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27 Best Stocks to Buy Now, According to Our Roundtable Investment Pros

Well, that didn’t take long. After a chilly start to the year—and we don’t mean the weather—stocks are roaring again, led by the even-more-Magnificent Seven. Gains in most of these tech highfliers lifted the
S&P 500
index to an all-time closing high of 4839.81 on Friday—its first such record in more than two years.

Everyone likes a winner, but would-be winners hold even greater appeal to the value-conscious investors on the Barron’s Roundtable, which met on Jan. 8 in New York. Nothing against
Nvidia,
but it’s the next Nvidia that appeals to this prudent crew. In our latest Roundtable installment, the second of three, you’ll learn about 19 such contenders, and a bevy of attractive bond funds, too.

Our speakers include William Priest, chairman, co-chief investment officer, and a portfolio manager at TD Epoch; David Giroux, chief investment officer at T. Rowe Price Investment Management; Sonal Desai, chief investment officer and a portfolio manager at Franklin Templeton Fixed Income; Scott Black, founder and president of Delphi Management; and John W. Rogers Jr., founder, chairman, co-CEO, and chief investment officer of Ariel Investments, making his Roundtable debut.

We’d be remiss if we didn’t also highlight Sonal’s sharp commentary on the economy (strong), liquidity (abundant), and interest rates (heading lower, but not too soon).

So, here’s to the big guys that powered the market to its latest peak. And here’s to the bargains, a rich source of future returns. You can learn more about them in the edited comments that follow.

Barron’s: Bill, tell us which stocks excite you this year.

William Priest: I’ll start with
Meta,
the world’s largest social-media company. Some people don’t like Mark Zuckerberg [Meta’s co-founder and CEO], but Meta has created one of the most valuable advertising franchises in the world. Its user base is over three billion people. It has unique data on these consumers. The company should remain a key beneficiary of continued digital advertising penetration. Investments in the metaverse are a drag on profits today. Either this initiative will turn profitable, or eventually it will be shuttered.

We expect the free cash flow from Meta’s family of apps to grow from more than $19 a share this year to nearly $29 by 2025, excluding the metaverse losses. If you capitalize the free-cash-flow stream at 20 times, discounting it back one year at 15%, and subtract $30 a share for the net present value of the metaverse losses, this suggests Meta could be worth about $470 a share in 12 to 18 months, up from $350 now.

My next stock is a bit more obtuse.

We’re all ears.

Priest: 
Evolution
is based in Sweden. It is a global provider of business-to-business online casino solutions. It develops, produces, markets, and licenses live casino and slot casino solutions to gaming operations in Europe, Asia, and the U.S., and delivers them through sophisticated and proprietary videoconferencing technology. 

In live casino, its core business, Evolution, runs live games such as roulette and blackjack from studios that allow players to interact with dealers through mobile devices and PCs. The company earns a take rate of customer winnings. It charges an annual fixed fee for product customization, and is the leader in this fast-growing market. It is a beneficiary of the secular shift from land-based to online gaming. Its wide economic moat—a function of its scale—array of games, and network effects should allow it to capture growth opportunities and generate attractive returns. The current valuation doesn’t discount this opportunity.

What sort of return do you expect?

Priest: Evolution can earn free cash flow of 5.50 euros [$6] in 2024, €6.50 in ’25, and €7.50 in ’26. The shares could be worth 1,450 Swedish kronor [$138.71] in 12 to 18 months, or about 20 times estimated free cash flow. The stock recently traded around SEK1,160.

Next,
RELX,
based in the United Kingdom, is a leading global provider of information-based analytics and decision tools for professional and business customers. Previously known as Reed Elsevier, the company has three core businesses—risk; legal; and science, technical, and medical—and an exhibitions business. The risk business helps insurance companies to evaluate and predict risk, and banks to prevent online fraud and money laundering. The legal business helps lawyers increase productivity and deliver better results. And the science, technical, and medical business organizes the review, editing, and dissemination of primary research, reference, and professional educational content.

Company / Ticker 1/5/24 Price
Meta Platforms / META $351.95
Evolution / EVO.Sweden SEK1,156.80
RELX / REL.UK £31.00
Keyence / 6861.Japan ¥60,130
ON Semiconductor / ON $75.70

Sources: FactSet, Bloomberg

RELX participates in large and growing global markets. Unique data assets and a network effect create a powerful flywheel effect that strengthens the company’s competitive position. The company is well placed to see accelerating growth in the coming years as its next generation of decision tools and artificial-intelligence-based product enhancements is rolled out, which could drive upside to Street estimates and the free-cash-flow multiple. RELX could generate per share free cash flow of 1.35 pounds sterling in 2024 [$1.71], £1.40 in ’25, and probably £1.50 in ’26. The company could be worth about £40 in 12 to 18 months, up from £31.

What else do you like?

