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Mark LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

Shani Jayamanne: Today is our annual Christmas gifts episode.

LaMonica: Which is always popular, Shani.

Jayamanne: It is, Mark. We've had this little tradition where we kick these things off by exchanging presents with each other, which of course goes terribly for me because I end up very embarrassed.

LaMonica: Okay, well, is there anyone that we can blame besides yourself for that, Shani?

Jayamanne: No, it's just me. I think to prevent as much embarrassment as possible this year, I was very, very, very specific about the parameters of our Christmas gifts.

LaMonica: You were. So, you set a price limit and a very specific outline of what gifts we could give each other this year.

Jayamanne: Yes, Mark. And this year, we're going to exchange $50 worth of stocks or stock after the success of SJ.

LaMonica: And SJ, of course, is Shani's initials, but it's also the ticker symbol of the stock I bought her last Christmas.

Jayamanne: Which has done very well. It's up 103%.

LaMonica: Yeah, it's Scienjoy, by the way, which is a Chinese small cap company. So yeah, but it's done very well overall, but it did have a high of $4.60, which means that once it was up 247%.

Jayamanne: All right, so that is the sound investment strategy, Mark, just investing with initials. So why don't we get to our investments on behalf of each other? And I can start if you like, or you can start whatever you prefer.

LaMonica: Go for it, Shani.

Jayamanne: All right, so the stock I bought for you tanked 6% on the day after I bought it, so it's going well.

LaMonica: That pretty much sums me up.

Jayamanne: And my present is actually going to follow on a little bit from the theme of SJ, but apparently not the stellar performance. So I'm going to ask you a question, Mark. You've got a nickname.

LaMonica: I have had lots of nicknames, Shani.

Jayamanne: A nickname that I call you, or people around the office call you.

LaMonica: Okay, you're just going to have to answer this one so I don't incriminate myself.

Jayamanne: MLM.

LaMonica: Okay.

Jayamanne: Yeah, Mark LaMonica, even though it's just ML, but we've put the M on there as well.

LaMonica: That's fair.

Jayamanne: So I didn't just go and invest in MLM, which is Martin Marietta Materials Inc. and was actually up 9% in the last week when we're recording this, but I went a level deeper. So what else does MLM stand for? We're actually going to trivia tonight. So this isn't a very good start.

LaMonica: Is it that marketing thing you're talking about?

Jayamanne: Yeah, multi-level marketing. Okay. And so I went and I looked up the listed multi-level marketing schemes that had a share price under $50.

LaMonica: And these are just Ponzi schemes to be clear.

Jayamanne: Yeah.

LaMonica: Okay.

Jayamanne: So there's Herbalife, which I think many of us have heard of. There's Tupperware, which many of us have heard of. And then there's eXp Holdings, which I don't think is anything, is something that any of us have heard of.

LaMonica: I certainly haven't.

Jayamanne: But it turns out it's a real estate brokerage firm. It has a $2 billion market cap. It's listed on the NASDAQ and is currently trading at $11.56. So that's down 20% from when I bought it. But it's basically domain, but a multi-level marketing scheme that is debated by some.

LaMonica: Why did you pick that one?

Jayamanne: Because no one had heard of it, thought it'd be interesting. Okay.

LaMonica: So you've spent $50 on this.

Jayamanne: 50 Australian, yeah. It's listed on the NASDAQ. So about $30 U.S. dollars.

LaMonica: Okay.

Jayamanne: But it is debated by some that it's a multi-level marketing scheme, but it's -- I think that's what happens with every multi-level marketing scheme. But they have a revenue sharing scheme with seven different levels. And as I said, it's trading at $11.56. But in 2021, it was trading at $78.

LaMonica: So I guess it's a good thing you didn't buy this for me. It would have been out of your price range, but it's a good thing you didn't buy this for me a couple of years ago.

Jayamanne: I know. But if it does ever get back to that price, around seven times what it is now, I'll be able to get you 12.5 Manhattan's. So we'll see what happens.

LaMonica: And a Manhattan is my favorite drink, Shani.

