Eric Schoenstein: High Growth Stock Picks With Quality Management

Eric Schoenstein: High Growth Stock Picks With Quality Management

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Looking for high growth stocks with a commitment to quality management? Consider the following strategy employed by the Jensen Quality Growth Fund.

As implied by the name, the fund places an enormous weight on picking stocks with quality growth models. We spoke with Eric Schoenstein, Co-Portfolio Manager to get the scoop on his stock picking strategies.

He explains Jensen's investment philosophy is geared towards trying to mitigate two biggest risks investors make: Business risk and pricing risk. Navigating around these obstacles is no easy task. So here's the approach.

Screening for Quality
Quality is defined as a firm that has a durable business model, a strong set of identifiable competitive advantages, and is a true market leader in their industry rather than a market follower. These firms will also have a talented management team, meaning "they understand how to balance short and long-term demand by trying to create business value day in and day out." In addition, they utilize and properly employ high levels of free cash flow.

Screening for Growth
Criteria: Generate 15% ROE every year for 10 consecutive years at a minimum.

This is the biggest constraint and manifestation of the aforementioned characteristics. It brings the available opportunities down to roughly 165 companies. "It can seem pretty constraining on the front end, but the thrust has been the same for the entire 24 year history of the firm."

After creating a select universe of high quality companies, the next task is to make sure valuations are fair, or undervalued, as to provide the best long-term growth opportunities.

Sectors
Due to the strict screens, some sectors rarely produce any qualifying companies. Traditionally, there have been no…
- Telecom stocks: "Telecom is straightforward. The industry has been in periods of transition for a while, the winners and losers haven't really been determined. There's a lot of excess capacity and nobody is able to really make big money.:
- Utility stocks: "It's harder for those businesses to earn the kind of performances we screen for because at the end of the day its predominantly a regulated industry. Regulations act as a cap on their ability to earn these kind of returns."
- Energy stocks: "While it certainly is a very hot/cold sector, at the end of the day the underlying product is a commodity, so you have more commodity like pricing such that you end up with a much more volatile industry. It can run a bit more based on speculation rather than traditional supply/demand and market leadership." A recent exception has been Excellon.

On the flip-side, there are sectors that are heavily represented in Jensen's field of investment worthy growth companies. They include:
- Healthcare Stocks: The patent barriers to entry and demographic trends help these firms take advantage, and there's no shortage of money being spent.
- Consumer Staples: There's a lot of brand loyalty consumers can get behind. They also have a competitive advantage that allows them to roll out across the globe.
- Industrials
- Information Technology

Recent Trades
The fund's newest position is in Varian Medical Systems, Inc. (VAR), an x-ray technology company that uses its machines to treat cancer. It is the dominant player with a 60% stake in global market share. The position was added in December. "The growth is still unlocked, and we see good growth opportunities around the globe… We're pretty patient investors with our discipline and we don't typically have a high level of turnover. We can hold stocks for years."

Most recently, the fund sold shares in The Clorox Company (CLX) and SYSCO Corporation (SYY). "It's not that they were bad companies, but our enthusiasm for their growth prospects declined."

Advice
Schoenstein was asked to share a pearl of wisdom with fellow investors:

"Whatever the vehicle is, an individual company or an investment strategy, understanding what you own and what you're investing in is most important…  So many times you see people relying on other people's advice and suddenly realizing they don't know what they bought or why they bought it."

Business Section: Investing Ideas
Looking to emulate Jensen Quality Growth Fund's (JENSX) investing strategy while heeding Schoenstein's advice?

Where better to start than to look at the fund's top holdings?

We list the top 20 below.  The Jensen Quality Growth Fund is based in Lake Oswego, Oregon. Total assets under management for the firm, Jensen Investment Management, is $5.5 billion.  Roughly $4 billion of that is in the Quality Growth Fund.

List sorted by % of portfolio.

 

1. Procter & Gamble Co. (PG, Earnings, Analysts, Financials): Provides consumer packaged goods in the United States and internationally. Market cap at $173.12B, most recent closing price at $63.18. Represents 4.9% of fund portfolio.

 

2. Pepsico, Inc. (PEP, Earnings, Analysts, Financials): Engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. Market cap at $108.34B, most recent closing price at $69.27. Represents 4.86% of fund portfolio.

 

3. Omnicom Group Inc. (OMC, Earnings, Analysts, Financials): Provides advertising, marketing, and corporate communications services. Market cap at $12.85B, most recent closing price at $47.12. Represents 4.82% of fund portfolio.