Priest: 
Keyence
is based in Japan. The company is a world leader in the development and manufacturing of industrial automation and inspection equipment. Keyence should benefit from the long-term structural growth opportunity in factory automation. The stock is trading for 60,130 yen [$417.16], and the shares could be worth around JPY75,000. We expect Keyence to generate about JPY1,700 in earnings per share in fiscal 2025, nearly JPY2,000 in fiscal year ’26, and almost JPY2,200 in fiscal ’27.

ON Semiconductor
peaked in July at around $108 and now trades near $75. ON provides power and sensing solutions mainly to automotive and industrial customers. It has undergone a substantial transformation under the current management team. It is in a strong market position in silicon carbide, a key component necessary to drive electric-vehicle adoption. While silicon carbide start-up costs are currently hurting gross margins, this headwind could turn into a tailwind beginning in 2024 and contribute strongly to the growth of free cash flow. ON has a high market share in automotive sensing, and will benefit as the industry shifts to autonomous driving, which requires a lot more sensing content. 

ON generates free cash flow of roughly $2 a share today. This is down from over $3.60 a share in 2022, primarily due to elevated capital investment and inventory levels that are expected to normalize. Our analyst expects that to grow to as much as $7 in 2025, driven by lower capital intensity and growing end-market demand and margin expansion. At a 20 multiple of 2025 estimated FCF a share, we get a stock worth as much as $140.

Why did the stock fall? 

Priest: Expectations were high, and it fluctuated with expectations about the sale of EVs.

Three of your five picks are based overseas. Are you finding more value beyond the U.S.?

Priest: I am not that optimistic about the U.S. stock market. It is particularly hard to handicap the outlook, given the myriad uncertainties facing the world. For 2024, my guess would be a market of up or down 5% from the 2023 close. A statistician would say that if one wants a forecast to fall within the range of 95% of all possibilities, the estimate would be positive 9% to plus or minus 35 percentage points! That isn’t much help for an investor but illustrative of the range of annual outcomes over the past 90 years.

Abby Joseph Cohen: Bill makes an excellent point. There is a tendency for forecasters, be they economic, stock market, or weather forecasters, to assign probabilities and then take the weighted average. They assume that gives you knowledge. What it gives you is a mush. As an investor, you are better off thinking about scenarios that others aren’t thinking about because they aren’t priced into the market.

Fortunately, Bill, you never give us a mush. Thank you, and let’s move on to David.

David Giroux: 
Fortive,
which I picked once before, is trading for $71 a share and has a $25 billion market cap. Annual sales are about $6.3 billion. The stock is trading for about 19 times 2024 estimated earnings and 18 times free cash flow. An analyst recently described Fortive as two steps forward, one step backward, which is fair. When Fortive was spun out of
Danaher
in 2016, it was awarded a Danaher halo. It spun off its lower-growth businesses in 2020 and was awarded a premium multiple to other high-quality industrials.

Today, however, it is trading at a five multiple point discount to companies such as
IDEX
and
Ingersoll Rand
and about a 20% discount to its historical valuation relative to the S&P 500. 

Yet, Fortive has more recurring revenue, less cyclicality, and a higher free-cash-flow conversion than peers. For all the negativity, the company has compounded earnings at a 13% annual clip in the past four years.

What is the market missing?

Giroux: Fortive bought ASP, a
Johnson & Johnson
business that makes hospital sterilization products, in 2019, for about 14 times Ebitda [earnings before interest, taxes, depreciation, and amortization]. It was a complicated transaction, and then Covid hit, slowing the growth rate to 1%-2% a year from what should have been 4%-5%. The good news is that growth outside the U.S. has already picked up again. Fortive injected management talent into ASP, which is now poised to grow by 5% a year. That is worth two to three multiple points alone. 

Fortive has followed the Danaher and
Thermo Fisher Scientific
playbook, buying faster-growing assets and paying higher-than-average Year One multiples. You get a little less accretion in the first year, but return on invested capital is likely better in years, six, seven, and eight. By the late 2020s, Fortive could have 6%-plus organic growth, 55% to 60% recurring revenue, and even less cyclicality. It has laid out a viable play to earn $6.75 in 2028. We model a more conservative $6.25. If the stock makes no progress in closing the valuation gap with peers, it could still compound at a 14% clip, hitting $122 a share in four years. If the company hits $6.75, you could have a stock price of $163.

Henry Ellenbogen: Has Fortive increased its growth rate, or lowered its cyclicality?

Giroux: Both. It has sold off slower-growing businesses and bought a lot of software businesses. The majority of acquisitions have done well. Solving the ASP issue would be a good rerating opportunity.

Todd Ahlsten: How much of management still has the Danaher DNA? Is this like investing in a mini-Danaher?

Giroux: The former CFO of Danaher, Daniel Comas, is on Fortive’s board. Fortive, like Danaher, is buying faster-growth businesses with less cyclicality. However, Fortive, due to the growth of its software businesses and probable future software acquisitions, is likely to see its free-cash-flow conversion increase from an already best-in-class 105% level.

My second recommendation,
Waste Connections,
is trading for $146 and has a $38 billion market cap. It trades in Canada and the U.S., but I will reference the U.S. shares. The company has $8.9 billion in annual sales, and trades for about 27 times free cash flow.

