Investment Expert David Sowerby's Positive Outlook on Intel's Acquisition of McAfee

Investment Expert David Sowerby's Positive Outlook on Intel's Acquisition of McAfee

Table of Contents:

1. Introduction
2. Market Outlook
   • Positive market indicators
   • Impact of economic data on market action
   • Debate between macro and micro perspectives
3. Micro vs Macro Factors
   • Positive micro factors prevailing
   • Lingering concerns about high structural unemployment rates
4. Investing in Companies
   • Finding companies unaffected by macro factors
   • Importance of free cash flow yields
   • Comparison with 10-year US Treasury yield
5. Corporate Bonds vs Stocks
   • Compelling valuations of corporate bonds
   • Flight to quality and safety in Treasury bonds
   • Stocks as a better bet than bonds
6. Growth and Earnings
   • Fair amount of catch-up for stocks
   • Positive outlook for double-digit returns
   • Growing economy and earnings
7. Investing in Acquired Companies
   • Acquisition of McAfee by Intel
   • Importance of deal structure
   • Positive surprise for investors
8. Interval Leisure Group
   • Spin-off from sending in 2008
   • Unlocking value for shareholders
   • Cash flow perspective and evaluation
   • Consumer-focused travel and leisure stocks
9. Other Travel Stocks
   • Wyndham as a better performer
   • Investing in the travel and leisure sector
10. Conclusion

Market Outlook

The recent slide in stocks has sparked concerns about the market outlook. However, our guest, David Sowerby, sees some positives ahead. As a portfolio manager for Loomis Sayles, he has a unique perspective on the market, with $140 billion under management. Moreover, as the chairman of the investment advisory committee for the state of Michigan's $51 billion pension fund, his insights carry weight.

Dominic, the host, kicks off the conversation by asking David about his thoughts on the market action. David acknowledges that the market seems to be driven by daily economic data. Positive data leads to market gains, while negative data causes declines. However, he emphasizes that we shouldn't miss the bigger picture.

Micro vs Macro Factors

David believes that the market is currently caught in a tug-of-war between macro and micro factors. While macro indicators are causing short-term fluctuations, he is confident that positive micro factors will ultimately prevail.

However, there are lingering concerns about high structural unemployment rates and their impact on the economy and earnings. While these macro factors are affecting the stock market, David argues that focusing on micro factors is crucial. He highlights the potential of buying companies with a free cash flow yield of 7 to 8 percent, significantly higher than the 2.5 percent yield on a 10-year US Treasury.

Buying such companies can prove to be a powerful investment in the long run. Despite companies' cautious approach to spending their cash reserves, the overall earnings, cash flow, and top-line revenue growth remain positive, with a growth rate of over five percent. David firmly believes that these micro factors will prevail over the next six months or longer.

Corporate Bonds vs Stocks

The debate continues, with Dominic questioning David about the preference for stocks over bonds. David explains that compared to Treasuries, corporate bonds can still offer compelling valuations and higher yields. However, he believes that stocks are a better bet, especially when comparing the valuations on a free cash flow basis.

David supports his argument by referring to historical data. A bearish sentiment, such as the one prevailing currently, has often been followed by double-digit returns on stocks within six to twelve months. After the dominance of bonds for the past years, stocks are poised for a positive resurgence.

Despite the headwinds in the macro environment, David remains optimistic. He predicts a growth rate of two and a half percent in the inflation-adjusted economy and double-digit earnings growth. These factors, coupled with the fight against the economic headwind, make the stock world a more favorable option compared to the Treasury world.

Investing in Acquired Companies

Moving on to specific stocks, Dominic mentions McAfee's acquisition by Intel. David confirms that they are pleased with the deal and the increase in stock price that resulted from it. He explains that in 2010, McAfee was one of the companies that didn't meet their expectations. However, they identified it as a high-quality company with significant cash flow generation potential.

The acquisition by Intel comes as a pleasant surprise for investors, validating Loomis Sayles' opinion about the company. David implies that their success with McAfee translates to other stocks in the small to mid-cap range. He mentions Interval Leisure Group as an example, a travel-focused consumer play. Despite its underperformance in the market, David believes it has great potential, with a robust free cash flow yield close to ten percent.

Interval Leisure Group

Dominic raises questions regarding the performance of Interval Leisure Group. He points out that the stock has not shown substantial growth since its spin-off from sending in 2008. David explains that spin-offs often unlock value and create better propositions for shareholders. Interval Leisure Group had a better year in the past but has faced challenges in the current market climate.

However, David sees potential in the company from a cash flow perspective. He believes it is shareholder-friendly and offers an attractive valuation, with a free cash flow yield estimated at close to ten percent. Additionally, in a period of uncertainty for retail, David considers the travel and leisure sector, including Interval Leisure Group, as a good place to invest.

Other Travel Stocks

While discussing the travel sector, David mentions another travel stock they own, Wyndham. He acknowledges that it has been a better performer compared to Interval Leisure Group. However, he reiterates his belief in the profit potential of the travel and leisure industry.

In conclusion, David Sowerby remains optimistic about the market outlook. Despite the short-term market fluctuations driven by macro factors, he believes that positive micro factors will ultimately prevail. From investing in companies with high free cash flow yields to favoring stocks over bonds, David presents a compelling case for investors. The acquisition of McAfee by Intel and the potential of Interval Leisure Group further reinforce his argument.