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Tom Marsico Favors Health Care Names Like Biogen Idec

By: Investor's Business Daily
Posted: 10/2/2012 5:50:00 PM
Referenced Stocks: ACN;BIDU;BMY;BUD;WLP

Thomas Marsico is one of the fund industry's marquee managers.

He ran Janus Twenty Fund from March 1988 through July 1997. In that time the fund's average annual gain of 22.59% outpaced 97% of its large-cap growth peers, according to Morningstar Inc. The S&P 500 averaged 17.88%.

Now he is chairman and CEO of Marsico Capital, where he runs or co-runs 20 funds for his firm and as a subadviser.

The $1.8 billion Columbia Marsico Focused Equities Fund , with 31 holdings as of Aug. 31, reflects the concentrated portfolio style for which Marsico is well-known. Coralie Witter, 41 years old, is co-manager.

Marsico, 57, talked shop from his office in Denver.

IBD: Why do you like a concentrated portfolio?

Marsico: We have a variety of companies, representing a lot of industries. This gives us a lot of best-of-breed companies.

IBD: When you say best-of-breed, what do you mean?

Marsico: We like companies that have strong market position, that are not dependent on capital markets to fund growth, that generate lots of free cash and have opportunities to invest it back in themselves. And when they don't, we like to see steady growth of dividends and share repurchases.

IBD: How are you allocating between the U.S. and the rest of the world now?

Marsico: Throughout my history of managing money for about 30 plus years, I've always owned what I thought were dominant franchises wherever they are in the world. You'll see a number of international names in the portfolio. There'sBaidu ( BIDU ), obviously the dominant search company in China.Accenture ( ACN ) (headquartered in Ireland) is another dominant firm in data services and consulting.Anheuser-Busch InBev ( BUD ) (based in Belgium) is basically a big consolidation in brewing.

So about 6% of the portfolio was in companies deemed to be international as of Aug. 31 (and the same weighting now), but companies like Accenture and InBev get a lot of their revenue in the U.S.

IBD: With 23% of your assets, consumer cyclicals are your largest sector as of July 31. But your health care weighting has soared over the past four quarters. Why is that?

Marsico: With the passage of health care laws in the U.S., we've started to increase our position in health care companies. That's a change over the last few years when we didn't know what the rules and regulations would be and what the new health care paradigm would be.

As a result of the Supreme Court judging ObamaCare constitutional and that the fee (imposed on individuals who don't buy coverage) is more of a tax, the day after that ruling there was an acquisition byBristol Myers Squibb ( BMY ) (ofAmylin Pharmaceuticals (AMLN). The following Monday an HMO (WellPoint ( WLP ) bought a different one (Amerigroup (AGP). So health care providers were waiting for that decision, ready to make moves.

We own some health care companies coming up with new treatments for unmet medical needs. We've taken that weighting up this year. It acted as a pretty defensive group through the rally we saw this summer. Now we're seeing strength in that group, given the backdrop of a very difficult economic environment. So health care companies should be defensive, but now should also provide moderate growth plus pretty good dividend yield plus share repurchases.

We think share repurchase is important because there seems to be some unwillingness (by investors) to put money into stocks. We've seen more money go into bond funds and surrogates even with their low interest rates.

IBD: You've gotBiogen Idec (BIIB) as well. I gather their new drug for the treatment of multiple sclerosis looks promising.

Marsico: They have a tremendous franchise in rheumatoid arthritis. And they're developing BG-12 for multiple sclerosis. It is taken orally, whereas their other drug for this is taken by infusion -- a patient must go to a facility. The BG-12 treatment profile is better, so the outcome profile is better.

IBD: You opened your current position inExpress Scripts (ESRX) in April. What's your thesis?

Marsico: With the acquisition of Medco, they are the dominant player in the pharmacy benefit management industry. Now they are at a size and scale to get significant cost savings. Also, they should see new opportunities of moving into specialty pharma, biologics, that generate a lot of cash flow. And they are growing their share repurchase program.

IBD: You began your current stake inHome Depot (HD) last December and have built it. Do you like housing?

Marsico: Housing is another area we like. If you look at homebuilders, it's not an industry where there is great franchise value.

So we've had a large position in Home Depot, which has been successful for us. They went through changes in leadership. Current leadership is strong at operating the business at a very high level. We think they are better positioned thanLowe's (LOW) for the do-it-yourself customer. They think only a small portion of their business, 15% to 20%, is related to new-home construction.

IBD: How are they impacted by rising existing home prices?

Marsico: We've seen data in the last couple of weeks that the median price for existing homes is moving up. So people are seeing some equity returning to the value of their home. So at the margin people are likely to invest in their homes again. They will build a new bath or remodel a kitchen. And that helps Home Depot.

IBD: Is the housing situation why you've been generally building stakes in recent quarters in big banks likeWells Fargo (WFC) andU.S. Bancorp (USB)?