Company / Ticker 1/5/24 Price
Fortive / FTV $71.44
Waste Connections / WCN 146.48
RTX / RTX 85.38
Canadian Natural Resources / CNQ 67.07
Biogen / BIIB 257.88

Source: FactSet

Waste is a good industry with pricing power, low cyclicality, and lots of small companies to acquire at reasonable multiples. Waste Connections is the premier waste company in terms of management and asset quality, free cash conversion, pricing power, and acquisition prowess. It trades at a far more narrow premium to other industrials than it has in the past and at a 10% discount to where it has traded historically versus the market.

Ronald Mittelstaedt, Waste’s founder, stepped down as CEO in 2019, but returned to the role last year. He focused on improving operations, and set an Ebitda margin target of 34% by 2025, well above the current Ebitda margin of 31.5%. He also invested in RNG [renewable natural gas] programs for some of the company’s landfills, investing $200 million on projects that will generate $200 million of Ebitda by 2026. In addition, Waste made an attractive acquisition in western Canada. As a result of these initiatives, the stock could have a total return of 14% to 15% in 2024-26, growing to 16% over the next three to four years.

Why Waste Connections over
Waste Management
or
Republic Services
?

Giroux: We also own Republic, the better stock over the past five years. We tend to be more contrarian in our thinking. Republic’s RNG projects are small relative to the company’s Ebitda base, whereas Waste is adding 7% incremental Ebitda to its base from 2025 to 2027. It is cumulative, not an addition to each of the years. Republic Services has an earnings algorithm normally in the high-single digits, whereas Waste’s is 10%-11% a year. 

Ellenbogen: I echo what David says. I owned the stock when Ron ran it previously. He is an exceptional capital allocator.

Giroux: Stock No. 3: We bought
RTX
after the stock fell last year. It is trading at $85 now and has a market cap of $123 billion. The valuation is 15.9 times 2024 estimated earnings per share. RTX’s business is about 50% defense and 50% commercial aerospace. The company set aggressive targets and had to walk them back. More recently, the Pratt & Whitney division had a problem with its GTF [geared turbofan] engine, which is forcing hundreds of engines to be remediated before their normally scheduled maintenance. The problem will end up costing RTX about $3 billion—$3.5 billion in 2024-25. The stock drew a raft of analyst downgrades, at one point losing $35 billion in market value, or 10 times the cost of addressing the issue. RTX is hated by analysts as much as
General Electric
was a year ago. Last year, GE’s stock was up 96%. RTX was down 14%.

What will turn hate to love at RTX?

Giroux: Beyond 2025, the impact of these problems on future cash flow is relatively minor. Pratt GTF has been getting a 40% share of orders of narrow-body jets. Commercial engines matter a great deal to GE, but Pratt’s commercial engines will account for less than 10% of RTX profits this year. What really matters is the defense business, a third of which is tied to missiles, probably the one thing in the defense budget that needs a massive increase in production.

Beyond Pratt, RTX’s Collins Aerospace business sells avionics, flight controls, and so forth. This is a great business, with long-term growth and substantial exposure to the A321 plane from
Airbus.
In two to three years, the GTF issue will go away and free cash flow will increase massively. We estimate RTX will earn $7.34 in 2028, excluding its pension expense. Put a market multiple on that and the stock could have a compound annual growth rate of 14% to 15%.

Scott Black: Pratt & Whitney has had problems with the F-35 fighter jet.

Giroux: Again, it isn’t that big a contributor to RTX profits, and we think it grows modestly over the next decade. The Pratt military business is around $7 billion, and all of RTX is $73 billion. 

Moving on, for probably the first time in 10 years, I am equal weight energy. My pick today is
Canadian Natural Resources,
ticker CNQ, an oil-sands company with a market cap of $73 billion. The company produces 1.33 million to 1.38 million barrels of oil equivalent a day. It trades for 12 to 13 times free cash flow, and its free-cash-flow yield is around 8% at current prices. 

CNQ’s reserve life is 29 years; the average major oil company’s is nine to 13 years. This means the company doesn’t need to make acquisitions. It can grow production by 3% to 5% a year in a capital-friendly, low-risk way. Here’s another nice thing: CNQ is going to hit its net debt target of 10 billion Canadian dollars [$7.4 billion] by the end of the first quarter. Once that happens, it will start paying back 100% of its free cash flow to shareholders, up from a previous 50%. You’ll get a 4.3% dividend yield plus a 3%-4% reduction in the share count. If the oil price is in the low $70s, you’ll get low-teens returns in the next five years, and at around $80, you’ll get a midteens rate of return. CNQ is one of the best capital allocators I have ever dealt with.

Are you bullish on energy generally?

Giroux: There are many reasons to be positive on energy. The Saudis and OPEC are focused on supporting higher prices with production cuts. U.S. shale oil productivity is beginning to slow as producers focus more on free cash flow. I worry about the sustainability of Russia’s oil production due to Western sanctions, and the Middle East is a powder keg. The only negative is that oil demand is slowing, partly due to EVs, slower economic growth in China, and modestly slower global growth.

