Dodge & Cox: 2 Sectors with Compelling Values

This video is the third of three with Diana Strandberg. You can watch one and two here.

Andrew Daniels: And outside of emerging markets, where else are you finding opportunities?

Diana Strandberg: If you look at our portfolios today, we've been adding to financials, particularly European financials with the more recent 2018 price declines. We think that valuations are approaching where they were in the financial crisis, deep discounts to book value, 7, 8, 9 times earnings, attractive dividend yields, and yet their fundamentals are vastly stronger than they were five years ago, 10 years ago. Much better asset quality, thicker capital cushions, more durable, sustainable sources of funding, higher liquidity. They have been improving earnings and ROA largely through cost cutting and refocusing their businesses where they can earn a good return on their capital. So, we think they are a compelling area in the portfolio today. So, earlier in the year we added to Socgen, for example, in the portfolio.

The other area we've been adding is in pharma. What we see are companies that are again at attractive valuations 12, 15 times earnings, 4%-plus types of dividend yields, good free cash flow, good balance sheets, and we think we're starting to see R&D productivity shine through. So, good growth prospects. And yet, the valuations, we think, are overly skeptical about the productivity of the R&D pipelines. And particularly, skeptical around pricing and what we know is that some of the areas where they are focused are in areas that are a little more insulated from payer pressure. Immuno-oncology would be an example; biologics would be another example. So, we quite like the pharma companies on an absolute basis. And then when we look around the market, we prefer them to consumer staples where we have a big underweight. They have better revenue growth, better free cash flow and lower valuations. So, we have about 15% of the portfolio in pharma compared to, I think, around 7% for the EAFE, 5% for the ACWI ex-U.S., and a sizable underweight in consumer staples relative to the benchmarks.