for SOXX clearly illustrates how short a year can be for long-term investors in a rapidly growing industry. Maris said: “What we really focus on are three-year and five-year rolling periods.”
ASML Holding NV /zigman2/quotes/210293876/composite ASML -0.08% is based in the Netherlands and makes equipment used by semiconductor manufacturers, including Taiwan Semiconductor /zigman2/quotes/204359850/composite TSM +0.41% /zigman2/quotes/207385621/delayed TW:2330 -0.38% , Samsung Electronics /zigman2/quotes/209800866/delayed KR:005930 +0.10% /zigman2/quotes/202367843/delayed SSNLF 0.00% and Intel /zigman2/quotes/203649727/composite INTC -0.33% .
Here’s a one-year price chart for the ADRs:
And a three-year chart:
With dividends reinvested, ASML’s ADRs have returned 97% over the past three years. Over the past 12 months they are up 1%, after staging a 24% rally in 2019, following a 17% fourth-quarter decline.