Rajiv Jain: We own CNQ, too. It is really a mining operation: Take the dirt out of the ground, mix it with hot water, and separate. That is why pollution is on a higher side. It is one of the negatives, but they have a very long reserve life.

Giroux: That is changing. The company has a program to take emissions down by a third through the end of the decade and another third by 2040, getting to zero by 2050.

Black: What is CNQ’s realized price of oil per barrel?

Giroux: The net realized price is West Texas Intermediate crude minus differentials, which should be $15 long term but has the potential to go to the low teens over time. 

My last name is
Biogen.
It is trading for $260, and the market cap is about $39 billion. The company has about $10 billion in sales and trades for 16 times 2024 estimated earnings. I recommended it in the midyear Roundtable, but a lot has changed since then.

Biogen brought in a new CEO, Chris Viehbacher, in November 2022. He is extremely impressive. He has played two cards so far, both positive. He has put in place an $800 million net cost-cutting program that will add $5 a share to earnings by 2025, off a $15 base in 2023. And, Biogen has completed the acquisition of Reata Pharmaceuticals, which makes Skyclarys for treatment of Friedreich’s ataxia, a rare neuromuscular disease. Looking out three to four years, it could add more than $5 a share of earnings.

But what is really exciting is the Alzheimer’s product, Leqembi. Biogen owns about 50% of the economics, and Eisai owns the rest. Leqembi provides a 27% reduction in the rate of cognitive decline, equivalent to a two-year delay in progression. We expect Leqembi to generate $2 billion of revenue in 2028 for Biogen, and $4 billion in 2033, but there could be upside to both.

There are three things to note. We assume a 60% market share for Biogen versus
Eli Lilly’s
donanemab, but this could be conservative, as Leqembi has a better safety profile.

Second, both products will be approved for intravenous infusion, but Biogen is likely to have a subcutaneous version in the fall that can be administered at home.

Third, doctors are most excited about the potential to treat Alzheimer’s before the disease ever shows up. Amyloid, implicated in Alzheimer’s, tends to accumulate for 10 to 15 years before the symptoms show up. Many treatments failed historically because they were given to people in later stages of the disease when plaque removal didn’t help. In three to five years, when diagnostic tests for amyloid are better, a 50-year-old might get tested as part of an annual physical, and given a small dose of Leqembi if plaque is present. Assuming the process is repeated every few years, we could end Alzheimer’s by 2040.

Black: Biogen was a one-trick pony in multiple sclerosis treatments for years. It once had the highest market cap among public companies in Massachusetts, but hasn’t done much in 15 years.

Giroux: It now has a product addressing probably the largest unmet health need. If Leqembi works, sales could be a multiple of our 2033 forecast for $4 billion. Every incremental $1 billion could be worth $3 to $3.50 a share.

Across big-cap pharma, there will be a massive wave of patent cliffs from 2025 to 2029, affecting
Merck,

Amgen,

Pfizer,
and
Bristol Myers Squibb.
All will have to replace lost revenue. Biogen, in contrast, has two growth products with patent lives to the mid- to late-2030s, and an interesting pipeline. It is one of the few companies that Big Pharma could buy without fears of product overlap and regulatory pushback.

Thanks, David. Let’s change the subject to fixed income, and hear from Sonal.

Sonal Desai: The 
10-year Treasury yield
ended last year within basis points of where it started—at about 3.90%. [A basis point is 1/100th of a percentage point.] During the year, the yield fell below 3.90%, but more importantly, rose above 5%. In bond market terms, these are massive moves.

Today, the market is expecting interest-rate cuts of close to 150 basis points, beginning around March. For this to happen, in my view, the real economy would need to experience a sharp slowdown. So, let’s look at riskier parts of the market, such as high-yield bonds. The Bloomberg U.S. Corporate High Yield Total Return index currently yields 350 basis points more than the 10-year Treasury. If we were on the verge of a recession, the yield spread would be much greater. A spread of 350 basis points argues for a much more benign outlook.

Bond investors are experiencing cognitive dissonance. Treasury bonds are trading on the outlook for rate cuts, whereas prices in riskier parts of the market suggest the economy is doing fine.

Does that mean inflation won’t fall further?

Desai: Inflation is unlikely to reach the Fed’s 2% target by the end of this year. But to investors, it is less about disinflation than happy days are here again. Inflation and growth aren’t a problem, so risky assets needn’t suffer.

Also, liquidity is improving as a result of both prospective rate cuts and back-of-the-envelope calculations that suggest the Federal Reserve’s balance sheet could be as large as $6.5 trillion at the end of this year. The Fed’s balance sheet was $800 billion at the start of the financial crisis. By the time we got into Covid, it was $4 trillion. At its peak, the balance sheet was $9 trillion.

Given this backdrop, I expect the bond market to have a choppy year. We are back to a place where bad economic news is good news, because it means the Federal Reserve will cut interest rates. Who cares about the economy?

