2025-01-30 issue recommended excellent stock list

We believe Albemarle shares are undervalued, as we anticipate lithium prices are currently at cyclically low levels. Demand from electric vehicle (EV) sales and utility-scale batteries is on the rise. However, the rapid influx of new, higher-cost, lower-quality lithium supply from China and Africa has shifted the market from undersupply to oversupply. Presently, lithium prices are below the marginal cost of production, prompting supply reductions. We expect that average prices in 2025 will exceed current lows as demand increases and the market stabilizes. Furthermore, unit production costs are likely to decrease as Albemarle expands its capacity and implements overhead cost efficiencies. Consequently, Albemarle's unit profits are projected to rise in 2025 compared to our expectations for the fourth quarter of 2024, even if prices remain at current levels. Albemarle's competitive advantage stems from its cost-effective lithium production, which is supported by its unique geological resources. Lithium constitutes the company's largest segment, accounting for nearly 90% of its profits. The primary driver of lithium demand is electric vehicle batteries, which represented approximately 50% of demand in 2023. As EVs are expected to grow to 40% of global auto sales by 2030, up from 12% in 2023, we forecast that they will comprise nearly 70% of total lithium demand by 2030. As one of the lowest-cost lithium producers worldwide, Albemarle is well-positioned to benefit from increased EV adoption, which will drive higher lithium prices and enhance profits. In addition, with rising lithium demand from utility-scale batteries used in energy storage systems, we project that lithium demand will grow to nearly three times 2023 levels by 2030, reaching 2.5 million metric tons. Supply is expected to struggle to keep pace with this demand, resulting in lithium prices remaining above the estimated marginal cost of production, which we project to be $20,000 per metric ton. We anticipate that lithium prices will remain volatile but will average around our $20,000 marginal cost estimate over the next decade, leading to robust profits for Albemarle.

Wide-moat International Flavors & Fragrances (IFF) shares appear undervalued as the market is currently focused on near-term risks to the company’s profit recovery following a double-digit decline in 2023. After experiencing stagnant sales for a couple of years, the market may also be questioning the company's long-term growth outlook. In 2023, profits decreased due to lower volume from customer inventory destocking; however, we anticipate that IFF's specialty ingredients, including flavors, fragrances, and biosciences, will see a solid recovery in 2024. With IFF having sold excess inventory and now operating its plants at normal capacity utilization levels, profits are likely to have increased in 2024, although we expect a more significant recovery in 2025. IFF’s current stock price suggests that investors are skeptical about the company's ability to achieve long-term profit growth. The company is a market leader in flavors, fragrances, enzymes, and cultures. As consumer demand shifts towards more natural flavors, alongside rising demand for cultures and enzymes, we expect IFF to capitalize on these trends, leading to solid long-term growth. IFF's debt levels are elevated due to the DuPont nutrition and biosciences acquisition in 2021. In response, management reduced the dividend by 50% to allocate more free cash flow towards debt repayment. The company has also divested multiple businesses to reduce debt, resulting in improved leverage ratios. Additionally, IFF has a deal in place to sell its pharma solutions business, with the transaction expected to close by mid-2025. With proceeds from divestitures and dividend savings directed towards debt repayment, we anticipate that IFF's balance sheet will return to good health by the end of 2025.

Comcast’s shares have faced significant pressure due to challenges in retaining broadband customers. We anticipate that losses in broadband customers will worsen before they improve, as fixed-wireless competitors and expanding fiber network competition continue to impact the market. Nevertheless, we believe Comcast has the potential to grow its customer base in the long term as these challenges subside. While we have some reservations about the company’s aggressive push into the wireless market, we expect price competition to remain rational, enabling Comcast to maintain stable cash flow despite the current pressures on its customer base. Our outlook for NBCUniversal is less optimistic, although it remains a valuable media asset. Comcast’s intention to spin off its traditional television networks appears to be the initial step in a broader industry restructuring. The company likely aims to shift premier content to Peacock to enhance the streaming service's competitiveness against larger rivals. Despite the high costs associated with content and the upcoming NBA agreement impacting profitability, we expect NBCU to adapt successfully to evolving consumer consumption patterns. Additionally, the theme parks continue to be a strong revenue contributor. With a robust balance sheet, Comcast is well-positioned to allocate most of its free cash flow towards shareholder returns, including a solid dividend and substantial share repurchases.

