Barron’s 2017 Roundtable, Part 3: 17 Picks From Three Pros

The 2017 Barron’s Roundtable, Left – Right: Brian Rogers, Oscar Schafer, Abby Cohen Photo: Brad Trent

Tables: 2016 Roundtable Report Card
2016 Mid-Year Roundtable Report Card

A rising tide supposedly lifts all boats, but that isn’t always the case on Wall Street. Even as the market breached another big, round milestone last week—Dow 20,000, we’re looking at you—plenty of stocks were beached by management missteps, corporate headaches, or industry-related foibles. The masses might be popping corks and the media exulting, but it is these washed-up, washed-out issues that most captivate the members of the Barron’s Roundtable. After all, value lies in stocks that potentially can improve, not in shares already priced for perfection.

Barron’s met with the Roundtable’s nine fabled investors and market seers back on Jan. 9 in New York to glean their views about the economy and financial markets in the year ahead. We reported their big-picture views and the specific investment picks of much of the crew in the prior two Roundtable issues. In this week’s final installment, Oscar Schafer, Brian Rogers, and Abby Joseph Cohen share their recommendations for 2017; the discussion is worth the wait.

Oscar, chairman of New York’s Rivulet Capital, has an impeccable eye for detail, whether it’s the perfect pocket square or the myriad attributes that make a particular investment attractive. He combed the U.S. and Europe this year to find five compelling values, including a John Malone play on Continental cable assets. He analyzes each with precision and panache.

Barron’s Roundtable Series

Barron’s 2017 Roundtable — Part 1
Barron’s 2017 Roundtable — Part 2

Brian chairs T. Rowe Price, and has a notable fondness for big, bruised blue chips likeBristol-Myers Squibb [ticker: BMY]. Their problems are painfully evident, their potential much less so without some digging, which he is more than happy to do. The conventional wisdom interests Brian little, which has long been a plus for clients of the Baltimore-based asset-management firm.

Abby, senior investment strategist and president of Goldman Sachs’ Global Markets Institute, has smarts to match her patience. She also has a practiced eye for picking issues recommended by Goldman analysts that dovetail nicely with her macroeconomic investment themes. She favors equities over bonds this year, and encourages investors to look for opportunities not only at home but abroad. Checking into Shenzhen Airport [000089.China] might be a good start.

For more on this week’s stocks and stockpickers, please keep reading.

Barron’s: Oscar, what are you recommending this year?

Schafer: My first pick is Advisory Board [ABCO], a research and technology company serving the health-care and higher-education sectors, with a market capitalization of $1.3 billion. ABCO’s health-care business accounts for 75% of revenue; it offers performance-improvement solutions to hospitals in the U.S. The stock was hurt by the presidential election. ABCO books up to 50% of its new health-care business in November and December, and given the uncertainty hospitals face under the Trump administration, spending on new products was frozen. Bookings were weak, and the health-care business is unlikely to grow this year.

What’s to like, then?

Schafer: These issues are temporary, allowing investors to buy a great business with recurring and growing revenue, expanding profit margins, and a good balance sheet for 12.5 times run-rate free cash flow. ABCO derives 55% of its health-care revenue from software and analytics. Another 30% comes from best-practices research. The remainder is from consulting mandates. The consulting business has given ABCO a unique insight into the highest-priority pain points that hospitals are experiencing. The company has leveraged that information to develop its software and analytics offering.

While growth has slowed, the business remains healthy. The software and research businesses are 100% subscription-based, with a 90% renewal rate. Prior to 2016, ABCO had grown its health-care business organically by 10% to 30% a year for more than a decade. We are relatively certain it will return to growth in coming years.

How is the higher-education business faring?