What is your federal-funds-rate forecast for year end?

Desai: I expect the Fed to cut rates by 75 basis points, to a range of 4.5%-4.75%, although 50 basis points would be more than enough. I expect the cuts to come in the second half of the year. My inflation forecast implies real rates [adjusted for inflation] of more than 2% at the end of 2024, and that’s good. Real rates of 2%-2.25% aren’t catastrophic for the economy or the markets. For 50 years before the 2008-09 financial crisis, real rates were around 2%-2.5%. There is no reason to go back to the ultralow rates of recent years.

Cohen: In previous election years, the Fed was always reluctant to change interest rates too close to the election. If Fed officials were going to make a change, they would do it by July or August. What are your thoughts about that?

Desai: The second half incorporates July. But given the starting level of inflation and how odd this election is likely to be, the Fed might feel it can do what it wants right up until the election.

As for my investment picks, I see this as a transitional year, and don’t want to load up on duration. Municipal bonds are well positioned to capitalize on the stabilization of monetary policy and stable-to-positive credit fundamentals. I am pairing the Franklin High Yield Tax-Free Income fund, which takes credit risk across the spectrum and has a 12-month yield of 4.62%, with the Putnam Strategic Intermediate Municipal fund, which favors investment-grade credits and manages its muni exposure dynamically from the perspective of duration. The Putnam fund has ranked in the top decile relative to peers over one, three, five, and 10 years.

I will stick with the Franklin Income fund, which I have recommended in the past. It has a 12-month yield of 5.66% and has paid dividends for 70 years. The fund invests across multiple asset classes. Its current equity allocation, 35%, is among the lowest in its history, and tilted to value names that have lagged behind the broader market. That could provide upside potential.

What else do you like?

Desai: The
iShares Core Total Bond Market
exchange-traded fund provides exposure to a large swath of U.S. bonds, while its quality tilt would offer protection in the event of a credit shock. Relative to peers, it has a high concentration in triple-A and double-A rated securities, with a preference for the government and corporate credit sectors.

The
iShares 1-5 Year Investment Grade Corporate Bond
ETF might be suitable for investors with a limited appetite for duration who are willing to take on some high-quality credit risk. The fund is most heavily weighted in A-rated and triple-B-rated names, and in bonds with three to five years left to maturity.

Fund / Ticker 1/5/24 Price
Franklin High Yield Tax-Free Income / FHYVX $8.83
Putnam Strategic Intermediate Municipal / PAMYX 14.13
Franklin Income / FRIAX 2.28
iShares Core Total USD Bond Market / IUSB 45.58
iShares 1-5 Year Investment Grade Corporate Bond / IGSB 51.03
Eaton Vance Emerging Markets Debt Opportunities / EADOX 7.50
Franklin Floating Rate Daily Access / FDAAX 7.74
ClearBridge Value Trust / LMNVX 115.51

Source: FactSet

Shifting gears, I am not inclined to give up on emerging markets. There will be winners and losers in the realignment of trade routes. Also, emerging markets lived through a difficult few years of rising interest rates. This year, whether the Fed cuts by 75 or 150 basis points, lower rates will be positive for these markets. I see EM as a good diversifier, as well.

What is your pick?

Desai: 
Eaton Vance Emerging Markets Debt Opportunities
fund. The 12-month yield is 8.72%. The current allocation is biased toward corporate bonds. The largest duration exposure sits in larger EM markets such as China, India, and South Korea, although the fund materially invests in frontier markets such as Serbia and Tanzania. 

Next, I am recommending the
Franklin Floating Rate Daily Access
fund. Investing in loans is an interesting idea for 2024, as the likely end of the hiking cycle has eased pressures on the most at-risk loan issuers. The fund is currently overweight aerospace and defense, gaming/leisure, transportation, and retailers, and underweight tech, services, and industrials.

The
Aristotle Floating Rate Income
fund is another option, with a 12-month yield of 8.64%. Both funds are top-quartile performers. The funds don’t use leverage.

I am nervous about recommending an equity fund, especially in this crowd, but given the outperformance of growth stocks, it might be time to consider a value fund, such as the
ClearBridge Value Trust.
Its heaviest overweights are energy, utilities, materials, and industrials. The fund can invest across market caps, but about 50% of the portfolio is in megacaps.

Thanks, Sonal. You are brave on many levels. Scott, what are you recommending?

Black: We are value investors. It is getting increasingly difficult to find good companies with reasonably cheap valuations. We buy companies with rising earnings that trade at low price/earnings multiples and generate lots of free cash.
Everest Group,
formerly Everest Re Group, is one. Everest is an insurance company based in Bermuda but run from New Jersey.

The stock closed on Friday [Jan. 5] at $371.41. There are 43.4 million shares, and the market cap is $16.1 billion. The company pays a $7 annual dividend for a 1.9% yield.

