Bob Millen is a co-manager of the Jensen Portfolio fund. Over the past ten years through September 4, the fund returned an annualized 3.3%, outpacing Standard & Poor's 500-stock index by an average of 4.4 percentage points a year.
Kiplinger's: The market's come so far, so fast. are there any bargains left?
My sense is that the market is either fairly valued or ahead of itself. But there are some good opportunities for long-term investors in quality growth companies. Quality should sell at a premium because investors are willing to pay a higher price for companies that have solid financial statements, consistent earnings and a projected rate of earnings growth that is higher than the market average. But you can now buy quality growth at the same earnings multiple as the market's.
How do you identify these firms?
We look for companies that have a sustainable competitive advantage, generate consistently high returns on investment, and have excess cash that can be used to reinvest in the business, buy back shares or pay a dividend. They must have a return on equity -- a measure of the profit a company generates with shareholders' money -- of at least 15% for ten consecutive years. Once we identify those great companies, we find out which are also great stocks -- outstanding businesses that can be purchased at a discount to our estimate of their intrinsic value.
Can you give an example?
Colgate-Palmolive has all the characteristics that we look for in a company. Its competitive advantage stems from superior brands that have been built up over a long time. Its return on capital has consistently been way above its capital costs. About 77% of sales are outside the U.S., and the company has opportunities to increase sales in fast-growing economies, such as Latin America and China.
How about one more stock?
We also like 3M. It achieves a sustainable advantage through intangible assets, such as patents. And 64% of its sales are outside the U.S., so it's also a global play.
What worries you over the long term in the stock market?
We're concerned about onerous regulation, higher taxes and too much government debt leading to higher interest rates. Quality growth companies should navigate these concerns.