Schafer: This business offers best-practices research and Royall, a platform that helps colleges with recruitment. The population of 18-year-olds is declining, and nonprofit colleges outside the U.S. News top 50 list are going to have more trouble filling their classes. Royall offers data-driven solutions that help colleges know when to send emails, whom to target on Facebook, and such. Management has described the opportunity set in higher education as “health care 15 years ago,” meaning the runway to roll out new research modules and other products is long. The higher-ed business could grow at a mid-teens annual rate.

Please give us some details on ABCO’s financial health.

Schafer: ABCO has just under $500 million of net debt. Its ownership ofEvolent Health, a health-management consulting firm, is worth $100 million. Net debt is less than two times Ebitda [earnings before interest, taxes, depreciation, and amortization]. ABCO is trading for $36 [as of Jan. 6]. The company could be worth considerably more to a strategic or financial buyer. On a standalone basis, ABCO could generate more than $3 a share of free cash flow by 2019. At some point, the stock will trade for $60.

[Elliott Management, the activist investment firm run by Paul Singer, disclosed on Jan. 12 that it had taken an 8.3% stake in Advisory Board. The firm said in a filing that Advisory Board’s shares are “significantly undervalued” and that it is seeking a “dialogue” with management. The shares have risen 24%, to a recent $44, since news of Elliott’s holding was reported. Schafer said in a follow-up email: “The presence of an activist increases the probability that ABCO is acquired in the near term. We believe there are buyers who would pay north of $50, and a strategic buyer could pay close to $60. This also puts more pressure on management to either accelerate growth in health care or take more costs out of the business.”]

My next pick is AA [AA.UK]. It is the leading provider of roadside assistance in the U.K.—like AAA in the U.S., but with a somewhat different model. Rather than outsource repairs to third-party garages, AA owns and operates its own patrol vans and employs its own mechanics. The mobile maintenance stations inside each van are equipped to handle a wide range of issues. About 80% of breakdowns are repaired at the roadside. AA has been operating for more than 100 years and is beloved by customers.

How do shareholders feel?

Schafer: It is a fantastic business with strong pricing power, but the business trades at a modest multiple. There are two reasons for this. AA has a lot of leverage, with debt equal to seven times Ebitda. Also, the management team is spending 130 million pounds [$163 million] to upgrade AA’s decades-old IT [information technology] systems. European investors are uncomfortable with high leverage, and elevated capital expenditures exacerbate the issue. With the spending cycle almost complete, the stock could double in coming years.

The roadside-assistance market in the U.K. is dominated by three players. AA has 40%; RAC has 27%, and Green Flag has 14%. It would be impossible for a new entrant to replicate the density of the AA owner-operated model, which creates a moat around the business. Consequently, AA generates strong, recurring revenue, has 40% Ebitda margins, and requires little ongoing capital reinvestment. While pricing increases have driven growth, membership has been declining for five years. AA is led by Robert Mackenzie and Martin Clarke. Mackenzie had been chairman of Northgate [NTG.UK], which I recommended at the Roundtable three years ago. The stock appreciated considerably when he was chairman.

Why did Mackenzie leave Northgate?

Schafer: He retired in 2015, but was executive chairman of AA at that time. Mackenzie and Clarke attempted to buy one of the big roadside-assistance companies several times in the past decade. They saw in AA a business that had been milked for cash under private-equity ownership and was badly in need of investment. The company didn’t even have a customer Website. Management has promised that its investments will improve retention and return AA to membership growth.

AA posted sequential quarterly growth in membership in the September quarter for the first time in many years. Ebitda is expected to grow by high single digits in the current fiscal year, which ends in January 2018. The company just refinanced its debt, pushing out 90% of its maturities to 2020 to 2025. At a recent £2.78, AA trades for 10 times Ebitda and has a free-cash-flow yield of 10.5% and a dividend yield of 3.5%. Free cash flow will increase dramatically as the company finishes the last of its upgrade spending and continues to pay down debt. The shares could be worth £4.50 this year, which implies a valuation of only 11.5 times Ebitda and an 8% free-cash-flow yield. A year ago, a private-equity firm acquired RAC, the No. 2 player, at a multiple of 13 times Ebitda.