Premiums grew at almost 19% in 2023, reflecting a combination of new business and rate hikes, especially in the property and casualty arena. Based on our financial model, the company will have net earned premiums in 2024 of $14.66 billion on the low side, and $15.05 billion on the high side. We calculate estimated net investment income of $1.62 billion, for a 4.2% yield on the portfolio, with a duration of a little over three years. We estimate the combined ratio [a measure of insurance-industry profitability] will be 90% this year. It was 90.1% in the latest quarter.

Net underwriting income on 10% premium growth equals $1.46 billion; on 15% premium growth, it would be about $1.5 billion. Subtract about $136 million of interest expense, tax pretax profit at 9%, and net income would total from $2.69 billion to $2.72 billion. Using the midpoint of our estimate, that’s $62.30 a share in 2024 estimated earnings, which means the stock is selling for six times earnings. The price-to-book ratio is 1.43 times, and pro forma return on investment is 22%.

Tell us more about the business.

Black: In last year’s first nine months, reinsurance accounted for 70% of premiums, and direct-write insurance, 30%. About 60% of the business is written through brokers. Everest’s biggest exposure is to hurricanes in the Southeastern U.S., which it models at $383 million per event based on a one-in-20-year incident. Keep in mind, book value is $11.2 billion. Next is earthquakes, modeled at about $134 million of exposure. European wind damage is estimated at $137 million. The company is adequately reserved, and the investment portfolio is pristine. The average credit quality of Everest’s investments is double-A-minus.

Like David, I normally don’t recommend energy companies, and we know that energy prices aren’t high. That said,
Diamondback Energy,
based in Midland, Texas, is one of the best-run independent oil-and-gas producers. The company is a shale producer operating in the Midland and Delaware basins in Texas. Based on third-quarter figures, it produced 425,000 barrels of oil equivalent a day. Diamondback also owns 770 miles of midstream energy assets, namely pipelines, and operates 330 wells.

The stock is trading for $155.95. There are 179 million fully diluted shares, and the market cap is $27.9 billion. The stated dividend is $3.36 a share, but don’t let that fool you because the company pays special dividends, which totaled $7 a share last year. We look at the breakup value, not just the price/earnings multiple.

What is your estimate of breakup value?

Black: Last year, Diamondback had two billion barrels of reserves: 53% oil, 23% gas, and 24% natural gas liquids. We’ll get updated figures in the next 10K filing. I value gross reserves at $34.926 billion. Gas-gathering and infrastructure assets are on the books for $706 million. Equity investments total $519 million, and real estate, $85 million. Add it up, subtract net debt of $5.4 billion less deferred taxes of $2.18 billion, and divide by 179 million shares, and you get $160 a share.

Diamondback’s purchase of Lario Permian closed at the beginning of the year. That added 5% to reserves, or another $9.80 a share. We estimate that Diamondback conservatively added 7% to its reserve base in 2023, which equals another $13.70. Altogether, that’s $183.50 in breakup value.

Diamondback is an investment-grade company with a triple-B credit rating. The debt-to-equity ratio is 0.32. The company generated $4.4 billion of free cash flow in 2022, and an estimated $2.9 billion last year. It returned about $2.2 billion to shareholders in buybacks and dividends. It still has a $1.7 billion buyback authorization.

Mario Gabelli: Do they hedge [against changes in energy prices]?

Black: Good question. They hedge about half their gas sales.

I expect Diamondback to earn $21.25 this year. Wall Street’s consensus estimate is $19 a share. With my estimate, the stock is selling for 7.3 times earnings and five times discretionary cash flow. Return on equity is 21.6%, and return on total capital, 16.4%. Earnings per share have compounded by 25.3% over the past five years, rising from $6.04 in 2018 to $18.66 last year.

My next pick,
Oshkosh,
is trading for $105 a share. There are 65.8 million fully diluted shares and the market cap is $6.9 billion. The dividend is $1.64 a share, for a yield of 1.6%. Oshkosh has three divisions. The access equipment segment is about 52% of sales. The defense business is 22% of sales, and the vocational business, which makes equipment like fire engines and refuse-collection trucks, is 26%.

Company / Ticker 1/5/24 Price
Everest Group / EG $371.41
Diamondback Energy / FANG 155.95
Oshkosh / OSK 105.29
Global Payments / GPN 127.39

Source: FactSet

The company generated revenue of about $9.7 billion last year, which could grow to $10.2 billion this year. We calculate about $992 million in segment operating margins, minus intercompany eliminations. Net interest expense will total $48.2 million. We estimate profits before taxes of $944 million. Taxed at 25%, we get $708 million in net income, or $10.76 a share, up from $9.59 last year. The Street’s consensus estimate is $10.36.

Return on equity will be about 18.7% this year, and total return on capital will be about 15.6%. The net debt-to-equity ratio is about 0.28. We estimate that Oshkosh will generate pro forma free cash flow of $500 million after tax. Oshkosh is a cheap stock, trading for 9.8 times expected earnings and 1.95 times book value. Currently, the operating margins in the defense segment are about 4%, but Oshkosh will be ramping up two major programs—the army robotic combat vehicle and a new postal truck. That should lift segment margins to 10% over two to three years.

Do you have another name?