We believe that narrow-moat Hanesbrands is an attractive investment opportunity, trading at approximately a 50% discount to our fair value estimate of $16.30. Our moat rating is derived from the company's intangible brand assets. Hanesbrands owns several well-known brands in the basic innerwear market in the United States and Australia, many of which command higher prices and achieve greater sales volumes than competing brands. Recently, Hanesbrands sold Champion to Authentic Brands Group for a favorable price of $1.2 billion, with the potential for an additional $300 million in earn-outs. This sale will enable Hanesbrands' management to concentrate on enhancing its core brands and products. Furthermore, the divestiture is anticipated to positively impact margins, as innerwear has historically demonstrated more consistent profitability compared to Champion. Hanesbrands generates approximately 70% of its sales in the U.S., but also has significant international growth opportunities. The company has seen particular success in Australia, where its Bonds brand and others hold dominant market shares. Hanesbrands is actively working to reduce its debt, which we believe is highly advantageous for shareholders. The firm has eliminated its quarterly dividend and is utilizing nearly all of its available free cash flow for debt reduction. Additionally, it has applied the proceeds from the Champion sale to pay down debt. As of the end of 2024, Hanesbrands reported a debt level of about $2.3 billion, which is $1.6 billion lower than at the end of 2022. Looking forward, we project that its debt will decrease to $1.8 billion by the end of 2027, resulting in a debt/EBITDA ratio of below 3 times.

We find the shares of Bath & Body Works to be attractive, currently trading at nearly a 45% discount to our fair value estimate of $69. 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 a swift adaptation to consumer trends. The company's narrow moat is reflected in the 37% average return on invested capital, excluding goodwill, that we anticipate it will generate over the next decade, significantly surpassing our 8% weighted average cost of capital estimate. While we project limited growth in its North American footprint (with nearly 1,900 owned stores), we expect that product innovation and productivity improvements from evolving 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 of the business, alongside loyalty program enhancements that will boost conversion rates and profitability. The company's emphasis on international expansion is likely to benefit both its physical and digital channels, enabling high-single-digit average international sales growth over the next decade. This 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 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. Packaging demand surged in 2021 due to pent-up demand for goods and supply chain challenges, leading to robust end-market demand. Consequently, Sealed Air achieved record financial performance in 2021-22. However, as supply chain disruptions eased, inventory levels began to rise. Many retailers faced excess inventory and were compelled to undertake inventory destocking actions, which significantly impacted the packaging industry. Initially, management provided optimistic guidance for 2023 and maintained this outlook through the first-quarter earnings report, despite ongoing signs of end-market weakness. However, Sealed Air later reported disappointing second-quarter results and reduced its full-year adjusted earnings per share guidance by over 20%, which unsettled the market. The shares have declined significantly 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 remains a key strength. The company sells packaging equipment and automation solutions to clients who utilize its packaging materials for years, which differentiates it from other packaging producers that operate on a price-taker basis. Sealed Air's competitive positioning and favorable long-term prospects enhance our confidence that the currently discounted share price will ultimately benefit long-term investors.

Polaris' shares are currently trading at a 35% discount to our fair value estimate of $75 per share. 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 an 18% return on invested capital (ROIC) by 2034, 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 has provided a conservative initial outlook for 2025, projecting a sales decline of 4% to 1% and adjusted earnings per share of $1.10, down from $3.25 in 2024. We also forecast a 4% decline in sales and earnings per share of $1.10. With dealer inventory largely optimized, we expect wholesale shipments to 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 2025. From 2026 to 2034, we project the company will achieve an average sales growth rate of 3.6% and double-digit growth in earnings per share.