Is AA’s business confined to the U.K.?

Schafer: Yes. Mario will like my third pick, Liberty Global [LBTYK], the largest cable TV operator in Europe. [Gabelli recommended Liberty Braves (BATRK) and Live Nation Entertainment (LYV) in last week’s Roundtable issue. Both stocks are part of John Malone’s Liberty Media (LMCA) empire.] Malone has owned cable assets in Europe since the 1980s, but Liberty Global was officially formed in 2005, when he merged his cable assets with UnitedGlobalCom. Since then, Malone has used Liberty to roll up cable assets across the Continent. After a 10-year run of value creation and stock appreciation, Liberty had a rough 18 months, with the stock falling 40% from its high, to $32. While some of the decline is due to currency, several other issues have weighed on the shares.

Such as?

Schafer: Liberty executed a string of complex transactions involving its Latin America assets, which has been a distraction to the company and a nuisance to investors. But these issues are in the past, and the economic interests of this business are now held by several tracking stocks. Liberty has also fallen short of its operating targets in Europe for the past two years. In particular, its subsidiary in the Netherlands, Ziggo, has seen increased competition from KPN. Additionally, Liberty announced a plan to increase its footprint, a move that will depress cash flow for several years.

The stock is widely held by hedge funds, many of which wrongly assumed Liberty would be sold to Vodafone [VOD] by now. We view European cable as an attractive business. The threat from cord-cutting [canceling cable contracts] is minimal, as most video packages in Liberty Global’s market cost only $10-$20 a month.

What is the outlook for growth from here?

Schafer: Liberty has a track record of organic growth, with contributions from increasing penetration and modest price increases. Recently, annual revenue growth slowed to 3%-4% and operating cash flow growth to 4%-5%. Liberty is planning to reaccelerate growth through the build-out, which will add seven million homes by 2018. The biggest piece will be in the U.K., where its Virgin Media subsidiary plans to add four million homes at a cost of $3 billion. Unlevered returns from this project are forecast at more than 30%. Between the build-out and plans to keep operating costs mostly flat, Liberty management has guided investors to expect growth in operating cash flow of 7% to 9% over the next three years. Targets are being met with skepticism, given the company’s recent shortfalls.

Liberty has taken some interesting strategic steps recently. The company just closed on a deal to combine Ziggo with Vodafone’s wireless business in the Netherlands, which will yield lots of synergies and create a more competitive converged offering. It also leaves the door open for a larger deal with Vodafone. Liberty has announced other deals in the past few weeks to acquire a cable system in Poland and Altice’s [ATC.Netherlands] cable business in Belgium.

Even if Liberty falls a little short of its targeted range for operating-cash-flow growth, it will still generate $3 a share of free cash flow in 2019, with elevated capex [capital expenditures]. Assuming a normalized level of capex to revenue, free cash flow could reach $4.25. The business is highly leveraged at five times Ebitda, but the leverage is appropriate for a diversified cable company. We expect Malone to use excess free cash flow to buy back stock.

Do you have a price target for the shares?

Schafer: We value the shares at $55 by the end of this year. Malone could create additional value through acquisitions.

In the past few years I have recommended Interxion Holding [INXN] on several occasions, most recently in the 2015 Midyear Roundtable. The shares have performed well, and this is an interesting time for an update. As a reminder, Interxion owns a network of carrier-neutral data centers in Europe. They are a critical part of the infrastructure powering some big technology trends, such as cloud computing, streaming video, and social media. Interxion gives me the opportunity to benefit from these broad secular trends without needing to pick individual technology winners and losers. Whatever comes out of Silicon Valley, it is likely to create more demand for Interxion’s products over time.

