2024-07-30 issue recommended excellent stock list

Albemarle shares are currently undervalued, as we believe lithium prices are at cyclically low levels. Demand from electric vehicle (EV) sales and utility-scale batteries is on the rise. However, since early 2023, batterymakers and automakers have been reducing their inventory, which has negatively impacted lithium purchases. Furthermore, the rapid influx of new, higher-cost, lower-quality supply from China has led to a rebalancing in the lithium market. Presently, lithium prices are below the marginal cost of production, prompting some supply to shut down in response. We anticipate that prices will increase by the end of 2024 from the lows observed in the first quarter, as demand strengthens and the market stabilizes. Additionally, Albemarle's unit production costs are expected to decrease as the company scales up new capacity and implements overhead cost reductions. Consequently, we project that Albemarle's profits will rise sequentially throughout 2024. The company's competitive advantage, or narrow moat, is derived from its cost-effective lithium production, which benefits from its unique geological resources. Lithium constitutes nearly 90% of Albemarle's profits, with electric vehicle batteries being the primary driver of lithium demand, accounting for approximately 50% of demand in 2023. As EVs are projected to grow to 40% of global auto sales by 2030, up from 12% in 2023, we forecast that they will eventually represent nearly 70% of total lithium demand by 2030. This positions lithium as a significant beneficiary of the increasing adoption of EVs. As one of the lowest-cost lithium producers globally, Albemarle stands to gain from the rising lithium prices and expanding profits driven by greater EV adoption. In addition, we expect lithium demand from utility-scale batteries used in energy storage systems to contribute to this growth. We project that lithium demand will increase to nearly three times the 2023 levels by 2030, reaching 2.5 million metric tons. Supply is likely to struggle to keep up with this demand, resulting in lithium prices remaining above the estimated marginal cost of production of $20,000 per metric ton for the remainder of the decade. We forecast that while lithium prices will remain volatile, they will average around $25,000 per metric ton from 2024 to 2030, leading to strong profits for Albemarle.

Wide-moat International Flavors & Fragrances (IFF) shares currently appear undervalued due to an economic slowdown impacting volume, with the market concentrating on short-term risks to the company’s profits. Following a period of stagnant sales, there are concerns regarding the company's long-term growth potential. The most pressing near-term challenge is the pace of recovery, particularly after profits fell in 2023 due to reduced volume from customer inventory destocking. We anticipate that IFF's specialty ingredients, which include flavors, fragrances, and biosciences, will experience normal demand in 2024. This normalization should enable IFF to operate its plants at more typical capacity utilization levels, positively impacting profits. We project modest profit growth in 2024, with a more significant recovery expected in 2025. The current stock price suggests that investors are doubtful about the company's capacity for long-term profit growth. IFF is a market leader in flavors, fragrances, enzymes, and cultures. As consumer demand shifts towards more natural flavors and the demand for cultures and enzymes increases, we believe IFF is well-positioned to capitalize on these trends, leading to robust long-term growth. However, IFF's debt levels are elevated due to the 2021 acquisition of DuPont's nutrition and biosciences division. In response, management has reduced the dividend by 50% to allocate more free cash flow towards debt repayment. The company has also divested certain businesses, including the recently completed sale of Lucas Meyer, to further reduce debt. Additionally, IFF has a pending agreement to sell its pharma solutions business, with the transaction expected to close by mid-2025. With proceeds from divestitures and savings from the dividend cut directed towards debt reduction, we anticipate that IFF's balance sheet will be in a healthier state by the end of 2025.

Rogers has experienced a significant decline alongside other Canadian telecom stocks, primarily due to concerns over potential increased regulation following the appearance of CEOs before Parliament. However, we believe that any new regulations are unlikely to be overly harsh, as the current market conditions do not justify such measures. The competitive landscape remains intense, pricing has remained stubbornly high, and companies have not enjoyed substantial financial gains, yet they continue to invest heavily in enhancing Canadian networks. Rogers is still generating considerable free cash flow and stands to benefit from additional synergies resulting from its merger with Shaw. Furthermore, it has emerged as the leading wireless carrier in terms of new customer acquisitions. While Rogers may not experience explosive growth, the prevailing pessimism surrounding the company appears excessively pronounced. All three major players in the market seem undervalued, but we feel most confident in Rogers' position.

Comcast is currently facing significant challenges, as concerns about slowing broadband customer growth impact its core cable business, while fears regarding increased content investments affect NBCUniversal. We anticipate that broadband customer growth will continue to decelerate due to market maturation, with phone companies likely gaining market share as they enhance their fiber networks. Nevertheless, we expect Comcast to boost broadband revenue through a combination of modest customer additions and strong pricing power. NBCUniversal will need to invest to generate more interest in Peacock, but we remain optimistic about the company's overall position, supported by its robust portfolio of content franchises, successful theme parks, and still highly profitable traditional television operations. With a solid balance sheet, Comcast is well-positioned to allocate most of its free cash flow towards shareholder returns, including a reliable dividend and substantial share repurchases.

We believe that narrow-moat Hanesbrands, currently trading at approximately a 65% discount to our fair value estimate of $15.80, represents an attractive investment opportunity. Our moat rating is derived from the company's intangible brand assets. Hanes owns several well-known brands in basic innerwear in the United States and Australia, which we believe has allowed some of its products to command favorable pricing and outperform competitors. However, Hanes has faced challenges in generating sales growth, particularly in its activewear segment, which has not yet returned to pre-pandemic levels. In response, the company has announced the sale of Champion to Authentic Brands Group for a total of $1.2 billion, with the potential for an additional $300 million in earn-outs. While this sale will decrease future cash flow, we believe it mitigates risk for shareholders, as the proceeds will be allocated towards debt reduction. Additionally, we anticipate that this strategic move will enhance profit margins, allowing Hanes' management to concentrate on its core innerwear business. Hanes has successfully diversified its brand portfolio and expanded internationally, particularly in Australia, where its Bonds brand and others hold significant market shares. Following the Champion sale, Hanes will no longer have exposure to the European market. With improved cash flow, Hanes has reduced its debt from $3.9 billion at the end of 2022 to $3.3 billion by the end of 2023. The company has also eliminated its quarterly dividend and plans to utilize all available free cash for debt reduction. Given this strategic focus, the proceeds from the Champion sale, and our expectations for steady cash generation, we project that Hanes' debt will decrease to $1.2 billion by the end of 2027, resulting in a debt/EBITDA ratio of below 2 times.

We rate VF as a no-moat company, as its largest brands—Vans, The North Face, and Timberland—have faced varying degrees of struggle since the pandemic. Despite this, VF’s shares are trading at a significant discount to our $39 fair value estimate. In October 2023, CEO Bracken Darrell introduced a strategic plan called “Reinvent,” which aims to drive innovation and implement new management for Vans, establish a new platform in the Americas, reduce costs, and decrease debt. VF is already making strides in this area, having agreed to sell Supreme for $1.5 billion in cash. We believe VF's valuation will improve as the Reinvent plan is executed, although this will take time. As one of the largest apparel firms in the US, VF operates in appealing categories; however, its share price has declined sharply due to a series of setbacks, including a notable drop in Vans sales, weak wholesale orders across many brands, inflation, high inventory levels, and an unfavorable tax ruling. While we recognize these challenges, we see VF’s reduced valuation as an opportunity to invest at a discount in a company that is positioned for improved profitability. The firm’s adjusted operating margin was a disappointing 4.5% in fiscal 2024, but we expect it to gradually recover to historical levels as Vans and The North Face regain sales growth in the Americas. Specifically, we project that VF can increase its operating margins to approximately 12% by fiscal year 2028. In light of its recent difficulties, VF cut its quarterly dividend twice in 2023. While this is disappointing for income-focused investors, we believe the company's emphasis on enhancing liquidity and reducing debt is advantageous for shareholders. There is also potential for further asset sales. Recently, VF has attracted the attention of activist investors advocating for cost reductions and the divestiture of noncore brands. Some of their objectives align with the strategic plan, suggesting they are supportive of Darrell's initiatives.