Black: 
Global Payments
is a fintech company—a rare investment for Delphi. The stock fell sharply, and we saw an opportunity. This is a payments technology company. It benefits from consumer spending, and people are spending significantly on experiences and travel. The company provides software and services to more than four million merchant locations and 1,500 financial institutions in 170 countries. The Americas account for 84% of revenue; Europe, 13%; and Asia Pacific, 3%. There are four pillars to Global Payments’ strategy: It is software-driven, focused on e-commerce, exposed to faster-growing markets, and through an acquisition, has increased its exposure to the B2B [business to business] market. Merchant solutions, a fancy phrase for credit-card interchange fees, account for 78% of revenue, and card issuance is 22%. 

Revenue grew by about 7.5% in 2023. I model a 6.8% growth rate for 2024, to $9.26 billion. Merchant solutions will have about $3.6 billion in operating income, and card issuance, $1.03 billion. Corporate expenses are about $300 million. After interest income of $111 million and interest expense of $613 million, I get pretax profits of $3.6 billion. We estimate net profits will be $2.81 million, or around $11.50 a share, including 71 cents of stock-based compensation.

What is the stock price?

Black: Global Payments is trading for $127.39 a share. There are 260.4 million shares outstanding, for a market cap of $33.2 billion. The company pays a dollar a share in dividends, for a 0.8% yield. The stock fell last year during the March banking crisis and again in October when the 10-year Treasury yield crossed 5%. There are many competitors in the payments business.

Today the P/E multiple is 11.1 times our 2024 earnings forecast. Minus stock-based compensation, it’s 11.8. The stock sells for 1.48 times book value, and pro forma return on equity is 12.6% after taxes. The net debt/equity ratio is 0.68 times. The company has a triple-B credit rating and generates tons of free cash. In 2022, free cash totaled $1.62 billion. Also, it has an excellent earnings record, with 13 straight up quarters.

Thank you, Scott. John, you’re next.

John W. Rogers Jr.: I have five stocks in two industries, and one special situation. Healthcare was one of the worst-performing sectors in the small-cap universe last year. Some of our favorite names became cheap and neglected.
Adtalem Global Education
isn’t quite as cheap as some others, but we have a lot of confidence in it long term. The stock trades for 13 times 2024’s expected earnings, for a $2.4 billion market cap—a 25% discount to our estimate of the private-market value.

Adtalem is the largest provider of for-profit education focused on healthcare. It is No. 1 in undergraduate nursing schools, with about a 9% market share, and the No. 1 educator of veterinarians in the U.S. The business was originally part of DeVry University, which faced challenges during the Obama administration. The Department of Education went after for-profit colleges and universities because some of these institutions were taking advantage of students. 

We always thought DeVry was on the better side, but it decided to exit the traditional for-profit education business and just focus on healthcare, which was the right thing to do. There is a huge and growing shortage of nurses, physicians, and veterinarians in the U.S., which is a tailwind for Adtalem. We expect this to translate to 10% annual earnings-per-share growth over the next few years. So, we think this is a great long-term holding.

Stericycle
is another healthcare company we like. The stock is selling for about 21 times expected earnings, but the P/E is a bit inflated because earnings and cash flow have been understated during a difficult period. Stericycle has a $4.5 billion market cap, and we estimate that it is selling at a 35% discount to its private-market value.

Stericycle is the leading domestic provider of regulated medical-waste management for hospitals, doctors’ and dentists’ offices, even tattoo parlors. It is also a leader in the document-destruction industry, via its Shred-it subsidiary. The company bought that business several years ago, and it now appears they overpaid, as synergies have proved more difficult to realize than people imagined. Stericycle has grown steadily over the years, mostly through small acquisitions, but hasn’t always done a good job of consolidating them and has had to make some accounting adjustments.

What has changed?

Rogers: Stericycle has a new management team and hasn’t been making too many new acquisitions. The company just finished a major upgrade to its IT systems, which took longer than we had hoped. But with the right leaders, the improvement in their technology, and financial-reporting challenges behind them, the company is well positioned in an important sector. Its new enterprise resource planning [ERP] system should lead to significant margin expansion, free-cash-flow generation, increased productivity, and potentially new account wins. We believe this contrarian call will reward us with earnings growth of 15% over the long term.

My third healthcare company,
Envista Holdings,
has a $4 billion market cap and is selling at a 50% discount to our estimate of its value. It is one of the top dental manufacturing companies in the U.S., with leading positions in imaging and diagnostics, orthodontics, implant-based tooth replacement, and other consumables and infection-prevention products.

Envista stock has struggled, as there has been a general malaise in the dental area, while the implant business, which has been a big part of its growth, has gotten more competitive. We have also seen that some lower-income consumers are having more trouble paying for dental implants, which has slowed them down. But we feel strongly that when the economy settles down, those procedures will come back. With an aging population, dental care is in demand, and Envista will be successful. We believe patients will once again return to the dental chairs for these delayed procedures, with increased average spending per patient.