Another thing I like is the company’s ability to reinvest profits at high rates of return. This is especially important in a capital-intensive business. Interxion does this by constructing new data centers adjacent to existing facilities. Expansion projects are relatively low-risk and leverage the personnel, power infrastructure, and fiberoptic networks already in place. I estimate the company generates north of 20% returns on this invested capital. As long as Interxion can continue this, the stock could compound in value. Finally, it is always nice to own a company with optionality, where you can wake up one morning and discover the business is being acquired for a nice premium.

Are you expecting to wake up to that news sometime soon?

Schafer: Interxion is in a great negotiating position because it doesn’t need to sell the business. There is plenty of organic growth ahead. But the industry is rapidly consolidating, and Interxion looks like a juicy target. It might sell at a price much higher than most people think. A few weeks ago, a private European data center, Global Switch, sold a 49% interest to a Chinese consortium for £2.4 billion. In this case, the buyer paid north of 23 times Ebitda for a minority stake. This transaction showed us that there is a wider pool of buyers for these assets than public U.S. REITs [real-estate investment trusts], and that buyers are willing to pay a high price to own such scarce assets. Even without a deal, Interxion could have 30% upside in the next 12 to 18 months.

I am also re-recommending ANI Pharmaceuticals [ANIP], a producer of generic drugs, which I discussed at prior Roundtables. The stock rose 30% in 2016. This was in an environment where Valeant Pharmaceuticals International [VRX] fell 80% and Teva Pharmaceutical Industries [TEVA] fell 50%. ANI is on course to achieve its short-term goal of generating $100 million of Ebitda. The company has only 11.5 million shares and is trading for $60 a share.

Oscar Schafer: “Interxion gives me the opportunity to benefit from broad secular trends without needing to pick individual technology winners and losers. Another thing I like is the company’s ability to reinvest profits at high rates of return. Photo: Jenna Bascom

The most interesting thing about ANI, in addition to its own product pipeline, is its optionality on a generic corticotropin product. A rival product, Acthar, is manufactured by Mallinckrodt [MNK] and sells for $68,000 a vial. ANI bought an NDA [new drug application] from Merck [MRK] for a similar product, and I hope it soon will file an sNDA [supplemental new drug application] to compete in this $1.5 billion market. The first 12 months ANI’s generic version is on the market, and I’m not sure when that will be, ANI should generate $200 million in Ebitda.

Witmer: What does Acthar treat?

Schafer: It is used to treat infantile spasms and multiple sclerosis. That’s it for me.

Thank you. Brian, let’s hear your ideas.

Rogers: I have five stocks today. In 2013, I recommended Legg Mason [LM], which I’d like to revisit. I call it the other great investment firm in Baltimore. Legg had a challenging year in 2016. The stock fell 24% and currently trades for $31.52. The company has a market value of $3.1 billion. It has 101 million shares outstanding, and a share count that goes down with great regularity. Legg pays an annual dividend of 88 cents a share and yields about 2.8%. It sells for 10 times forward earnings, one of the few companies with a 10 P/E. Legg is a diversified investment-management firm with about $725 billion in assets under management. Western Asset Management is its biggest unit, but there are other interesting parts. ClearBridge Investments is the company’s primary equity vehicle now.

Black: The stock sells below book value.

Rogers: Correct. Acquisitions in the industry typically are done for between 1% and 2% of assets under management. Legg sells for 0.4% of assets. The CEO, Joseph Sullivan, was hired in 2012 and has done a good job. He worked well with Nelson Peltz, whose Trian Fund Management owned a big stake in the company. Last year, Peltz sold his stake to a Shanda Group, a Singapore-based investment firm. Sullivan has embarked on a fairly aggressive stock-buyback program. In the past six to seven years, the company’s share count fell by about 38%. Legg is shrinking its share count at a rate of 6% to 8% a year, which its cash flow allows. From an investment perspective, there is a buyback case and an undervaluation case. Legg could earn about $2.30 a share in the fiscal year ending in March, and $3.10 in fiscal 2018.

Schafer: Why such a big increase?