Marsico: At some point, rising home prices also translate into banking, where we have positions in Wells Fargo and U.S. Bancorp, two of the largest mortgage origination companies.

Wells Fargo is currently originating loans on close to 30% of new homes.

There's been tremendous consolidation in the mortgage industry as a result of the collapse in 2006 through 2008.

IBD: The fund is sector agnostic -- it can have whatever sector weightings it wants. And technology is your second-largest weighting, with 22% of assets. Why not a larger weighting in a sector that many managers see as a mother lode of innovation?

Marsico: We in general are lightly weighted in tech. Few companies have proprietary exclusive type products that are difficult to duplicate. The lifecycle of a product can be as long as a couple of years but as short as maybe three months.

So it's an area we haven't aggressively invested in. We do like companies using technology to improve either their information about customers or their ability to produce or their logistics. Companies we've invested in are well aware of where their customers are spending money.

IBD: You've gotApple (AAPL). Why do you think it still has legs?

Marsico: It's our largest position. We've owned it a long time. Our cost basis is 125. (Now it's trading in the mid-600s.) It's a position that at different times we've cut back. We think the leadership under Tim Cook is very strong. Their pipeline of new innovative ideas is strong. They have executed at a very high level. Also, they've implemented a basically 1.5% dividend and now a significant share repurchase. We expect them to grow their dividend and the amount of stock repurchase.

IBD: What other holdings use technology in ways you like?

Marsico: We ownEquinix (EQIX). It is a data center company. It will convert to REIT status in early 2015 (to take advantage of tax benefits). The considerable moat they have is the locations of their data centers. They are at the nexus of where telephone trunks come together as well as cable systems, generally at the intersection of where the most digital traffic is.

The use of digital data continues to grow. Now voice is being converted to data. Over radio, voice is being converted to data so these are all new IP packets, especially when you go to an LTE network, which are being switched to with all the new smartphone products.

So in Equinix's business, you must colocate your services close to the on-ramps for the Internet and to these telephone networks, and that's where Equinix has located their data centers.

IBD: IsMonsanto (MON) another creative user of technology?

Marsico: Monsanto has proprietary positions finding hybrids and finding technology to improve yields for farmers.

Their next product is a drought-tolerant corn. With severe drought in the U.S., demand will be high. Even in normal conditions, this product will extend (corn) farming into high plains arid areas like Colorado, where there's a lot of land but not a lot of water.

They've expanded their business in Brazil and Argentina. As their GMO (genetically modified organism) products become more accepted in Europe, farmers there are using it more. And it's being used more in Eastern Europe.

IBD: Priceline (PCLN) is also an innovative tech user rather than tech creator, right? But you've been trimming.

Marsico: Before they announced their quarter, we cut the position in half. We were concerned about travel activity in Europe.

But actually the stock has performed well after the adjustment downward, reflecting new estimates for the quarter. So this is not a company we want to be completely out of it.

Our cost basis is low, around 200. The stock is trading around 620.

Priceline lets small hotels add exposure on the Internet. This gives Priceline more destinations than other travel services. They dominate Europe. They are in the process of dominating Asia with their Agoda service.

Europe could fall into recession, although things should not get significantly worse. But the savings a traveler can get by booking through Priceline is significant. Priceline's comps vs. last year will get easier.

IBD: Chipotle Mexican Grill's (CMG) earnings-per-share growth has accelerated for two quarters. How much growth is in front of them?

Marsico: You can watch your meal prepared in front of your own eyes. It's an easy model to execute. But their focus on natural products makes them unique.

They have a tremendous opportunity to expand their number of stores. Their penetration on the East Coast is low. And they have the ability to take the company international. They're just starting to take advantage of that with a couple of stores in the U.K.

And they're introducing a second concept: Thai food. The palate of people has gotten broader.

They have a proprietary product. They have a good value proposition. They can double the size of their footprint just with Chipotle, and more than that with their new food concept.

IBD: Why are you finding so many promising names in consumer discretionary, which has 32% of your assets by your in-house weightings?

Marsico: We don't think they all sell discretionary products.

Dollar General (GD) is one of the dollar chains. It sells basic goods and convenience at a low price.

The average ticket at Dollar General is around $10 per trip. Pricing is similar toWal-Mart (WMT), but Dollar is more convenient.

Also, they are expanding into California. They have only one store there now. They see an opportunity to grow their store base there dramatically in the next five years.

They are well run. They buy back a lot of their own stock. Their margin profile is improving quarter-over-quarter and year-over-year.

IBD: Tom, you ran Janus Twenty Fund from March 1988 through July 1997. What are the differences between that fund and this one?

Marsico: I would say there are no differences. Except now I might be more experienced. It's the same fundamental research, same concentration, and we're benchmark agnostic. We don't need indexes. We don't follow them. They say you can't change your stripes. We're not an organization where we change our stripes.

We're fundamental investors looking for high-quality companies at the right price.

I'm a large shareholder in all of our funds at Marsico Capital. We eat our own cooking.