Shares of VF, the owner of The North Face, Timberland, Vans, and eight other brands, are currently trading at approximately a 30% discount to our valuation, despite a 50% rally over the past year. We assess the firm as having no economic moat, as Vans and several other key brands have faced challenges since the pandemic. Nevertheless, VF remains one of the largest apparel companies in the US and operates in appealing market segments. In response to these challenges, CEO Bracken Darrell is executing a strategy called Reinvent, aimed at overhauling Vans, launching a new platform in the Americas, reducing costs, and managing debt more effectively. Notably, VF has reduced its debt by $1.9 billion to $4.7 billion over the past year, partly due to the recent sale of Supreme for $1.475 billion in cash. We believe VF’s reduced valuation offers an attractive investment opportunity in a company that is positioned for improved profitability. The adjusted operating margin was a disappointing 4.5% in fiscal 2024, but it is on an upward trajectory. We anticipate it will return to annual double-digit levels within approximately three years, driven by more consistent sales from Vans and other brands, cost reductions, and various initiatives. At its October 2024 investor event, VF outlined reasonable fiscal 2028 targets, including an adjusted operating margin of at least 10%, an adjusted gross margin of at least 55%, an adjusted selling, general, and administrative margin of 45% or less, and net leverage of 2.5 times or below. VF has attracted the attention of activist investors advocating for significant changes, such as cost reductions and the divestiture of noncore brands. Darrell is implementing many of these reforms under the Reinvent strategy, although it seems the company plans to retain its remaining brands for the time being. In the future, we believe that Dickies and some other brands may be sold.

Nike is currently trading at approximately a 30% discount to our fair value estimate of $112 per share. The company is facing one of its most challenging periods in decades, with shares dropping nearly 30% in 2024. However, we believe that new CEO Elliott Hill is implementing the right strategies to enhance the brand's value, which underpins our wide moat rating. Hill's strategy focuses on investing in the company's connections to global sports—its greatest advantage—while also cutting costs in other areas. In the long term, we expect Nike to achieve mid-teens EBIT margins by increasing full-price sales, launching new merchandise, and boosting sales in high-margin markets. Under former CEO John Donahoe, the company emphasized direct selling over product development, which inadvertently opened doors for more innovative competitors in key categories. Additionally, demand for sportswear in critical markets such as North America (43% of revenue) and Greater China (15%) has softened due to economic challenges. Elliott Hill, who previously worked at Nike for 32 years and served as president of consumer and marketing before retiring in 2020, possesses extensive insider knowledge. He faces significant challenges in improving relationships with wholesale partners and enhancing full-price sales through company-owned digital channels, but we believe he is well-equipped to tackle these issues. Hill plans to increase discounting to clear inventory in anticipation of new product launches, particularly in footwear, as Nike reduces reliance on overexposed lines to make way for more competitive offerings. We anticipate a return to sales growth by fiscal 2026.

Hasbro's shares have underperformed the broader market over the past year, rising 18% compared to a more than 19% increase in the Morningstar Global Markets Index as of January 29. We believe the shares are undervalued relative to our fair value estimate of $83. Investors may not fully recognize Hasbro's successful business transition, which included the sale of its entertainment division, enabling the company to achieve structurally higher operating margins. We anticipate a significant improvement in revenue mix, with the high-margin Wizards of the Coast and digital segments projected to account for approximately 36% of sales in 2024, up from 29% in 2023. Additionally, by concentrating on core competencies, Hasbro is poised to benefit from focused innovation and a streamlined operating model, enhanced by the outlicensing of lower-productivity brands to partners, which should free up working capital. Furthermore, due to a rigorous focus on expenses, Hasbro aims to reduce gross costs by $750 million by the end of 2025, which will support profit growth. While the company is targeting a 20% operating margin by 2027, we believe it has the potential to achieve this target as early as fiscal 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 Estée Lauder have declined by 38% over the past 12 months, primarily due to weak demand in China and investor skepticism regarding the firm's profit recovery strategy. Recent changes in top management, including new CEO and CFO appointments, have added to the uncertainty. We believe the shares, currently trading at a 48% discount to our fair value estimate of $162, present a compelling investment opportunity, and we recommend that investors seeking exposure to the attractive beauty care market consider buying in. Although the weak consumer environment in China has created short-term challenges for Estée and its beauty industry peers, we maintain that the premiumization trends and Estée Lauder's competitive position remain strong. We believe the current difficulties in China are manageable, as the company can leverage its strong brands, solid channel relationships, and various research and manufacturing initiatives in Asia to enhance its positioning and long-term growth prospects. While we anticipate a low-single-digit sales decline in fiscal 2025 due to ongoing issues in China, we expect revenue growth to accelerate in subsequent years, averaging 6%. This growth will be driven by Estée's focus on the structurally appealing premium skincare segment. Additionally, we project that operating margins will rebound to 17% by fiscal 2034, supported by an improved channel mix (moving away from heavy promotions in department stores), manufacturing efficiency gains, and cost-cutting measures.