Rogers:It assumes some cessation of cash outflows and a lot of expense cuts. Legg has taken a meat cleaver to corporate expenses, so there has been a return to stability in the business.

Gabelli: I own the stock. Shanda owns 10% of the shares, and is trying to increase its holdings to 15%. Legg made some big acquisitions last year.

Rogers: It bought an alternative asset manager and a real estate manager. On Shanda, which is run by Tianqiao Chen, the firm has a 15% investment limit and a standstill agreement for three years. It is an activist investor of sorts. Shanda is also investing $500 million in various Legg Mason products and putting two directors on the board.

Gundlach: Why did the stock drop so precipitously?

Rogers: Investors were concerned when Trian sold, and asset managers generally didn’t have a great year last year.

Gabelli: Also, there are concerns that the growth of exchange-traded funds will have a negative impact on active managers like Legg. And there was lingering concern about the two acquisitions, which used up a lot of cash and required debt.

Gundlach: It seems really cheap. Is there anything under the hood?

Rogers: We don’t think so. The stock ought to sell at least in the $40s.

Black: Legg Mason historically has had a low return on equity, in the sub-10% range. Can they ever make a decent return on equity?

Rogers:If they buy back more stock, that will help improve return on equity.

Schafer: Do you expect Legg Mason to be taken over?

Rogers: There is some interesting activity going on in the asset-management business, but that isn’t part of the bet.

Next, we like CVS Health [CVS]. When I was a kid growing up in Massachusetts, the company was called Consumer Value Stores. It was once part of Melville. Like Legg Mason, CVS had a challenging 2016. The stock was down 19% and currently trades for $82. The company reduced its full-year earnings estimate when it reported third-quarter results. High expectations had been built into the stock price. CVS is a high-quality, blue-chip company. It offers a great combination of a retail pharmacy network and Caremark, a pharmacy-benefits manager.

CVS has a market cap of $87 billion. It will probably earn $5.85 a share this year, not the $6.85 previously expected. Again, much like Legg Mason, CVS has been buying back 6% to 8% of its shares outstanding every year, so return on capital is growing. The company increases the dividend almost every year; the current yield is 2.4%. We expect the dividend to go up in 2017. This looks like a classic contrarian play. The sharp drop in the stock wasn’t warranted.

The company lost contracts to Walgreens.

Rogers: But they weren’t super-big contracts. Walgreens Boots Alliance [WBA] will be a formidable competitor. If Walgreens buys Rite Aid [RAD] and gets it out of the marketplace, that will be good for the retail side of CVS’ business.

Schafer: A lot of CVS’ profitability comes from the sale of generic drugs. But prices for generics are under pressure.

Rogers: That is one reason the stock fell.

Gabelli: But cash flow is terrific.

Rogers:And their competitive position is strong. CVS is also a good corporate citizen. After we had riots in Baltimore in 2015, CVS was one of the first companies to begin to rebuild its Baltimore presence. That caught my eye as a local business leader. We see upside for the stock of $100 a share, and there isn’t a lot of downside—maybe to $75.

My third name is Casey’s General Stores [CASY], not my usual cup of tea. The company has 40 million shares outstanding and a market value of roughly $4.5 billion. The stock is trading for $116 a share. Casey’s is based in Iowa and occupies an interesting niche. It runs convenience stores and gas stations in the Midwest, and roughly half its stores are in towns with fewer than 5,000 people. It effectively has a competitive moat because no one else is going to enter these markets. The company has 1,940 stores; it owns 99%, and its best business, interestingly, is pizza delivery.

Casey’s isn’t a value-based investment; it is a growth-oriented company. It is planning to expand into small towns in states including Ohio, Kansas, Tennessee, and Arkansas. It builds new stores or makes bolt-on acquisitions. It buys stores it can remodel. It is adding 60 to 70 new stores a year. Casey’s could earn $5.71 a share in fiscal 2017, ending in April, and $6.50 in fiscal 2018. It is inexpensive, as retailers go, but with a clear growth trajectory.