Another disappointing area for us in 2023 was housing-related companies. Our housing-related companies came roaring back at year end, but still have quite a ways to go.
Leslie’s
is one of the cheapest housing-related companies, with a P/E multiple of roughly 13 times next year’s earnings and a $1.2 billion market cap. We estimate it is trading at a 48% discount to private market value. Management has a high degree of confidence it is going to get this business back on track, and executives have been buying the stock.

What has been ailing Leslie’s?

Rogers: Leslie’s is the largest and most trusted direct-to-consumer company in the pool and spa industry. If you have a pool or a spa, the company will sell you everything you need to keep it working effectively, test and clean the water, and more. It is vertically integrated from manufacturing to more than 1,000 stores. It has five times the volume of its 20 largest competitors. 

Company / Ticker 1/5/24 Price
Adtalem Global Education / ATGE $56.91
Stericycle / SRCL 47.70
Envista Holdings / NVST 23.38
Leslie’s / LESL 6.85
Sphere Entertainment / SPHR 33.30

Source: FactSet

Leslie’s grew sales for 59 consecutive years until 2023, helped by the tailwind of more people moving to the South and more people installing pools. Last year, it had too much of an inventory buildup and missed earnings. Some of that had to do with the weather, which was cooler than expected, so people weren’t using their pools as much and bought fewer chemicals. 

Now, however, the company is in a great position to succeed. It is getting inventories back on track, paying down debt, and continuing to benefit from more people having pools. It has also been expanding its sales channels. Leslie’s has a great relationship with
Amazon.com.
It is building up the professional part of its business. The company is working to stay relevant so that it doesn’t lose market share to giants like
Costco Wholesale
or
Home Depot.
We expect at least 10% long-term earnings growth from organic same-store sales as well as store expansion and margin expansion, and the rest in the form of debt reduction and share buybacks.

How much of Leslie’s sales are tied to new pools, which might be sensitive to housing-market trends, versus the maintenance of existing pools?

Rogers: The business is more about recurring revenue. Once you have installed a pool, you need to make sure you’re keeping it fresh and clean. New construction can help or hurt on the margin.

Black: When do you expect earnings to turn up?

Rogers: In the second half of 2024. Hopefully, we will have normal weather. The year-over-year comparisons will be much more favorable when we get to the second half.

My final idea is one that Ariel got in a spinoff:
Sphere Entertainment,
which had been a part of
Madison Square Garden Entertainment.
We watched the Jim Dolan-led
MSGE
execute well with a major renovation at Madison Square Garden and were optimistic that Sphere would go well, too. It was spun off with the Tao Group restaurant chain to create a Las Vegas–focused company, while helping to generate cash to build the Sphere. The music and entertainment arena was supposed to cost $1.3 billion, but ended up costing $2.3 billion—off by just a little bit.

Gabelli: It’s just a number, John, just a number.

Rogers: The excuse was that during the Covid pandemic, manufacturing and construction costs rose dramatically. 

Sphere Entertainment has about a $1 billion market cap, which we think is a 40% discount to its value. I encourage everyone who can to see a concert at the Sphere. You probably saw some highlights from the U2 concerts there. It’s unbelievable to see.

The concerts are significant but probably will be the least-profitable part of the business, because you have to pay the acts so much to perform. Dolan learned with Radio City Music Hall that it is much better to own and control the intellectual property, as with the Christmas Spectacular. That generates much more cash.

Sphere has followed that model with a movie called Postcards from Earth, which has received spectacular reviews. You can track the ticket prices and sales, and both are rising. This is just the start: It is going to get better and better as they bring in new films, new ideas, new talent. There is the potential to generate a huge amount of cash flow. 

There is also a tremendous advertising opportunity here. Companies are paying as much as $600,000 a week to advertise on the outside of the Sphere, or the Exosphere. If you advertise there, people take pictures and post them to social media, which makes the advertising more effective. 

While the Sphere still gets a “Dolan discount,” due to concerns on the Street that the company is controlled by the Dolan family, the three existing segments are working well. In the future, there will be other revenue from conventions and conferences, and the possibility of franchising the Sphere design in a capital-light way around the world. There is expressed interest from the Middle East and Asia, plus North America and Europe. To be able to take content and leverage it across multiple Spheres would be extraordinarily cash-generative. Other cities could have a 5,000-seat arena, or something more appropriate.

How has the stock performed since it went public?

Rogers: Since it began trading in April 2023, the stock is up 30% [through Jan. 5].

On what do you base your estimate of private-market value?

We perform a discounted-cash-flow analysis with Sphere’s two segments, The Sphere and MSG Networks. Private-market value is based on the after-tax free cash flow of these segments. We expect 20% long-term free cash flow growth. The Sphere is an unusual company for Ariel, given that it’s a brand-new business with a novel entertainment concept, but we love the story and continue to be excited about its long-term future.

Thanks, John.

Corrections & Amplifications

Canadian Natural Resources has a market cap of $73 billion. An earlier version of this article incorrectly said its market cap was $73 million.

Write to Lauren R. Rublin at lauren.rublin@barrons.com

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