We consider the shares of narrow-moat Bath & Body Works to be attractive, currently trading at over a 45% discount to our fair value estimate of $70. The company possesses a strong competitive advantage in the substantial addressable markets it serves. Its robust brand intangible asset is reinforced by its leading position in the bath and shower, as well as the candle and air freshener sectors, which has been enhanced by Bath & Body Works' swift adaptation to consumer trends. The narrow moat is reflected in a 48% average return on invested capital, excluding goodwill, which we anticipate the business will achieve over the next decade, significantly exceeding our 8% weighted average cost of capital estimate. While we project limited growth in its North American footprint (with over 1,800 owned stores), we expect that product innovation and productivity improvements from new store formats will drive growth in both revenue and profits over time. Additionally, advancements in omnichannel strategies (such as buy online/pick up in store) are expected to remain a key component, while other digital enhancements will contribute to increased conversion rates and profit potential. A strategic emphasis on international expansion is likely to benefit both physical and digital sales channels, enabling high-single-digit average international sales growth over the next decade, which will help Bath & Body Works enhance its brand intangible asset on a global scale. We project that these opportunities will result in average sales growth of 3%-4% in the long term, aligning with global growth forecasts (according to Euromonitor) for the bath and shower and soap industries, thereby facilitating additional market share gains for Bath & Body Works beyond its already strong position.

We consider Nordstrom to be significantly undervalued, currently trading at over a 40% discount to our fair value estimate of $38.50. Although the company's recovery from the pandemic has been lackluster, it consistently generates cash flow, and we expect its earnings to improve. Additionally, Nordstrom offers a dividend yield of approximately 3.5%. The company's strengths include a loyal customer base, a strong reputation for service, substantial e-commerce sales, and a presence in both luxury and off-price apparel, footwear, accessories, and beauty. However, due to intense competition that has severely impacted the department store model, we classify Nordstrom as a no-moat company. Given the current market dynamics, we do not anticipate that the firm will return to the double-digit operating margins it achieved consistently before 2014. Nevertheless, we foresee a potential turnaround as management rolls out its Closer to You plan, which focuses on e-commerce, expansion in key cities, and a wider off-price offering. As part of its merchandising strategy, Nordstrom plans to increase private-label sales and significantly expand the range of items available through partnerships. Consequently, we believe Nordstrom's operating margin will stabilize around 6% in the medium term, as sales enhancement and efficiency initiatives should enable better cost leverage in areas such as marketing, wages, and store overhead. Through effective cost-cutting, efficiency improvements, and a refined merchandise mix, we project that Nordstrom will increase its gross margin on net sales to 36% by 2026, up from less than 35% in 2023, while reducing its selling, general, and administrative expenses as a percentage of total revenue to 32%, down from 33% in 2023. Recently, Peter and Erik Nordstrom revealed that they are considering the possibility of taking the company private. We interpret this as further evidence of the stock's undervaluation, but it also indicates that a turnaround will require time.

Polaris' shares are currently trading at over a 30% discount to our fair value estimate of $120. The company's strong brands, innovative products, and Lean manufacturing practices contribute to its wide economic moat. We believe Polaris will continue to leverage its research and development, high-quality standards, and operational excellence to drive demand. Historically, the company has generated exceptional returns on invested capital, including goodwill, and we anticipate it will achieve a 23% return on invested capital (ROIC) by 2033, significantly exceeding our 10% weighted average cost of capital assumption. Recently, the stock has faced pressure due to challenges related to slowing consumer conversion and cautious dealer behavior, which we view as temporary issues. Consequently, the company revised its 2024 outlook significantly after the second quarter, now projecting a sales decline of 17%-20% (down from a previous estimate of 5%-7%) and adjusted earnings per share (EPS) of $3.50-$4.00, a reduction of approximately 60% from the prior range of $7.75-$8.25. We forecast an 18% sales decline and an EPS of $3.75. Once dealer inventory is optimized, expected to decrease by 15%-20% during 2024, wholesale shipments should align more closely with consumer demand. We believe that long-term demand driven by new product launches will support shipment growth and profit improvement beyond 2024. From 2024 to 2033, we project the company will achieve an average sales growth rate of 3.5% and double-digit EPS growth.

We continue to see value in Sealed Air shares. The company produces a diverse range of flexible resin packaging, protective shipping materials, and integrated packaging systems. In 2021, packaging demand surged due to pent-up consumer demand and supply chain challenges, leading to record financial performance for Sealed Air in 2021-22. However, this positive trend reversed as supply chain disruptions eased and inventory levels increased. Many retailers faced excess inventory and had to implement destocking measures, which negatively impacted the packaging industry. Management initially provided an optimistic outlook for full-year 2023 and maintained this perspective through the first-quarter earnings report, despite ongoing signs of end-market weakness. However, Sealed Air's second-quarter results fell short of expectations, prompting a reduction in full-year adjusted EPS guidance by over 20%, which unsettled the market. Consequently, the shares have significantly declined from their January 2022 peak and have underperformed compared to packaging peers during this period. Despite these recent challenges, Sealed Air’s unique business model in the packaging sector remains noteworthy. The company sells packaging equipment and automation solutions, which are utilized by clients for years, differentiating it from other packaging producers that operate on a price-taker basis. Sealed Air’s strong competitive positioning and favorable long-term outlook enhance our confidence that the currently discounted share price will ultimately benefit long-term investors.

Hasbro's shares have begun to outperform the broader market, experiencing a 31% increase year to date, compared to an approximate 12% rise in the Morningstar Global Markets Index. Despite this performance, we believe the shares remain significantly undervalued relative to our fair value estimate of $84. We think investors are not fully recognizing Hasbro's successful business transition, which included the divestiture of its entertainment segment, enabling the company to achieve structurally higher operating margins. We anticipate a notable improvement in revenue mix, with the high-margin Wizards of the Coast and digital segments projected to account for about 35% of sales in 2024, up from 29% in 2023. Additionally, by concentrating on core competencies, Hasbro is poised to benefit from enhanced innovation and a streamlined operating model, supported by the outlicensing of lower-productivity brands to partners, which should help free up working capital. Moreover, due to a rigorous focus on expenses, Hasbro aims to reduce gross costs by $750 million by the end of 2025, which will aid in profit growth. While the company is targeting a 20% operating margin by 2027, we believe it has the potential to achieve this milestone as early as 2024, with long-term operating margins stabilizing around 23%-24%. Therefore, we see a strong opportunity for Hasbro to exceed expectations, driven by its renewed emphasis on product innovation, cost management, and a lean operating profile.

Shares of wide-moat Estee Lauder have declined by 42% over the past 12 months, primarily due to weak post-pandemic travel retail performance in China and investor skepticism regarding the firm's profit recovery plan. We believe the shares, currently trading at a 52% discount to our $210 fair value estimate, offer compelling value and recommend them to investors seeking exposure to the attractive beauty care market. We consider Estee Lauder's competitive position to be strong and view the challenges it faces in China as temporary and manageable. The firm is well-positioned to leverage its strong brands, solid channel relationships, and various research and manufacturing initiatives in Asia to enhance its market standing. Notably, the firm's most recent quarterly update indicated significant improvement in gross margins, reinforcing our positive outlook on its premium positioning and channel inventory management in travel retail, with expectations for further progress. Although Estee reported a 10% sales contraction in fiscal 2023 (ending June) due to inventory issues in travel retail in China, we see minimal impact on the premiumization trends in the country or Estee's long-term brand perception and channel relationships. For fiscal 2024, we now project a 2% revenue decline to account for ongoing challenges in China; however, we anticipate a rebound in sales growth to high single digits starting in fiscal 2025, as we expect Estee to outperform the mid-single-digit growth of the overall beauty market, driven by its focus on premium skincare. We also expect operating margins to expand to the high teens by fiscal 2033, supported by an improved channel mix (moving away from heavy promotions in department stores), manufacturing efficiency gains, and cost-cutting measures.

