By Philip van Doorn, MarketWatch
MarketWatch photo illustration/iStockphoto
Investors have a golden opportunity to grow their “buying power” by scooping up high-quality companies.
That’s according to Dev Kantesaria, who founded hedge fund company Valley Forge Capital Management in 2007.
“The best protection in a downdraft like this is to own the highest-quality businesses on the planet,” he said in an interview. “The idea that ‘safe-haven assets,’ such as bonds, real estate, gold, bitcoin and art are the best way to protect yourself is a fallacy.”
Valley Forge, based in Wayne, Pa., has $550 million in assets under management. According to Hedge Fund Alert, Valley Forge had an average annualized return of 14.8%, after expenses, in the 12 years through 2019, compared with 8.6% for the benchmark S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.24% .
Kantesaria provided three examples of companies he believes are excellent buys for “patient and disciplined“ investors who “should be handsomely rewarded when the recovery takes hold:”
|Company||Total return - 2020 through April 8||Total return - 2019||Total return - 5 years|
|Fair Isaac Corp.||-20%||100%||225%|
|Visa Inc. Class A||-7%||43%||172%|
For comparison, the S&P 500 is down 14.4% this year after returning 31.5% in 2019; its five-year return through April 8 was 46%. Those returns include reinvested dividends.
“We want to own monopolies or companies that are part of oligopolies. They have dominant positions, and provide essential product and services,” and have “pricing power to offset industry volume declines through a period like this,” Kantesaria said.
Kantesaria called Moody’s /zigman2/quotes/202808835/composite MCO +1.20% “a compounding machine that can increase its intrinsic value year after year.” Moody’s is essentially in a duopoly with Standard & Poor’s, a unit of S&P Global /zigman2/quotes/208931849/composite SPGI +0.35% , in the bond-ratings business, because about 90% of new bonds are rated by both companies.
Moody’s is the purer play, with about two-thirds of its revenue coming from the traditional bond-ratings business, while S&P Global is a more diversified company, according to Kantesaria.
Moody’s reaffirmed its 2020 earnings guidance March 11, and Kantesaria believes it is likely the company’s 2020 earnings will match those of 2019 or even “show some modest growth.”
“That will be an outstanding result for a company operating through an economic dislocation we have not seen since the Great Depression,” he said. “It is a company that doesn’t require a significant amount of R&D or capital expenditures. So it can use almost all of its free cash flow to buy back the stock, raise its dividend or make tuck-in acquisitions,” he added.
Fair Isaac’s /zigman2/quotes/200175312/composite FICO +1.10% consumer-credit scores are known as FICO scores. This has been the worst-performing stock this year among the three Kantesaria discussed.