Kraft Heinz is currently trading at approximately a 45% discount to our fair value estimate of $56 and offers a 5% annual dividend yield, making it an attractive option for investors. We believe that market skepticism primarily revolves around concerns about the company's ability to avoid significant and lasting volume declines in the face of ongoing cost pressures, reduced consumer spending, and increased competition, including more aggressive promotions from other branded companies and private-label products following recent price increases. However, we contend that these concerns are unfounded. The company has shifted away from previous management's focus on short-term profitability and cash flow. Since mid-2019, Kraft Heinz has strategically pursued sustainable efficiencies, increased brand investment (allocating a mid-single-digit percentage of sales to product innovation and marketing, aligning more closely with industry peers), improved its category management and e-commerce capabilities, and utilized its scale to adapt more effectively to evolving market conditions. We believe the company is dedicated to maintaining this strategic direction. As a result of these initiatives, we anticipate that Kraft Heinz will achieve low-single-digit sales growth annually while maintaining operating margins in the low 20s.

From the beginning of 2022 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's shares have rebounded approximately 25% since then, they remain well below our fair value estimate, presenting attractive risk-adjusted upside potential along with a healthy dividend yield of about 3.5%. Tyson's adjusted EBITDA dropped 62% from fiscal 2022 to fiscal 2023. As a no-moat food producer primarily reliant on raw meats for revenue, Tyson is vulnerable to fluctuations in input costs and product prices. This has been particularly challenging recently due to significant cost inflation and supply/demand imbalances in the beef and pork markets. Additionally, the recovery of the US cattle supply will take time. However, we believe the current stock price suggests that these difficult conditions will persist. Meat markets are cyclical, and a return to a more stable operating environment is all that is needed to support our valuation. The chicken market has already started to recover, with 12-month trailing adjusted EBITDA increasing by 45% at the end of fiscal 2024 (which concluded in September). Furthermore, we do not anticipate any structural changes in the meat markets that would necessitate a permanent alteration in profitability. Therefore, we project a 2% growth in revenue over the next five years, with operating margins recovering to our 2029 estimate of 7.1%, aligning with historical averages and improving from the fiscal 2024 margin of approximately 3.4%.

From early April to late July 2024, Lamb Weston shares experienced a significant decline, falling by 50% following two disappointing quarters. In its fiscal third quarter (ending February), the company faced challenges due to a problematic rollout of a new enterprise resource planning (ERP) system, which resulted in inaccurate inventory estimates at distribution centers. This led to decreased customer fulfillment rates, loss of market share, and inventory write-offs. The company has struggled to regain lost market share, compounded by sluggish restaurant traffic. In its fiscal second quarter of 2025 (ending November), Lamb Weston continued to report lower sales and declining profit margins. The situation is further complicated by an industry-wide investment cycle aimed at expanding capacity, which poses risks to Lamb Weston's utilization rates and margins in the near to medium term. These challenges are expected to persist for some time. Despite these headwinds, long-term valuation catalysts remain promising. Although traffic has decreased, attachment rates for fries—one of the most profitable menu items for restaurants—remain high. As consumers adjust to stabilizing inflation, we anticipate a return to typical mid-single-digit growth in fry sales. Furthermore, while the company is currently facing excess capacity, we believe that long-term demand growth and the recovery of lost market share will help restore utilization rates to the high-90% range. Lamb Weston's recent struggles have attracted acquisition interest from Post Holdings and involvement from activist investors such as Jana Partners and Continental Grain, who are advocating for significant changes. The departure of CEO Tom Werner may not fully address their concerns, particularly since COO and incoming CEO Michael Smith has a long history with the company and may not be perceived as a change agent. Nevertheless, a strategic acquisition or activist-driven changes could serve as near-term catalysts for improvement. Although shares have rebounded by approximately 10% since late July, we believe there is still considerable upside potential. Additionally, the challenges posed by traffic and ERP issues do not diminish Lamb Weston's cost advantages or the strength of its intangible assets. 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. Despite losing some market share due to ERP difficulties, we expect Lamb Weston to maintain strong customer relationships and regain its share as operations stabilize.