Lamb Weston shares have nearly halved since early April following two disappointing quarters. In its fiscal third quarter, a problematic rollout of a new enterprise resource planning (ERP) system resulted in inaccurate inventory estimates at distribution centers, leading to decreased customer fulfillment rates, lost market share, and inventory write-offs. The company was unable to regain lost market share in its fiscal fourth quarter, and sluggish restaurant traffic further compounded its challenges. Additionally, Lamb Weston is currently undergoing an investment cycle aimed at expanding capacity, which is negatively impacting its utilization rate and margins. The near- to medium-term outlook appears challenging, as these headwinds are unlikely to dissipate quickly. However, long-term valuation catalysts and Lamb Weston's narrow moat remain intact. Despite the decline in traffic, attachment rates are still high, and fries continue to be one of the most profitable menu items for restaurants. As consumers adjust to stabilizing inflation, we anticipate a return to typical mid-single-digit top-line growth for fries. Furthermore, while the company is facing short-term excess capacity, we believe that long-term demand growth and the recovery of lost market share will restore utilization rates to the high-90% range. Importantly, the traffic and ERP challenges do not diminish Lamb Weston's cost advantage or the sources of its intangible asset moat. The company’s supply chain is heavily concentrated in the low-cost Columbia Basin and Idaho, where high yields result in costs that are 10%-20% lower per pound. Although Lamb Weston has lost some market share due to its ERP issues, we expect its customer relationships to remain robust, allowing it to recapture share as operations stabilize.

From early 2002 to late October 2023, Tyson Foods’ shares declined nearly 50%, significantly underperforming the Morningstar US Market Index, which fell by 5%, as well as protein-centric peers Pilgrim’s Pride (down 7%) and Hormel (down 33%). Although Tyson has begun to recover, with shares rising approximately 30% since then, they remain well below our fair value estimate, presenting an attractive risk-adjusted upside along with a healthy dividend yield exceeding 3%. The decline in Tyson’s share price can be attributed to deteriorating financial performance. As of the end of the second fiscal quarter, trailing 12-month adjusted EBITDA had decreased by 31%. As a no-moat food producer primarily reliant on raw meats for revenue, Tyson is vulnerable to fluctuations in both input costs and product prices. Recent challenges have been exacerbated by significant cost inflation and supply-demand imbalances in the beef and pork markets. Additionally, the US cattle supply is not expected to improve in the near term. However, we believe the current share price suggests that these adverse conditions will persist. Meat markets are cyclical, and a return to a more stable operating environment is sufficient to support our valuation. We do not anticipate any structural changes in the meat markets that would lead to a permanent shift in profitability. Consequently, we project moderate top-line growth of 2% over the next five years, with operating margins expected to recover to our 2028 estimate of 7.5%, aligning with historical averages and improving from the fiscal 2023 result of approximately negative 1%.

In response to shareholder and market concerns regarding expenditures, Exxon has adjusted its plans. Nevertheless, the company continues to uphold a strong pipeline of high-quality projects that are expected to facilitate value-accretive growth. Currently, earnings are under pressure due to low oil prices and significantly weak refining and chemical margins. However, Exxon is likely to gain a greater advantage compared to its peers as these margins improve. Additionally, the dividend appears secure, making the yield appealing.

We believe the threat to Enbridge’s Mainline tariffs and volumes posed by the Trans Mountain pipeline expansion is overstated. The Mainline's reliability, along with the rerouting of barrels from the Trans Mountain expansion to the US, supports the Mainline’s established position. The acquisition of utilities from Dominion Energy was unexpected, but we see it as a positive move that enhances the stability of Enbridge’s returns. Additionally, focusing on the growth of renewables, particularly solar and wind, which are replacing coal, by investing in established utilities rather than in no-moat pure-play renewables projects is a prudent strategy.

TC Energy is currently facing several investor concerns, including high debt levels, ongoing worries about the future impacts of Coastal GasLink cost overruns, and skepticism regarding the planned liquids spinoff in 2024. However, we believe that the completion of over CAD 5 billion in asset sales, along with an additional CAD 3 billion in planned sales and CAD 750 million in optimization opportunities, provides ample capital to reduce debt. The liquids spinoff is expected to be capitalized at five times debt/EBITDA, indicating that more leverage can be removed from TC Energy's balance sheet. Notably, Coastal GasLink is now fully complete and prepared to supply gas to LNG Canada. We anticipate that the liquids spinoff will showcase the quality and growth potential within the gas and power portfolios, particularly in areas such as carbon capture and hydrogen.

SoFi Technologies is currently trading significantly below our $13 fair value estimate. Throughout most of 2023, the company's performance was adversely impacted by the automatic forbearance of federal student debt, a measure implemented under the CARES Act. Prior to the pandemic, approximately 60% of the loan volume in SoFi’s lending segment stemmed from student debt refinancing. Naturally, the incentive to refinance student debt diminishes when payments are suspended, resulting in SoFi’s student loan origination volume remaining well below pre-pandemic levels for several years. However, with the conclusion of student forbearance, a significant obstacle to SoFi’s future performance has been lifted. Despite these challenges, SoFi has continued to deliver strong results in its other segments, making progress toward its long-term strategic objectives. Similar to trends observed in other digital lenders, SoFi’s personal loans have experienced a considerable increase in volume, with loan origination more than doubling over the past couple of years. The financial-services segment has also seen a notable enhancement in user monetization, benefiting from higher interest rates, increased debit card transaction volume, and the introduction of SoFi’s new credit card. The acquisition of a bank charter has proven advantageous for SoFi, as rapidly growing deposits have allowed the company to significantly enhance the funding structure of its lending operations and financial-services segment. Rising net interest income has been the primary driver of the company’s robust results in 2023, despite the ongoing weakness in student loan origination. Additionally, SoFi’s banking-as-a-service subsidiary, Galileo, has experienced a resurgence in account growth after a sluggish start to 2023, with the number of accounts on the platform increasing by over 12.4% from the end of June to the end of December. We believe that the market is overly focused on the short-term risks associated with rising credit costs, overlooking the long-term growth drivers that SoFi possesses.

In recent years, the market sentiment regarding PayPal has fluctuated between optimism and pessimism. The stock experienced a significant increase, roughly tripling during the early stages of the pandemic, but has since declined nearly 80% from its peak, falling to a level substantially below its pre-pandemic price. With market confidence in the stock currently low, we perceive a potentially attractive long-term investment opportunity. Our fair value estimate for this narrow-moat company is $104. We believe the market is placing too much emphasis on short-term absolute growth, whereas it should focus more on relative performance, which we consider a better indicator of the company’s competitive position and long-term value. We acknowledge the challenges the company faces in the near term. However, in the long run, PayPal's prospects are closely linked to the high-growth e-commerce sector, with Venmo offering additional potential upside. Historically, PayPal has shown its ability to gain market share in this area, and we believe the company maintains a robust competitive position. While the e-commerce landscape is highly competitive, we are confident that PayPal can compete effectively, and we see no evidence in its recent performance indicating a weakening of its overall competitive stance. Nonetheless, we recognize that long-term results could vary in either direction. Therefore, we consider the stock to be more appropriate for risk-tolerant investors.