Gabelli: About seven years ago Canada’s Couche-Tard [ATD.B.Canada] tried to buy Casey’s for $38.50 a share. 7-Eleven came along and offered $43. Management said no to both, and the stock has tripled since.

Rogers: This is a good niche operation with high returns. Mario recommended Viacom[VIA.B] today [see last week’s Roundtable issue], which is the hard way to make money in the entertainment sector.

Gabelli: Nothing in life is easy.

Rogers: The easy way, at least this year, is to buy Walt Disney [DIS]. The stock was flat last year but has come to life recently with the release of Rogue One: A Star Wars Story. It is trading at $109. One of the biggest issues facing Disney is pressure on ESPN, due to the high cost of sports programming and problems with subscriber retention. Disney is one of the world’s great companies and was left behind in last year’s market advance.

Schafer: One great movie release might change investors’ minds and lift the stock.

Gundlach: I never understood why that would be the case.

Rogers: Investors at the margin get all revved up over an exciting movie, but you have to view it within the context of the overall company.

Gabelli: In 1977 George Froley [a Los Angeles money manager] called me from Brentwood [a neighborhood in Los Angeles] and said, “Mario, there are long lines for this release Star Wars. I’ve never seen anything like it.” I bought 20th Century Fox stock on that news. Today, these companies are too big to have a single movie move the needle.

Rogers: Regarding ESPN, competitors such as Fox Sports Network and NBC Sports are coming in and bidding up the cost of programming.

Brian Rogers: “CVS is also a good corporate citizen. After we had riots in Baltimore in 2015, CVS was one of the first companies to begin to rebuild its Baltimore presence. That caught my eye as a local business leader.”Photo: Jenna Bascom

Gabelli: If someone doesn’t like sports, but has to pay $7 a month for ESPN because it is part of the cable bundle, that’s a challenge. There is an alternative to the “skinny bundle”: Adopt a la carte cable programming.

Rogers: Given the networks Disney owns, it probably wouldn’t be in a bad place if the industry went to a la carte pricing. Disney could repurchase $8 billion worth of stock this year. It has a blue-chip balance sheet. The CEO, Robert Iger, who has done a great job, is scheduled to retire in 2018.

He has been scheduled before.

Rogers: Yes, but one never knows if this is the final scheduling. It is probably a good time. He will try to go out on a high note, so the company will be on the upswing. We expect Disney to trade for 20 times our 2018 estimate of $6.50 a share; the fiscal year ends Oct. 1. That implies 20% upside. The downside is $100 a share, or maybe $95.

Gabelli: You guys like big-cap companies. I like the minnows that will be taken over.

Rogers: Health care was the only sector in the S&P 500 that lost money last year. Shares of Bristol-Myers Squibb were down about 15%. The company has a roughly $100 billion market value, $7 billion in debt, and a 2.6% dividend yield. It raises the dividend every year. The shares are a little expensive for a drug company, but Bristol is the go-to company for immunotherapy drugs. The stock dropped about 20% on a single day last August after its leading immunotherapy drug, Opdivo, failed a study that could have led to more widespread use in lung-cancer patients. The shares have recovered a bit since then. In October, the company authorized a new $3 billion stock buyback.

This is an exciting long-term growth story. Bristol and Merck have the lead in immunotherapy applications for different types of cancer, and go back and forth on who has the upper hand. Bristol’s drugs, Yervoy and Opdivo, have had a major positive impact on cancer patients. Bristol’s pipeline also includes compounds for other types of cancer applications. It is also working on prostate-cancer vaccines and hepatitis drugs.

Give us the financial picture.