In response to shareholder and market concerns regarding expenditures, Exxon has adjusted its plans. Nevertheless, the company continues to uphold a robust 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 than its peers from any improvements in these margins. Additionally, the dividend appears secure, making the yield appealing.

In recent years, the market sentiment surrounding PayPal has fluctuated between optimism and pessimism. The stock experienced a significant increase, roughly tripling during the early stages of the pandemic, but subsequently plummeted nearly 80% from its peak, falling to a level significantly 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 overly focused on short-term absolute growth, while it should prioritize relative performance, which we consider a more accurate reflection of the company's competitive position and long-term value. We acknowledge the challenges the company has encountered recently. However, in the long run, PayPal's prospects are closely linked to the high-growth e-commerce sector, with Venmo offering additional potential upside. We maintain that the company holds a strong competitive position within this space. While the e-commerce landscape is characterized by intense competition, we believe PayPal is well-equipped to navigate these challenges, and we see no indications in its recent performance that suggest a significant weakening of its long-term competitive position. Nonetheless, we recognize the possibility of results fluctuating in either direction. Consequently, we view the stock as more appropriate for risk-tolerant investors.

Moderna's shares have experienced significant volatility, with investors initially overly optimistic in 2021 regarding the company's technological potential, followed by a more pessimistic outlook on its growth post-coronavirus. While we maintain modest expectations for sales of the firm's COVID vaccine due to the substantial demand driven by the pandemic in 2021 and 2022, we believe that Moderna's pipeline of mRNA-based vaccines and treatments is progressing swiftly across various therapeutic areas. Despite a decline in sales during 2023-2024 in anticipation of new product launches, we remain confident in the long-term sales trajectory of the company's diversified pipeline. We see strong validation of Moderna's technology in respiratory virus vaccines (with an RSV vaccine set to launch in 2024 and a COVID/flu combination approval anticipated in 2025), oncology (with a potential melanoma launch by 2027), and rare diseases (with possible accelerated approvals by 2026).

Baxter remains on our Best Ideas list, with shares currently trading at a significant discount to our estimated value. In recent quarters, demand for many of its products has been improving due to increased medical utilization. Additionally, new product launches, such as the Novum IQ pump platform, are expected to further enhance demand in the near future. Baxter also presents a margin improvement opportunity, as most inflationary pressures in its supply chain are subsiding, and important new group purchasing organization contracts are set to take effect in 2025, which should positively impact its product pricing. We anticipate that profits will grow at a relatively rapid pace in the near term before stabilizing at a more normalized rate in the high single to low double digits over the long run. While we acknowledge the near-term market concerns related to Baxter's capital equipment business, we believe there is a significant margin of safety built into the shares.

Humana continues to be featured on our Best Ideas list, highlighting the significant discount at which its shares are currently trading compared to our fair value estimate. The company maintains a strong competitive position in the Medicare Advantage market and has substantial potential for long-term profit growth. However, the outlook for 2024 indicates that profits may be severely impacted due to mispriced Medicare Advantage plans, which may not adequately cover the rising medical utilization expected in that year. Additionally, initial star ratings for 2025 marketing and 2026 bonus payments have seen a notable decline. Although the company is contesting these star ratings in court, this situation introduces uncertainty regarding Humana's profit trajectory in the intermediate term, leading many investors to sell their shares. While these investors may be acting out of fear, we believe that those with a long-term investment perspective should take advantage of Humana's discounted shares, which offer a rare combination of a high-quality company at an attractive valuation within the managed care sector.

Wide-moat HII, a former subsidiary of Northrop Grumman, is the largest military shipbuilder in the US. While the company benefits from extraordinarily long planning horizons and budget visibility, small shifts in the timing of major programs can lead to lumpy quarterly results, which we believe have impacted the stock. Nevertheless, HII'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 the company 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 minor timing shifts in major programs, such as aircraft carriers, can result in 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, provided it maintains sufficient visibility into similar work at each of its two shipyards as projects near completion. HII's 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 HII from other defense contractors, as it is highly insulated from macroeconomic or market risks. In 2022, HII generated only $50 million in revenue from commercial customers out of nearly $11 billion in total revenue. Additionally, 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 HII 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.