We believe the banking sector is currently undervalued. The primary risks to our top picks include unexpected changes in deposit and funding costs, as well as the potential onset of a recession. Although we believe banks are already trading at recessionary valuations, the actual realization of a recession is unlikely to improve valuations in the short term. US Bancorp has experienced a sell-off similar to some regional banks; however, we perceive the risk of deposit outflows as minimal, given its status as the largest regional bank. While the bank does have slightly higher-than-average unrealized losses on securities, we consider this more of an earnings issue (with lower-yielding assets remaining on the balance sheet) rather than a capital concern. Although US Bancorp's earnings may face pressure as interest rates rise, its size, strong competitive position, and relatively favorable deposit situation lead us to believe that the recent sell-off is overblown. Nevertheless, depending on future interest rate movements, there may be additional pressure on the stock, potentially extending the timeline for our outlook to materialize.

Moderna's shares experienced significant volatility in 2021. Initially, investors were overly optimistic about the potential of the company's technology, but later became too pessimistic regarding its growth prospects post-coronavirus. While we maintain modest expectations for sales of the firm's COVID-19 vaccine, following the substantial pandemic-driven demand in 2021 and 2022, we believe that Moderna's pipeline of mRNA-based vaccines and treatments is progressing rapidly across various therapeutic areas. By the end of 2023, Moderna had 37 development candidates in clinical trials. Although sales are expected to decline in 2023-24 ahead of new product launches, we are increasingly confident in the long-term sales trajectory of the firm's diversified pipeline. We believe that Moderna's technology has been well validated in respiratory virus vaccines, with an RSV vaccine set to launch in 2024 and a COVID/flu combination vaccine anticipated in 2025, as well as in oncology, with a potential melanoma launch by 2025, and in rare diseases, where accelerated approvals are also possible.

Baxter remains on our Best Ideas list, with shares currently trading at approximately half of our estimated fair value. Investors are benefiting from a dividend yield exceeding 3% while awaiting improvements in market sentiment. Demand is strengthening across most of Baxter's medical supply businesses, driven by increased medical utilization, and new product launches, such as the Novum IQ pump platform, are expected to further enhance demand in the near term. Baxter also presents a margin improvement opportunity, as inflationary pressures in its supply chain are subsiding. Key new group purchasing organization contracts are set to take effect in 2025, which should positively impact BAX's product pricing. We anticipate that profits will grow at a relatively rapid pace in the near term before stabilizing at a more normalized level in the low double digits over the long run. While we acknowledge the market's concerns regarding Baxter's capital equipment business, the upcoming kidney care divestiture, and long-term economic profitability, we believe there is a significant margin of safety in Baxter's shares. The weak first-quarter performance of Baxter's capital equipment segment, particularly from the legacy Hillrom assets, was partly due to the Change network outage, which led to liquidity issues for smaller caregivers and delayed their purchases of Baxter products. These delayed purchases are expected to materialize in future quarters. However, we also recognize that internal challenges and competitive pressures have impacted Baxter, especially in its larger hospital-facing assets, where Stryker outperformed in the first quarter. Some of these issues may take longer to resolve, prompting Baxter to lower its guidance for that segment for 2024. Given management's credibility issues with guidance, investors seem concerned that the company's overall 2024 guidance could be revised downward, despite a recent increase following a strong first quarter and the appointment of a new CFO responsible for guidance. Additionally, there is a risk that Baxter may sell its kidney care assets below fair value in the near term due to divestiture plans and weak market sentiment. We estimate a risk of approximately $5 per share on Baxter's fair value estimate related to this planned divestiture and market comparables in dialysis. Furthermore, we assess Baxter's moat rating as being on the weaker end of the narrow rating spectrum. If profits do not improve as anticipated, there is a possibility that Baxter's moat could decline into the no-moat category, which would further pressure our fair value estimate without any changes to our forecast. Nevertheless, we still see substantial upside potential in Baxter shares, even if these negative divestiture and moat scenarios materialize.

Illumina continues to be an appealing business, trading significantly below its intrinsic value, in our view. Following the arrival of activist investor Carl Icahn in spring 2023, along with new leadership on the board and in the executive team, we believe that positive catalysts for the stock are more probable than further downside risks, despite some complexities in the company's narrative. While Illumina may encounter increased competition in its established genomic sequencing technology, we maintain that the elements defining its economic moat—intangible assets and switching costs for end users—remain robust and should enable the company to generate economic profits over the long term. Additionally, Illumina has recently spun off its Grail liquid biopsy assets, which are focused on a promising technology opportunity for the early detection of cancer. This loss-generating segment had previously impacted Illumina's earnings and diverted the attention of the former management team, which was engaged in regulatory battles to retain Grail. With the divestiture, we expect earnings to improve immediately, and the direct spinoff to Illumina shareholders appears to be a reasonable approach to appease regulators while providing Illumina shareholders with long-term options regarding Grail technology. Illumina has also kept a minority stake of 14.5% in Grail. In summary, we believe Illumina shares present a compelling opportunity for investors who can accept significant uncertainty regarding future cash flows and possess a long-term investment perspective.

Humana remains on our Best Ideas list due to its current discount to our fair value estimate, strong competitive position in Medicare Advantage, and significant potential for profit growth following a challenging 2024. The company's outlook for 2024 indicates a substantial decline in profits, primarily attributed to mispriced Medicare Advantage plans that may not adequately cover the rising medical utilization expected this year. We anticipate that Humana will enhance its profitability in this sector starting in 2025 by exiting unprofitable markets, reducing additional benefits, and increasing shared costs for consumers. However, it appears that the company will face profit challenges in 2024. Despite the near-term uncertainty affecting its typically robust outlook, we believe Humana's long-term prospects remain promising. Currently, Humana's discounted shares offer a rare combination of a high-quality company and an attractive valuation within the managed care sector.

ResMed is experiencing robust device sales, while Philips continues to face challenges due to ongoing remediation efforts. Sleep apnea diagnosis rates are on the rise, and ResMed's supply constraints are beginning to ease. Recent declines in share price are attributed to concerns that weight-loss medications may impact the sleep apnea market. However, we believe that the widespread adoption of these drugs will take time due to their higher costs, limited availability, and potential side effects. It's important to note that obesity is only one risk factor for sleep apnea; patients who lose weight may still be classified as obese and would likely continue to benefit from using a sleep device. We anticipate that ResMed will remain a significant player in the sleep apnea sector. For further insights, please refer to our special report, “The Start of Unconstrained Sales for ResMed,” published in July 2023.

Chart Industries’ first-quarter results and reaffirmed 2024 guidance have reinforced our belief that the stock is undervalued. Although the stock price experienced a significant increase following the first-quarter results, we still anticipate further upside to our $200 fair value estimate. The management team at Chart continues to meet its objectives consistently, and we believe the market's skepticism is unfounded. We view Chart as a compelling growth opportunity, with potential in various sectors such as Big LNG, hydrogen, carbon capture and storage, water treatment, and even space exploration. The company is targeting multiple substantial markets and is also focused on margin expansion. In 2023, gross margin increased by over 500 basis points, and we foresee an additional 300 basis points of expansion potential. Revenue growth for heat transfer systems and specialty products, which cater to many of these markets, is projected to be between 40% and 50% in 2024 compared to 2023 pro forma levels.

