What is your top "sleeper" or "under the radar" stock pick?
We have a few in the Jensen Quality Growth Fund and one of the more interesting is the healthcare company Varian Medical Systems, a fast growing company that manufactures x-ray technology applications. The company is a technological leader in its field, and it enjoys a leading 60% global market share of radiation therapy equipment.
The emerging markets are a small portion of its business but they represent a rapidly growing element of the company's sales that offsets pricing pressures in the more developed countries. Switching costs in this business are high and customer's need for service provides the company with an annuity-like stream of earnings. Over the past five years Varian's average annual growth in earnings per share has been 14% and last year the company's return on equity was an impressive 32%.
What stocks or sector would your sell or avoid right now?
We prize "all weather business models" with consistency and sustainability in earnings and cash flows so we avoid companies where the market, not the business, sets the price of the finished product. So we don't own any commodity-based companies nor are we invested in utilities that are generally too highly regulated to meet Jensen's basic investment requirement of a 15% return on equity.
What is your outlook for 2013?
Much will depend on how our government chooses to address the fiscal cliff's expiring tax cuts and sequestration provisions. Regardless of who is in power, we believe it is important that investors recognize the homegrown challenges that will face the U.S. economy next year, including the urgent need for the next administration and Congress to reduce federal spending and raise revenues.
Both of these issues have the potential to reintroduce uncertainty and volatility into the economy, which we believe highlights the attractiveness of high-quality growth companies with durable competitive advantages, regardless of the economic backdrop.
Written by Gregg Greenberg in New York