Jayamanne: Yes. But that's my present for you. Let's see how you go.

LaMonica: Wow. Okay. Well, I went a little bit of a different direction.

Jayamanne: We always do, don't we?

LaMonica: Yes. Well, I bought you an ETF.

Jayamanne: Okay.

LaMonica: And I bought you an ETF with the ticker symbol WOMN. And it's an ETF that tracks the Morningstar Women's Empowerment Index. And what it basically does is it takes large and mid-cap U.S. companies and it uses attributes. It ranks these companies across four different categories. So gender balance in leadership and workforce, equal compensation and work-life balance, policies promoting gender equality and commitment to transparency and accountability. And I've done this for two reasons. And the first reason is I thought that, you know, a good gift should be a reflection on who you're giving the gift to.

And one of my favorite things about you, Shani, is how you are a relentless champion for the underdogs. And you do this in a couple different ways. You, of course, do it from your actions and the way that you help your friends and family members navigate their careers in the financial markets. And then you do this for complete strangers, like you recently volunteered to teach financial literacy to refugee communities. And you also do this just by being an example by what you've accomplished. So for women and for immigrants and other groups where there have been barriers to success that many of the people in charge don't even understand.

And I certainly put myself in that category, except for, of course, being in charge of anything. But just getting to know you, you've really opened my eyes to a lot of different perspectives. And I think that gaining new perspectives and understanding new things is really, really important. And from an investment perspective, taking that same thing, it's really, really important for successful companies to have different viewpoints and opinions in management. And there's been study after study that's looked at this.

And gender equality is obviously a really important thing. So I thought that this would also be a good investment because, well, I do roll my eyes at some of the ESG stuff that's out there. This is a proven thing that different opinions and more opinions leads to better business outcomes. So hopefully this will be a successful investment. And it has outperformed the S&P 500 since 2018, which is when this ETF first came out. So I thought it was a good example of you and a good example of things we can look for in investments.

Jayamanne: Wow, Mark, that's very kind. And I feel like you've outdone me again. We've both, I should have set tighter parameters.

LaMonica: That we could only buy each other companies that maybe Ponzi schemes?

Jayamanne: Yes. That was very kind. That was very, very nice, Mark. Thank you.

LaMonica: Well, it's all true. And obviously I know you and Will knows you. Listeners hopefully know you a little bit by listening, but now they know you better, which I think is great.

Jayamanne: Thanks, Mark. Now, with my embarrassment out of the way, let's get to our Christmas gifts episode. And we're going to continue on our own little Christmas tradition by choosing a few stocks from our best ideas list. But first, Mark, I'm going to ask you a question. Where do you buy your clothes?

LaMonica: So this is going to be an insult because Shani thinks that I dress terribly and dress like an old man. But my wardrobe is pretty simple, Shani.

Jayamanne: Yes, I know that we're on a podcast, but some of you have seen Mark on webinars before and in person. He does love a polo button up.

LaMonica: Apparently I do, Shani. So when I need new clothes, I would generally just go to, I guess, Amazon and order the same things.

Jayamanne: Okay, that's very Steve Jobs of you, Mark, except maybe with a little bit more color.

LaMonica: Well, I order them in different colors.

Jayamanne: But less turtlenecks as well. But there was a reason I asked you about that, and that is because our first pick from the global equity best ideas list is Nordstrom.

LaMonica: Okay. And if people have not heard of Norstrom, they're an American luxury department chain that surprisingly, I have never shopped at.

Jayamanne: Yeah, right. Well, it's lots of beautiful overpriced clothes. But we think the stock itself is extremely undervalued. It's trading at roughly 65% below our $45 fair value estimate.

LaMonica: And like many companies, they've suffered with the effects inflation and COVID related issues that have slowed down the company's recovery from the pandemic. But our analysts anticipate that earnings will continue to rise.

Jayamanne: And there has been profit recovery. So, Nordstrom has resumed its quarterly dividend payments, which they stopped due to the poor conditions. And so, they're resuming the quarterly dividend payments with a yield of about 5%.