Huntington Ingalls, a wide-moat company and former subsidiary of Northrop Grumman, is the largest military shipbuilder in the United States. While the company benefits from extraordinarily long planning horizons and budget visibility, minor shifts in the timing of major programs can result in lumpy quarterly results, which we believe have impacted the stock. Nevertheless, the company's strong ties to the US Department of Defense, its status as the sole provider of nuclear aircraft carriers and turbine-powered amphibious landing ships, and its position as one of only two producers of nuclear submarines for the US Navy position it for recurring profits well into the future. The long-cycle shipbuilding business does not yield the highest margins in the defense contracting industry. However, it exemplifies the conditions that provide a durable competitive advantage and significant visibility into revenue and profitability for decades. The large shipbuilding sector offers extensive planning horizons and budget visibility, although small timing shifts in major programs, such as aircraft carriers, can lead to uneven quarterly results. We anticipate some potential volatility later this decade, contingent on upcoming revisions to US Navy budgets. The timing of work on two America-class amphibious assault ships expected to commence around 2027 may or may not offset the decline in work on the third Ford-class aircraft carrier, the Enterprise. This concern is more operational than financial and should not impact the company as long as it maintains sufficient visibility into similar work at each of its two shipyards as projects near completion. Huntington Ingalls' products take years to build and are typically produced in small quantities. The potential for margin gains as the company progresses down the learning curve is limited, especially since the government negotiates the price of each ship, affecting the available profit. This close relationship between the buyer and the company distinguishes Huntington Ingalls from other defense contractors, as it is highly insulated from macroeconomic or market risks. In 2022, the company generated only $50 million in revenue from commercial customers out of nearly $11 billion in total revenue. Moreover, as the sole provider of nuclear aircraft carriers and turbine-powered amphibious landing ships, and one of only two producers of nuclear submarines for the US Navy, the Defense Department has a vested interest in maintaining multiple shipyards in operation and ensuring their financial viability. This policy results in a balanced distribution of work between Huntington Ingalls and General Dynamics, mitigating risk and distributing rewards. While the firm may experience uneven revenue and profits in certain quarters and years due to the multiyear production cycles of its large products, we believe long-term investors will be rewarded, particularly with the anticipated growth in submarine and destroyer revenue.

TransUnion’s shares have experienced volatility due to modest fluctuations in the company’s business performance and investor uncertainty. We believe the firm’s revenue will remain resilient during a recession, and we find the current valuation, which aligns with the S&P 500 Index, to be attractive given the company’s competitive advantages and business model. Improving trends in the US mortgage market, along with higher pricing from FICO, are expected to enhance profitability. Additionally, the firm has encountered softer revenue in typically noncyclical sectors, such as insurance and tenant screening, due to specific market idiosyncrasies that we anticipate will normalize over time. On the cost front, restructuring efforts and lower interest rates (as the firm has variable debt on its balance sheet) are also expected to support profitability in 2024.

Following the successful development of a COVID-19 vaccine in November 2020, the hotel industry, along with the broader REIT sector, experienced a rally as investor confidence grew that business would eventually return to pre-pandemic levels. However, the emergence of the delta and omicron variants of the coronavirus led to a decline in hotel stock prices, while the rest of the sector continued to perform well. Many hotel companies have yet to achieve positive corporate cash flows since the onset of the pandemic; the rise in virus cases has delayed the industry's recovery and prolonged the period of negative cash flows. We see the current situation as an opportunity for investors to acquire Park Hotels & Resorts at a discount to our fair value estimate. We believe the company's balance sheet is robust enough to withstand ongoing disruptions in the hotel industry for the next several years. Although many businesses have postponed plans to fully return employees to the office, which in turn delays the recovery of hotel demand driven by business travel, we do not expect the current disruption to significantly impact the long-term demand for Park's portfolio of high-quality hotels. Additionally, Park's management has effectively managed hotel net operating income during the pandemic, exceeding our expectations, which gives us confidence in their ability to navigate the current challenges facing the hotel industry. We anticipate that Park will rebound from the pandemic, experiencing several years of strong growth, and will return to its 2019 peak levels by the end of 2024.

Kilroy Realty, despite lacking a moat, presents a compelling investment opportunity due to its high-quality office portfolio, which appears attractively undervalued following the recent selloff of office REITs. While we acknowledge the uncertainty surrounding the future of office spaces and anticipate a challenging environment for office owners in the near to medium term, we believe the recent market reaction has been excessive. The current implied valuation of Kilroy’s shares does not align with the prevailing private market valuations of its office portfolio. For long-term investors, Kilroy Realty is worth considering, as its shares are trading significantly below our fair value estimate of $59 per share. We regard Kilroy’s office portfolio as one of the best among publicly traded REITs, with an average age of just 11 years, compared to 30 years for its peers. Additionally, Kilroy’s portfolio excels in other important metrics, such as rent spread and sustainability. The company is well-positioned to capitalize on the flight-to-quality trend, which is gaining momentum as employers seek to encourage employees to return to the office. However, there are risks to our investment thesis. The recovery in physical office occupancy levels has been slow; according to Kastle Systems' weekly work barometer, average occupancy in office buildings is still around 50% of pre-pandemic levels. Furthermore, Kilroy’s geographic concentration in California and significant exposure to the technology and life sciences sectors pose additional risks.

No-moat Realty Income is currently trading at a significant discount to our $76 fair value estimate. We believe the decline in share price since August 2022 is primarily due to rising interest rates. Our analysis indicates that Realty Income is the most interest rate-sensitive REIT we cover, exhibiting the highest negative correlation with interest rates. As "The Monthly Dividend Company," it attracts many investors when interest rates are low; however, these investors may shift to risk-free Treasuries as rates rise. Moreover, the company sets relatively low annual rent escalators, which means it depends on executing billions in acquisitions each year to drive growth. Rising interest rates have narrowed the spread between the company's acquisition cap rates and the weighted average cost of capital used for funding these acquisitions, potentially hindering growth. Nevertheless, Realty Income has increased its acquisition volume in recent years and continues to acquire at a positive spread over its cost of capital. In 2023, it completed $9.5 billion in acquisitions at an average cap rate of 7.1%, significantly above the average interest rate of around 5% on the debt issued for these transactions. The company's $9.3 billion acquisition of Spirit Realty, which closed in January 2024, is expected to enhance shareholder value. We believe management will continue to identify opportunities that boost funds from operations, supporting ongoing dividend growth for shareholders. The recent selloff driven by rising interest rates offers investors an attractive entry point, especially if the Federal Reserve signals any rate cuts in 2024.

We believe that concerns regarding Sabre's financial health, amid elevated credit costs and reduced demand for corporate travel due to the pandemic, present an opportunity to invest in a company with network advantages, efficient scale, and switching cost benefits at an attractive margin of safety. Sabre's global distribution system encounters manageable competitive risks from the new distribution capability protocol and direct connections, which face significant aggregation and processing challenges to compete effectively with Sabre and its peers. In the first half of 2024, American Airlines reported weaker sales, largely due to its decision to reduce emphasis on GDS platforms. However, American is now returning to GDS networks to recover lost corporate business. Additionally, investments in cloud platforms, new distribution capabilities, and revenue opportunities in ancillary services, hotel IT, and airline IT further solidify Sabre's customer base, reinforcing its competitive advantages. We estimate that over half of Sabre's pre-pandemic sales were linked to corporate travel, which is recovering more slowly than leisure travel. While we acknowledge that some corporate travel may be permanently replaced by video conferencing and sustainability efforts, we anticipate a rebound in business trips in the coming years as economic growth continues and more employees return to the office. We believe that in-person interactions can serve as a significant differentiator in retaining and acquiring customers compared to video calls. Sabre has also enhanced its debt profile. As of early 2022, it had $3.8 billion in debt maturing in 2024-25, but it now has no major debt maturing until 2027, following successful tender offers and refinancing efforts. We believe that Sabre's cash reserves, free cash flow generation, and the gradual recovery in platform demand position the company well to manage its maturing debt.

Cognizant is among our top picks in the technology sector, presenting an attractive long-term investment opportunity reflected in our $94 fair value estimate. We believe the market is currently penalizing the firm for past execution and strategic missteps, which we consider to be behind them. Cognizant is well-positioned to enhance its reputation beyond that of a back-office outsourcer, focusing on higher-value technical offerings such as digital engineering, artificial intelligence solutions, and digital transformation consulting. We anticipate that all major IT services firms we cover will benefit from the demand for digital transformation to some extent. We see no reason why Cognizant would be significantly less of a beneficiary than the market suggests. In our view, smaller IT services players are likely to struggle in the digital transformation landscape due to the consolidation of accounts with larger vendors like Cognizant. Conversely, Cognizant offers a diverse range of services that align with digital transformation needs, and we maintain that its financial-services platform is the best in the industry. As a beneficiary of consolidation, Cognizant has the potential to increase switching costs, which underpins its narrow moat, along with its intangible assets. We project a five-year revenue compound annual growth rate of 8% for Cognizant, representing an acceleration of 5% compared to the previous five years. Despite current delays in decision-making, the long-term demand for digital transformation projects remains strong, as evidenced by robust bookings. Cognizant’s trailing 12-month book/bill ratio stands at a healthy 1.3, reinforcing our confidence in future demand for the firm's offerings. We also expect a moderate 90-basis-point operating expansion over the next five years, driven by a gradual shift towards higher value-added offerings.