Rogers: Sales from new products could add about $9 billion to revenue, on top of the $17 billion a year the company already reports. Upside for the stock, which closed at $60 last Friday [Jan. 6], is probably $75 to $80. The downside could be $50, and you collect the yield. There is a remote chance that Novartis [NVS] or Pfizer [PFE] or some other large drug company might express an interest in buying Bristol-Myers if its market cap shrank. We don’t think it will happen, but you can’t fully discount it.

[Bristol-Myers’ stock sank 11% on Jan. 20 after the company said it wouldn’t try for accelerated approval of its Opdivo/Yervoy combination in first-line lung-cancer treatment. The company subsequently lowered its 2017 earnings guidance. In a follow-up conversation, Rogers said he expects the drug combo to be approved at some point.]

Thanks, Brian. Last but not least, it’s Abby’s turn.

Cohen: It is important this year to look at things that benefit from economic growth. Fixed income isn’t appealing, but equities are, and not just in the U.S. Like Brian, I will discuss some stocks that didn’t do well in 2016. Health-care stocks were clobbered after performing well for an extended period. Also, some had idiosyncratic risks, including pricing issues. There is a lot of confusion as to whether the Trump administration will be good for health-care stocks or bad. No one is sure. I have selected stocks that aren’t sensitive to policy but rather demographic trends, including aging.

Eli Lilly [LLY] is in the process of being “reformed.” The stock was down 10%, year on year, through last Friday [Jan. 6]. We are projecting revenue growth of about 5% this year, and earnings growth of about 15%. The stock yields 2.7%. Return on equity will exceed 25%, and 2017’s estimated earnings growth will be followed by double-digit growth over the next several years. Lilly’s earnings could grow by 14% to 15% per annum, versus 10% for peers. We expect profit-margin expansion of 900 basis points [nine percentage points] between now and 2020.

What is Lilly’s stock price?

Cohen: Lilly is trading for $75. Its price/earnings multiple is about 15% below the rest of the industry. The company has a significant product pipeline. New products currently represent about 15% of the product mix. By 2020, they will be more than 45%. The company is working on treatments for many things, including diabetes, psoriasis, and arthritis. It also has a cancer drug in final testing. The risk isn’t so much political as pipeline execution for these new drugs.

Another health-care stock we like is Olympus [7733.Japan]. People think of this Japanese company as a camera maker, but 76% of its sales are related to the medical field. Another 13% are scientific processes, and the remainder comes from cameras. Through last Friday, the stock was down 12%, year on year. Olympus has a 20% global market share in minimally invasive surgical products. Its Thunderbeat surgical energy device is an example. The company is a global leader in gastrointestinal endoscopes, with almost a 70% market share. It is also a leader in endoscopic knives.

As I mentioned earlier today, the Japanese stock market looks interesting. It was under pressure early in 2016, but has been recovering in recent months because of a supportive valuation and positive earnings revisions.

Witmer: Abby, didn’t Olympus have an accounting scandal some years ago?

Cohen: It did. [Olympus executives hid losses through fraudulent accounting for more than a decade; the fraud was exposed in 2011.] In the past few years, there has been a commitment by Japan to enhance disclosure and improve accounting.

Black: What kind of P/E multiple do you expect for Olympus?

Cohen: We expect the stock to trade for 23 times fiscal 2018 earnings. The fiscal year ends in March. Olympus yields 0.7%.

Speaking of minnows, bluebird bio [BLUE] is small and unprofitable. This year could be an inflection point. Bluebird is developing gene therapies to treat rare diseases and cancers. Its current drivers are hematology products for transfusion-dependent patients. Bluebird recently announced positive results for a new immunotherapy treatment for cancer. It is an innovative company.

The stock has fallen to $68 from almost $200 in July 2015. What happened?

Cohen: This is a speculative investment. The share-price decline in late 2015 was tied to disappointing clinical results. The company said it would move ahead with testing of a stronger version of the drug, LentiGlobin, for beta-thalassemia [a blood disorder] and sickle-cell anemia. Clinical results announced in 2016 were favorable, and more news is expected in 2017.