 

4. Microsoft Corporation (MSFT, Earnings, Analysts, Financials): Develops, licenses, and supports a range of software products and services for various computing devices worldwide. Market cap at $246.48B, most recent closing price at $29.34. Represents 4.79% of fund portfolio.

 

5. Emerson Electric Co. (EMR, Earnings, Analysts, Financials): Operates as a diversified manufacturing and technology company. Market cap at $34.11B, most recent closing price at $46.49. Represents 4.77% of fund portfolio.

 

6. T. Rowe Price Group, Inc. (TROW, Earnings, Analysts, Financials): A publicly owned asset management holding company. Market cap at $15.24B, most recent closing price at $59.76. Represents 4.7% of fund portfolio.

 

7. United Technologies Corp. (UTX, Earnings, Analysts, Financials): Provides technology products and services to the building systems and aerospace industries worldwide. Market cap at $67.57B, most recent closing price at $74.14. Represents 4.69% of fund portfolio.

 

8. 3M Co. (MMM, Earnings, Analysts, Financials): Operates as a diversified technology company worldwide. Market cap at $60.27B, most recent closing price at $86.86. Represents 4.64% of fund portfolio.

 

9. Oracle Corporation (ORCL, Earnings, Analysts, Financials): Develops, manufactures, markets, distributes, and services database and middleware software, applications software, and hardware systems worldwide. Market cap at $133.88B, most recent closing price at $26.91. Represents 4.31% of fund portfolio.

 

10. Amphenol Corporation (APH, Earnings, Analysts, Financials): Engages in the design, manufacture, and marketing of electrical, electronic, and fiber optic connectors; interconnect systems; and coaxial and specialty cables worldwide. Market cap at $8.81B, most recent closing price at $54.41. Represents 4.11% of fund portfolio.

 

11. Cognizant Technology Solutions Corporation (CTSH, Earnings, Analysts, Financials): Provides information technology consulting and technology services in North America, Europe, and Asia. Market cap at $17.99B, most recent closing price at $59.09. Represents 4.1% of fund portfolio.

 

12. Abbott Laboratories (ABT, Earnings, Analysts, Financials): Engages in the discovery, development, manufacture, and sale of health care products worldwide. Market cap at $97.77B, most recent closing price at $62.14. Represents 3.8% of fund portfolio.

 

13. Adobe Systems Inc. (ADBE, Earnings, Analysts, Financials): Operates as a diversified software company in the Americas, Europe, the Middle East, Africa, and Asia. Market cap at $15.71B, most recent closing price at $31.67. Represents 3.74% of fund portfolio.

 

14. Praxair Inc. (PX, Earnings, Analysts, Financials): Engages in the production, sale, and distribution of industrial gases primarily in North America, South America, Europe, and Asia. Market cap at $31.22B, most recent closing price at $104.53. Represents 3.67% of fund portfolio.

 

15. Equifax Inc. (EFX, Earnings, Analysts, Financials): Collects, organizes, and manages various financial, demographic, employment, and marketing information solutions for businesses and consumers. Market cap at $5.75B, most recent closing price at $47.78. Represents 3.41% of fund portfolio.

 

16. Colgate-Palmolive Co. (CL, Earnings, Analysts, Financials): Together with its subsidiaries, manufactures and markets consumer products worldwide. Market cap at $48.35B, most recent closing price at $101.32. Represents 3.41% of fund portfolio.

 

17. Becton, Dickinson and Company (BDX, Earnings, Analysts, Financials): Develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. Market cap at $14.83B, most recent closing price at $73.14. Represents 3.3% of fund portfolio.

 

18. Automatic Data Processing, Inc. (ADP, Earnings, Analysts, Financials): Provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers worldwide. Market cap at $26.62B, most recent closing price at $54.42. Represents 3.13% of fund portfolio.

 

19. Stryker Corp. (SYK, Earnings, Analysts, Financials): Operates as a medical technology company worldwide. Market cap at $19.94B, most recent closing price at $52.34. Represents 3.13% of fund portfolio.

 

20. Waters Corp. (WAT, Earnings, Analysts, Financials): Designs, manufactures, sells, and services high performance liquid chromatography, ultra performance liquid chromatography, and mass spectrometry (MS) instrument systems and support products primarily in the United States, Europe, Japan, and Asia. Market cap at $7.14B, most recent closing price at $80.32. Represents 2.94% of fund portfolio.

 

 

Written by Rebecca Lipman

 

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