We believe NiSource presents investors with the chance to acquire a high-growth utility that is valued similarly to its slower-growing counterparts. The company's shift from fossil fuels to clean energy in the Midwest is poised to drive a decade of above-average growth. NiSource's electric utility intends to shut down its final coal-fired power plant by 2028, transitioning to wind, solar, and energy storage for power generation. We anticipate that NiSource will invest $17 billion over the next five years and potentially up to $35 billion over the next decade, resulting in an expected annual growth rate of 7% for both earnings and dividends.

We believe Entergy presents one of the most compelling combinations of yield, growth, and value within the utilities sector. The market has been slow to recognize Entergy's decade-long business transformation. For the first time in twenty years, nearly all of Entergy's earnings are derived from its five regulated utilities in the Southeast United States. However, the market does not assign Entergy the same valuation as other regulated utilities. Entergy's long-term growth potential is often misunderstood and undervalued. We project an annual earnings growth of 8% at least through 2026, which would rank among the fastest growth rates of any U.S. utility. Factors such as population growth, data center demand, economic expansion, and renewable energy development in the Southeast serve as tailwinds that are not commonly experienced by other utilities.

We believe NetEase is undervalued due to the market's overreaction to recent regulatory risks, which has overshadowed the company's long-term international opportunities. Once license approvals resume, regulatory concerns are expected to dissipate, leading to positive earnings revisions as new titles find success abroad. NetEase's business portfolio is stronger than ever. We anticipate continued strong performance, fueled by the global launch of the Harry Potter: Magic Awakened card game, the mobile and console adaptation of Naraka: Bladepoint, and the launch of Diablo Immortal in China. We recommend that investors capitalize on current market weakness to acquire this narrow-moat business, which boasts net cash and over 20% earnings per share growth, while trading at a 5% free cash flow yield.

We consider Yum China to be a long-term beneficiary of demographic changes in China. There is considerable potential for increased fast-food penetration, primarily fueled by enduring trends such as longer working hours for urban consumers, a significant rise in disposable income, and decreasing family sizes. We believe that investors are undervaluing the company's long-term growth potential and the opportunities for margin improvement as Yum China progressively transitions towards a greater focus on franchising.

Macao is experiencing a robust recovery from COVID-19 disruptions. As of the third quarter, the industry's gross gaming revenue has rebounded to 69% of the pre-pandemic levels seen in 2019, despite a decline in junket VIP income due to regulatory changes. We believe that Sands China, with its emphasis on the mass market, the largest number of hotel rooms in Macao, and a proven track record in nongaming activities, is well-positioned to benefit from the ongoing demand recovery in the region.

We believe the market has a differing perspective on the outlook for lithium prices, which is the key valuation driver for IGO. In our view, lithium prices are approaching a cyclical bottom, presenting an attractive entry point for investors. Currently, lithium is trading significantly below our estimate of the marginal cost of production, and we anticipate a price recovery as end-market demand increases and higher-cost supply is phased out. IGO's main asset is its minority stake in Greenbushes, recognized as one of the highest-quality and lowest-cost hard rock lithium mines globally. This asset provides IGO with a narrow economic moat. We project that lithium demand will nearly triple by 2030 compared to 2023 levels, primarily fueled by electric vehicle sales. To accommodate this growth, IGO intends to expand Greenbushes' capacity by approximately two-thirds by the end of the decade.

Shares in narrow-moat TPG Telecom are currently the most attractive option within our Australia and New Zealand telecom coverage. We anticipate a medium-term earnings recovery across multiple areas and project an adjusted EBITDA compound annual growth rate (CAGR) of 5% over the next five years. The benefits of a more rational mobile market are becoming evident, supported by ongoing growth in fixed wireless and the corporate segment. However, cost reductions from the ongoing transformation program are progressing more slowly than we had expected, which is limiting near-term earnings growth during the current capital expenditure phase related to the 5G rollout. Additionally, the overhang from major shareholders whose holdings have recently come out of escrow following the Vodafone merger is creating some unease among investors. Nevertheless, these concerns are largely reflected in the current share price, particularly in light of the long-term tailwinds for the telecom industry as it transitions to 5G and as the benefits of transformation are gradually realized.

We consider SiteMinder to be a strong industry leader with a substantial and highly attainable market opportunity. We anticipate that the hotel industry will consolidate around larger software providers, such as SiteMinder, which can distribute significant fixed technological and regulatory costs across a broader customer base. In our opinion, economic downturns will further expedite this trend. Additionally, we believe that SiteMinder’s new platform products will raise switching costs and foster network effects, leading to considerably higher terminal margins.

Domino's Pizza is a high-quality company with a substantial growth trajectory. We project a 20% compound annual growth rate (CAGR) in earnings over the next five years, driven by its global store expansion. While Domino’s sales growth has experienced volatility, the share price often reflects short-term trading conditions rather than its long-term potential. The near-term outlook remains uncertain, largely dependent on a reduction in elevated inflation. Nevertheless, we believe the market is undervaluing Domino’s significant and enduring long-term growth prospects. We anticipate the network will expand to 5,900 stores by fiscal 2033, up from approximately 3,800 as of June 2023, which is below management’s long-term target of 7,100 stores.

Negative sentiment stemming from short-term challenges, management changes, and structural shifts in the automotive industry has overshadowed the fundamental strength and resilience of Bapcor’s automotive parts business. A decline in discretionary spending is impacting retail in the short term; the new management team will need to demonstrate its capabilities; and the rise of electric vehicles presents a long-term challenge for the trade sector. Nevertheless, we believe that the current pessimism fails to recognize the inherent resilience in automotive spare parts, and Bapcor is well-positioned to navigate the gradual technological transition successfully.

Shares are currently trading at an attractive valuation with a fully franked yield. We believe the market is underestimating the defensive long-term earnings outlook, especially as consumers reduce nonessential spending. However, fiscal stimulus is expected to enhance household budgets in fiscal 2025. We project that Australian liquor retail sales will increase in the mid-single digits following minimal growth in fiscal 2024. In the long term, liquor demand remains defensive, supported by inflation and population growth, and we anticipate that the ongoing trend of premiumization will offset declines in per capita liquor consumption. As the largest liquor retailer in Australia, with well-known brands such as Dan Murphy’s and BWS, we expect Endeavour’s liquor sales to grow in line with market trends. We also believe that concerns regarding regulatory risk are overstated and have already been factored into the current price.

PDD is moving away from the American market, which is expected to lower regulatory risks. Meanwhile, Temu is performing well according to the data we have monitored.

BYD is confident in achieving its annual sales target of 3 million units, despite economic uncertainties. In the first quarter, typically a slow season, BYD sold 552,000 units, representing an 89% year-over-year increase and accounting for 18% of its target. The company has recently launched two new models—the Song L SUV and the Destroyer 07 hybrid sedan—to reinforce its leading position in the mass new-energy vehicle segment, along with an entry-level small sedan, the Seagull, aimed at a broader customer base. Additionally, BYD's premium brands, Denza and Yangwang, have introduced new models to enter the luxury market. The increase in sales volume and reduced battery costs may help mitigate pricing pressures amid industry competition. Currently, BYD H shares are trading at 0.8 times 2023 sales, which is below the average of 1.3 times for Chinese EV makers. Key near-term catalysts include strong monthly sales momentum and improved profitability compared to peers.