Abby Joseph Cohen: Intuit “could have a dual tail wind: It has a tax rate of about 33%, and earnings would benefit if corporate taxes were cut. In addition, if there is a simplification of taxes, the company might see increased demand for its products.” Photo: Jenna Bascom

Next, we are interested in alternative forms of energy—in particular, electric vehicles. LG Chem [051910.Korea] is the largest chemicals company in Korea. It also makes battery packs for electric vehicles. The stock fell 21% in the 12 months ended Friday. Our analyst estimates revenue could rise by 6% this year, and earnings by 9.7%. The company is No. 1 in lithium-ion battery packs used for cars, and its U.S. subsidiary, LG Chem Michigan, manufactures advanced battery cells for electric vehicles in the U.S. It provides battery packs for the Chevy Volt and the Ford Focus. The company can produce up to 200,000 battery packs a year in the U.S. LG Chem has 14,000 employees in Korea, and 12,000 elsewhere. Of the latter, 3,000 are in research and development, mostly in Michigan. LG Chem also provides advanced materials for electronics.

What are your expectations for the stock?

The stock trades for 266,000 Korean won [$226], which equates to 11.4 times 2017 estimated earnings. That makes it reasonably priced, even for a chemicals company. Our analyst has a price target of KRW335,000 over the next year.

There was much discussion today about a likely simplification of the tax code and a reduction in corporate taxes. Intuit [INTU] would benefit from such changes. Many people are familiar with its products, including TurboTax and QuickBooks. Intuit shares did well in the past 12 months; they were up 21%, to $116. The stock isn’t cheap at 26 times earnings for the fiscal year ending in July 2018. Our analyst expects revenue to rise about 11% next year, and earnings to increase by 15%. The company could have a dual tail wind: It has a tax rate of about 33%, and earnings would benefit if corporate taxes were cut. In addition, if there is a simplification of taxes, the company might see increased demand for its products.

Haven’t some legislators called for tax returns on a postcard?

Cohen: That seems unlikely to happen. Houghton Mifflin Harcourt [HMHC] fell 45% in the past 12 months. The company didn’t execute well. It is a book publisher with some notable children’s book franchises, but the growth is coming from textbooks. Not surprisingly, technology is disrupting this business, and textbook publishers are selling a lot of interactive materials, not just for the students but teachers. Houghton Mifflin didn’t do well in the latest textbook-adoption cycle in California. Our analyst likes it because the company has taken steps to fix things, and is investing heavily to make sure it is better prepared for the next round. A few states, including California and Texas, make the big decisions on textbook adoptions, and the rest of the country follows.

Black: The industry’s accounting has changed. In the old days you sold a book and recognized the revenue. Now, if technology is licensed over three to five years, you might have deferred revenue.

Cohen: Thank you for mentioning that. Last year, Houghton probably lost $1.53 a share. This year, it will lose $1.20. Revenue is expected to be up about 5%.

When do you expect a turnaround?

Cohen: We estimate the turnaround will come in the next two years. The next big cycle is in 2018. If Houghton doesn’t get it right, it has some interesting assets that someone else might find a way to enhance.

Finally, one way to participate in Asia’s growth is through infrastructure stocks. We like Shenzhen Airport. About 80% of airports in China aren’t profitable. This is a profitable airport.

Zulauf: No wonder 80% aren’t profitable. China has too many airports.

Cohen: Exactly. Shenzhen is operating at close to capacity. We expect earnings to rise 18% this year and revenue to be up 11%. If the government allows them to increase their slots, that would be positive. Capacity utilization of existing slots is 98%. There was also an increase in air traffic in Asia toward the end of the year. Shenzhen passenger traffic was up about 10%, year on year, in December. Cargo-volume growth exceeded that. Shenzhen’s focus is not only on the domestic market but Australia and New Zealand. The stock trades for 21 times 2017 estimated earnings.

Thank you, Abby, and everyone.