LaMonica: And they've got a very loyal customer base of more fashion conscious people than me. And they have a reputation for great service. They have a presence in stronger, more upscale malls. They've got a good e-commerce operation and off-price operations that separate them from other department stores. And that is what our analysts see driving the improved profitability.

Jayamanne: So, I was actually listening to a podcast recently of a couple in the U.S., and they were looking to buy an investment property. And they were thinking that they would piggyback off the millions of dollars that Nordstrom spends on research for up-and-coming areas to purchase real estate.

LaMonica: And we've talked about, like people do that with Bunnings in Australia, not just to be close to sausage.

Jayamanne: No. I mean, I've based some of my decisions on that. But they must be doing something right if people are staking most of their net worth on their decisions. But the case with Nordstrom is that our analysts do not think that they can return to their double-digit operating margins that it consistently posted before 2015, but they definitely see a turnaround.

LaMonica: And we're, of course, very big on planning at Investing Compass. Well, Nordstrom has a plan. They have their Closer to You plan, which sounds like a dating approach. But in this case, it is a high-end department store's plan. And they announced that in early 2021. And it emphasizes e-commerce, growth in key cities, and a broader off-price offering.

Jayamanne: Among the merchandising changes, Nordstrom intends to increase its private label sales and greatly expand the number of items offered through partnerships. So as a result, we're seeing operating margins stabilize around 6% in the medium term.

LaMonica: And this plan, hand-in-hand with effective cost cutting, efficiency gains, and an improved merchandise mix, has led our analysts forecasting the business improving gross margins on net sales to around 36% by 2025. And that's up from 34% in 2022.

Jayamanne: As well as lowering its expenses, selling expenses, general expenses, and administrative expenses as a percentage of total revenue to about 32% from 33% in 2023.

LaMonica: And something we preach all the time and the bow around this stock is the narrow moat. We believe that Nordstrom can keep competitors at bay and protect and grow earnings for at least the next 10 years. So, Shani, you asked me about clothes. Now, I'm going to ask you a question for what we're doing next. I'm going to ask you about alcoholic beverages.

Jayamanne: I don't know anything about alcohol, Mark. I don't drink.

LaMonica: Well, I know you've seen other people drink. So let's just say, what is your favorite drink? If you were to have your first drink ever?

Jayamanne: Okay, it depends on the mood. I would say that I like a gin martini with a twist. But I really can't have too many of those in a row, but I can't go past a good champagne. Okay.

LaMonica: Well, as you mentioned, mine is, of course, Manhattan. I only have many of those in a row. But one thing that maybe is a little bit surprising is that Bud Light is not on the list. So do you like Bud Light, Shani?

Jayamanne: I can't say I've ever had Bud Light.

LaMonica: All right. Well, Bud Light is owned by Anheuser-Busch InBev. And that's our next stock off the best ideas list. And full disclosure, I do own this stock. And we're seeing it as extremely undervalued right now because investors have sold off the stock because they're a little worried about the financial risks.

Jayamanne: The recent share loss that we've seen is because of a disastrous marketing event.

LaMonica: And that's exactly how our analyst report describes it. So no further details needed there.

Jayamanne: A disastrous marketing event. It is intriguing and I do want to know more.

LaMonica: Well, that's great, Shani. But our analyst reports don't normally go into the scandals. Even though I know you're very interested in scandals. This podcast has everything, bad stock investments, where we buy our clothes and a little bit of scandal.

Jayamanne: Well, basically Bud Light used a Trans TikTok star, Dylan Mulvaney, to promote their beer.

LaMonica: And of course, this didn't go down well with the traditional base of Bud Light drinkers.

Jayamanne: I can't imagine it did. And our analysts think that this isn't just short-term damage. It's an event that is going to impair the beer in the long term. Third quarter results that we've seen have shown little signs that the brand was recovering.

LaMonica: But in our analyst opinion, the reason to own AB InBev is not for its U.S. performance, but for the much more structurally attractive market that it has in developing countries.

Jayamanne: How does it feel as an American to be told that you're not the focus of attention?