We believe that the premiumization trend in the baijiu sector will serve as a long-term advantage for distillers, with leading companies poised to capitalize on this opportunity. At present price levels, Luzhou Laojiao stands out as our top choice in the sector, thanks to its robust brand heritage, exceptional product quality, and comprehensive distribution network. We anticipate that the company's proactive national expansion strategy and strengthened partnerships with distributors will enhance its competitiveness, enabling it to achieve higher net profit growth relative to major competitors like Wuliangye over the next five years.

Yili is the leading dairy producer in China, boasting a vast distribution network and strong relationships with retailers across the country. The company has strategically invested in lower-tier cities to distribute its ultra-high-temperature dairy products, which incur lower logistics costs compared to low-temperature products. In the medium to long term, Yili has the potential to broaden its category coverage by leveraging its channel strength. The company has already demonstrated progress in capturing a larger market share in the infant milk formula segment, which presents higher entry barriers than other packaged food categories due to stringent regulatory requirements for product safety.

Asahi's share price experienced a significant decline following a surge in coronavirus cases in Japan, which resulted in a sharp drop in beer demand in bars and restaurants. Concerns that a recession could undermine the company's premium beer strategy also contributed to the decrease in share price. We believe that job losses are more likely to impact lower-income earners, and that demand will gradually recover as lockdowns ease and economic activities resume. While income growth is essential for beer premiumization, Asahi has the potential to enhance margins on mainstream beers by rationalizing rebates if premiumization is hindered by a slower economy. In the long term, we expect Asahi to capitalize on excise tax cuts through 2026 to increase beer prices, a category in which it holds a strong brand presence and over 45% market share in Japan.

We believe that Harmonic Drive Systems' shares are undervalued. The market appears to be overreacting to concerns regarding a potential peak in orders due to the component supply crunch, uncertainty surrounding Nabtesco's timeline for selling its remaining stake in HDS shares, and HDS's decision to list on the Tokyo Standard market instead of the Tokyo Prime market, which has stricter governance and liquidity standards.

We favor Wharf REIC due to its premier retail properties, Harbour City and Times Square. These locations are the largest retail assets in their respective areas, and we anticipate that the company will gain from the resurgence of tourism in Hong Kong. Additionally, Wharf REIC stands to benefit from the trend of luxury retail consolidation, as luxury brands are downsizing their presence in other parts of the city while increasing their space in key shopping destinations like Harbour City.

China Overseas Land & Investment (COLI), with its significant presence in higher-tier cities in China, is well-positioned to capitalize on the ongoing recovery in homebuyer sentiment. We anticipate that demand for residential properties in affluent cities will remain resilient, resulting in stronger sales growth for COLI. Furthermore, we believe that high average selling prices, combined with effective cost management, will allow COLI to continue outperforming most of its peers in terms of profit margins. We feel that investors are undervaluing COLI's long-term growth potential and margin improvement capabilities, as the company continues to actively acquire land in key cities across China.

We are optimistic about Grab Holdings due to its leading market position in Southeast Asia's ride-hailing sector. The company has reached a pivotal moment, achieving cash flow positivity in its ride-hailing operations, marking a notable improvement from the previous year. Furthermore, its delivery segment is experiencing rising operating margins, and Grab has already updated its long-term margin expectations for this area. We see several new long-term growth drivers on the horizon, including its advertising business, which remains underutilized.

We maintain our outlook that the supply and demand for multilayer ceramic capacitors (MLCCs) will remain strong and tighten as the year progresses, fueled by the recovery in smartphone production and increased content requirements in the automotive sector. While we consider all passive component suppliers within our coverage to be undervalued, we believe that narrow-moat Taiyo Yuden presents the most compelling opportunity for accumulation. Although we recognize the risks posed by the Russia-Ukraine conflict and the ongoing chip shortage, we anticipate sustained robust demand for high-end MLCCs in the long term. There will be a need for smaller sizes and larger capacities for MLCCs utilized in smartphones, while automotive MLCCs will require larger capacities, higher reliability, and higher breakdown voltages. We believe Taiyo Yuden will be well-positioned to benefit from this trend.

We believe Santos is not receiving adequate recognition for its ongoing oil and gas developments, and its shares are undervalued. The company boasts a strong balance sheet and low operational costs, along with a freight advantage to Asia, positioning it well to endure any cyclical downturns in prices. Currently, crude and liquefied natural gas prices are robust, and gas is increasingly essential for global energy needs, particularly in supporting the growth of renewable energy sources. We project a group hydrocarbon growth of approximately 50% by 2027, primarily driven by the Pikka oilfield development in Alaska and the revitalization of Darwin LNG's output through new feed from the Barossa gas field development. We anticipate that Santos will largely sustain its earnings in 2027 at levels comparable to the strong performance in 2022, as increasing volumes will counterbalance a return to more normalized pricing.

We consider ASX to be a natural monopoly that provides essential infrastructure for Australia’s capital markets. Although the regulatory environment is becoming increasingly challenging, we believe the business is well safeguarded by its significant economic moat, which is supported by network effects and intangible assets. Additionally, we view the energy transition as an often-overlooked tailwind. We anticipate that it will drive demand for resources, in which Australia possesses strong natural advantages, leading to new listings and sustained revenue from trading and clearing activities.

The shares of narrow-moat Aurizon present an attractive yield, supported by high-quality rail infrastructure and haulage operations. Significant downside is already reflected in the share price, and our analysis indicates that the risks for investors are tilted towards the upside. Haulage volume was subdued in fiscal 2023 due to wet weather; however, the outlook suggests a recovery in volume and an increase in haulage tariffs in line with the Consumer Price Index. Furthermore, rising interest rates allow for higher returns on the regulated rail track. We believe that environmental concerns are overstated, creating an opportunity for investors to acquire a company of better-than-average quality at a discount. Aurizon primarily transports coking coal from globally competitive mines, and a commercially viable alternative to coking coal for steel production remains distant.

As the largest supplier of reusable wooden pallets globally, Brambles holds a near-monopoly position as a pooler in its primary markets. This dominance is attributed to its scale and first-mover advantage, which effectively limits competition. This competitive edge supports a cost advantage, resulting in our wide moat rating. A significant portion of the company’s earnings comes from large, stable beverage and food companies, which we view as defensive, thereby reducing Brambles’ correlation to economic fluctuations. Consequently, we project steady revenue growth with a compound annual growth rate (CAGR) of 6% over the next decade. Additionally, earnings are expected to benefit from improvements in operating margins, driven by the company’s efficiency initiatives in pallet repairs and transportation, as well as the adoption of new digital technologies.

We have added narrow-moat Dexus to our Best Ideas list. The group's office portfolio is currently generating higher-than-market rents, indicating potential earnings downside as leases expire and tenants negotiate lower rents. However, with an average office lease length of 4.5 years, there is ample time for the office market to recover. We believe this recovery is likely, as city centers in Sydney and Melbourne are becoming busier. We anticipate increased inner urban activity as significant public transport projects are completed in the coming years, including Sydney Metro, Melbourne Metro Tunnel, and Brisbane Cross River Rail, all of which should positively impact Dexus' locations. Additionally, Dexus' industrial tenants are currently paying below-market rates, allowing the company to implement substantial price increases upon lease expiration. We also expect growth in the group's funds management earnings. Dexus is trading well below its net tangible assets of AUD 10.04 per security, and we estimate it has a fiscal 2024 distribution yield of 7.1%, which we believe provides a valuation cushion and compensation for investors as they await recovery.

Narrow-moat APA Group is a high-quality company offering an attractive yield. We anticipate that near-term revenue growth will accelerate as elevated inflation increases CPI-linked tariffs and as development projects are completed. APA Group is well-positioned to benefit from the transition to renewable energy, with ongoing investments in wind and solar farms. Additionally, its core gas transmission networks are expected to gain from the rising demand for gas to support intermittent renewable power supply. Furthermore, APA is poised to assist remote mines in Western Australia in replacing diesel generators with a combination of solar panels, batteries, and gas turbines, which should lead to reduced carbon emissions and lower operating costs for the mines.

We believe Just Eat Takeaway is the most favorably positioned food delivery company in Europe. It is better protected against downside risks and has promising prospects if it chooses to expand more aggressively into other delivery fields.We support the company's recent move to invest heavily in its own delivery operations. We anticipate that this will drive profit growth at a faster pace and to higher levels than what the market consensus suggests, particularly in the UK market. We think that achieving such profit growth over the next few years could lead to a substantial revaluation of the company's shares.Currently trading at a significant premium (deep in 5 - star territory), the firm's shares seem undervalued based on both discounted cash flow analysis and relative valuation methods. This presents a significant investment opportunity with a substantial margin of safety for long - term, patient investors.

Swatch enjoys a narrow moat due to its strong brand intangible assets and significant manufacturing scale. The company's valuation is particularly attractive, as it does not fully reflect several favorable trends, such as substantial exposure to Chinese consumer demand, the recovery following lockdowns, the stabilization of lower-priced watch segments, the maturation of smartwatches, and the benefits of operating leverage.

Admiral boasts a robust balance sheet, impressive returns on equity, an effective management team, and is founded by its owners. The company possesses pricing power and operates under a distinctive business model. Additionally, it is capital-efficient and enjoys an expanding competitive advantage.

We believe the London Stock Exchange Group (LSEG) is the best-positioned financial data and exchange group in Europe. The acquisition of Refinitiv has significantly enhanced LSEG's standing in the lucrative financial data market, bolstering its data distribution capabilities and adding unique data sets to its already robust FTSE/Russell index business. We anticipate that the group will benefit from the ongoing shift from active to passive investment strategies, as well as the rise of theme-based investment styles, including environmental, social, and governance (ESG) considerations. We believe the market is currently overly focused on the integration risks associated with the Refinitiv acquisition, presenting an excellent entry point for investors looking to acquire a high-quality business with a strong competitive advantage and a long-term growth trajectory.

We believe the market has not fully recognized Roche's robust drug portfolio and its industry-leading diagnostics, which together create sustainable competitive advantages. While challenges from declining COVID diagnostic revenue and competition from generics and biosimilars for older drugs remain, these pressures are expected to diminish in 2024, thereby showcasing the strength of Roche's portfolio of leading drugs. We also see the firm's research and development expenditures becoming increasingly efficient, and recent acquisitions in obesity and immunology appear poised for multi-billion-dollar sales potential. As a leader in biotech and diagnostics, this Swiss healthcare giant is uniquely positioned to advance global healthcare towards safer, more personalized, and cost-effective solutions. The synergy between its diagnostics and drug development teams provides Roche with a distinctive in-house perspective on personalized medicine. Furthermore, Roche's biologics constitute three-quarters of its pharmaceutical sales; while biosimilar competitors have encountered development challenges, Roche's innovative pipeline may render these products less relevant upon their launch.

We anticipate a 10% CAGR for Veolia's EPS and dividend from 2023 to 2028. This represents the second highest EPS growth and the highest dividend growth within our coverage. The projected earnings growth will be fueled by efficiencies, including the remaining synergies from the Suez integration and strategic growth investments. Recently, we upgraded the economic moat rating from none to narrow. We believe the market is underestimating the company's competitive advantages and the reduced cyclicality resulting from its transformation, leading to a significant undervaluation.

Intertek, one of only three globally diversified firms in the testing, inspection, and certification sector, has faced significant challenges over the past year. Its substantial exposure to China and the consumer sector has adversely impacted its performance, resulting in a notable discount compared to its peers, SGS and Bureau Veritas.

We believe Fineos possesses investment merits that are not typically found in profitless technology companies. The market appears to underestimate the revenue potential stemming from the adoption of cloud software by insurers, as well as the increasing loyalty of Fineos' insurer customers. Fineos is strategically positioned to secure new business, bolstered by long-standing customer relationships and referrals. Although the company is not yet profitable, it reinvests to strengthen switching costs with its loyal customer base, acquire new business, and maintain its competitive edge. We anticipate share gains through increased product offerings per client, the addition of new clients, and expansions into new regions and adjacent markets. Additionally, there are opportunities for cost efficiencies arising from client transitions to the cloud, the automation of manual processes, and recruitment in emerging economies. We expect Fineos to be able to self-fund its future growth.

Narrow-moat Infineon Technologies is among our top picks in the technology sector. Our EUR 50 fair value estimate provides an attractive margin of safety for long-term, patient investors. We remain optimistic about the long-term secular tailwinds in the automotive market, as Infineon is poised to benefit from increased chip content per vehicle, particularly in electric vehicles (EVs). Additionally, we appreciate Infineon’s green industrial power business and its involvement in renewable energy. In recent years, Infineon has successfully expanded its gross and operating margins, and we expect these margins to be sustained over the long term. However, the company has lowered its outlook for fiscal 2024 revenue and profitability. We also observe some warning signs in the broader EV market, including excess inventory, competitive pricing among original equipment manufacturers, and potentially slower growth than previously anticipated. Despite Infineon’s leadership in power semiconductors for EVs, we still anticipate an increase in chip content per vehicle over time. We believe that the near-term risks are already reflected in current market prices, and we see potential rewards for investors willing to endure the latest cyclical downturn in the semiconductor sector. Looking ahead, we are not overly concerned about the expansion of trailing-edge chip manufacturing equipment and capacity in China, as domestic chipmakers may attempt to displace companies like Infineon. We believe that Infineon’s diverse product portfolio and high customer switching costs will help the company remain relevant in the Chinese market and likely in most other global markets in the long run. Furthermore, we are not particularly worried about Infineon’s significant expansion plans in the silicon carbide (SiC) semiconductor market. Even if overcapacity occurs, we expect Infineon to emerge as a leader in auto and industrial SiC, capable of efficiently utilizing its facilities.

Narrow-moat STMicroelectronics is among our top picks in the technology sector, with fair value estimates of $52 for US shares and EUR 48 for European shares, providing an attractive margin of safety for long-term, patient investors. We are optimistic about the long-term secular tailwinds in the automotive market, as ST is poised to benefit from increased chip content per vehicle, particularly in electric vehicles. The company has experienced significant gross margin expansion in recent years, and we expect it to sustain these margins over the long term. We recognize the near-term risks facing ST, as it has recently lowered its outlook for 2024 revenue and profitability. Additionally, there are warning signs in the broader EV market, including excess inventory, competitive pricing among OEMs, and potentially slower growth than anticipated. However, we believe these near-term risks are already reflected in current market prices, and we see potential rewards for investors willing to endure the current cyclical downturn in the semiconductor sector. In the long run, we are not overly concerned about the expansion of trailing edge chip manufacturing equipment and capacity in China, as domestic chipmakers may attempt to displace companies like ST over time. We believe ST’s diverse product portfolio and high customer switching costs will help the firm remain relevant in the Chinese market and likely in most other global markets. Furthermore, we are not particularly worried about the growth of the silicon carbide-based semiconductor market, and we expect ST to maintain its position as a market leader with strong revenue growth in these products throughout the remainder of this decade.

RWE's transition from a coal-heavy company to a leader in renewable energy showcases a strong strategy and execution that remain undervalued in the market, even with a clear exit from coal following its agreement with the German government. The acquisition of ConEd's clean energy business positioned RWE as the fourth-largest renewable energy player in the US, a highly attractive market following the implementation of the Inflation Reduction Act. RWE enjoys significant exposure to European power prices and clean spark spreads, attributed to its substantial share of liberalized renewable capacity and combined-cycle gas turbine plants. Furthermore, the company typically gains from commodity price volatility through its trading operations.