LaMonica: Okay, well, first of all, I'm an Australian. So we need to remember that, Shani.

Jayamanne: That's fair enough. Longer term, we think that AB InBev is a great franchise. It's got a wide moat, so we think that they're able to keep competitors at bay and protect and grow their earnings over at least the next 20 years. This wide moat is driven by cost advantages in Africa and Latin America, where they have dominant positions that are mostly monopolistic. So we see them benefiting from the growth of these regions.

LaMonica: And Africa is likely to increase volume in the medium to long term, while Latin America offers a large mix opportunity. Developed markets are remaining a drag, though, as consumer migration to wine and higher quality beer pressures industry volumes.

Jayamanne: One of the concerns that investors have is balance sheet leverage. It's been a concern for a little while. However, the favorable effects of the weaker U.S. dollar against some major currencies should provide a tailwind over the next 12 months. And with inflation slowing and growing earnings, they should be able to reduce net debt.

LaMonica: Okay, the last stock from the global equity best ideas list. I don't, or at least I hope we don't, have any personal stories that can relate to the use of these products.

Jayamanne: And that is because we're going to talk about ResMed, which is a company that specializes in sleep apnea machines. So no experience on my end. But ResMed is one of the two leading players in the global obstructive sleep apnea or OSA market. With cloud connected devices, physicians can monitor patient compliance, and they can encourage continued usage. Following first quarter fiscal 2024 results, we maintain our U.S. $258 fair value or A$40 per CDI at current exchange rates.

LaMonica: And we see the shares as extremely undervalued. So ResMed is currently trading at a 45% discount to fair value. It has also been awarded a narrow moat. That means that our analysts believe that it can protect and grow its earnings for at least the next 10 years.

Jayamanne: ResMed's moat is based on switching costs and intangible assets, which have helped the company achieve high customer adherence rates and above average industry growth.

LaMonica: In fiscal 2021, ResMed had over 15 million cloud connected devices sold globally. These newer generation devices enable physicians to remotely monitor the patient's usage and breathing performance, entrenching ResMed as a preferred provider with both patients and physicians. For the patient, device feedback encourages usage and allows them to get individualized care from the physician leading to better clinical outcomes. For the physician, trust and recorded data and grown familiarity with the software is likely to reduce switching to a different provider.

Jayamanne: ResMed reports up to 87% adherence rates when the physician is using its cloud based patient monitoring systems AirView, compared with the estimated industry average adherence of around 50%. A high adherence rate benefits both device upgrades as well as masks and accessories revenue as a physician reminds the patient of when they should be replaced.

LaMonica: ResMed's intangible assets, namely its brand and patent portfolio, have also contributed to above average industry growth and helped maintain its commanding market share. ResMed typically spends roughly 7% of revenue on research and development each year, which has ensured consistent product launches. Despite growing off a much smaller base, Fisher & Paykel's competing home care segment has a trailing five year revenue compounded annual growth rate of 5% lagging ResMed's 10% over the same period. We think ResMed's intangible brand has also enabled significant price premiums over less well known peers.

Jayamanne: And due to its significant market share and high gross margins in a structurally growing industry, ResMed has posted an average return on invested capital or ROIC of 20% over the last decade. We anticipate the company's ROIC to far exceed its weighted cost of capital of 7.4% over our forecast period, even in our bear case scenario.

LaMonica: Okay, so a couple stocking stuffers for investors there.

Jayamanne: That's it.

LaMonica: There we go. So thank you very much for your gift, Shani.

Jayamanne: Thank you, for yours.

LaMonica: We'll have to keep people updated on how everything's going and of course, make sure SJ is powering ahead.

Jayamanne: That's true.

LaMonica: And yeah, we'll keep update, we should keep people updated also on the shares that we picked. Nordstrom's, AB InBev and of course ResMed. All right. Well, thank you very much for listening. We really appreciate it. And we hope you keep listening so you are around to hear Investing Compass' Christmas episode next year. And of course, any feedback is appreciated. You can send an email to me, my email address is in the show notes. Or of course, we would appreciate a rating and a comment as a Christmas present.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)