A.O. Smith is a specialized water technology company and the leading manufacturer of water heaters in North America. Beyond the established North American water heater market, opportunities for growth exist through expansion into international markets and the development of water treatment products. The company's stock price has been declining since the guidance for 2024 was reduced in October, primarily due to disappointing sales in China, which represented 21% of total sales in 2023. However, we anticipate a sales rebound of approximately 4% in 2025, driven by increased demand for water heaters in North America and a recovery in the Chinese market. We expect another robust year for boilers and water treatment products in North America in 2025. We project that the company’s operating margin will approach 20% in the coming years as the Chinese housing market recovers, larger scale operations enhance water treatment profit margins, and margins for North American water heaters and boilers remain relatively stable.

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, with expectations of a return to pre-pandemic business levels. However, the emergence of the delta and omicron variants led to a decline in hotel stock prices, even as the rest of the sector continued to perform well. Many hotel companies have struggled to generate positive corporate cash flows since the onset of the pandemic; the rise in virus cases has hindered the industry's recovery and prolonged the period of negative cash flows. We believe the current environment presents an opportunity for investors to acquire Park Hotels & Resorts at a price below our fair value estimate. We assess that the company's balance sheet is robust enough to withstand ongoing disruptions in the hotel industry for the foreseeable future. Although numerous businesses have delayed their plans to fully return employees to the office, which subsequently postpones the recovery of hotel demand driven by business travel, we do not expect this disruption to significantly impact the long-term demand for Park's portfolio of high-quality hotels. Additionally, Park's management has demonstrated effective management of 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 sector. We anticipate that Park will recover from the pandemic, experiencing several years of strong growth, and will return to its 2019 peak levels by the end of 2024.

Kilroy Realty, which lacks a moat, presents an attractive investment opportunity due to its high-quality office portfolio, especially 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 selloff has been excessive. The current implied valuation of Kilroy’s shares appears disconnected from the private market valuations of its office portfolio. Long-term investors may find this stock appealing, as it is trading significantly below our fair value estimate of $59 per share. Kilroy’s office portfolio is considered one of the best among publicly traded REITs, with an average age of just 11 years, compared to 30 years for its peers. Additionally, it performs well in terms of rent spread and sustainability metrics. 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 consider in 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. Another risk factor is Kilroy’s geographic concentration in California and its significant exposure to the technology and life sciences sectors.

No-moat Realty Income is currently trading at a significant discount to our $75 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 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 increase. Moreover, the company maintains relatively low annual rent escalators, which means it depends on executing billions of dollars in acquisitions each year to drive growth. The rise in interest rates has 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 over the past several 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, finalized 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 appealing entry point, especially if the Federal Reserve signals any rate cuts in 2024.

We believe that the current environment of elevated credit costs and reduced demand for corporate travel due to the pandemic, along with concerns about Sabre's financial health and the impact of artificial intelligence, presents a compelling 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 effectively compete with Sabre and its peers. In 2024, American Airlines reported weaker sales as a result of its decision to reduce emphasis on GDS platforms. However, American is now returning to GDS networks in an effort to recover lost corporate business. Additionally, investments in cloud platforms, new distribution capabilities, and sales opportunities in ancillary services, hotel IT, and airline IT further solidify Sabre's customer base, enhancing its competitive advantages. We estimate that over half of Sabre's pre-pandemic sales were linked to business travel, which is recovering at a slower pace compared to leisure travel. While we acknowledge that some corporate travel may be permanently replaced by video conferencing and sustainability initiatives, we anticipate a gradual rebound in business trips over the next few years as economic growth continues. We believe that in-person interactions will remain a key differentiator in customer retention and acquisition compared to video calls. Sabre has also strengthened its debt profile. As of early 2022, it had $3.8 billion in debt maturing in 2024-25, but it has since eliminated major debt maturities until 2029 through successful tender offers and refinancing. 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. Furthermore, we think that mass-market artificial intelligence search products are likely to direct users toward suppliers and operators that possess the necessary information and networks, ensuring that bookings continue to occur through Sabre's platform. Sabre is also actively investing in its own artificial intelligence capabilities, which further enhances its competitive edge.

We are highlighting wide-moat Microsoft as one of our top technology stocks, as shares appear attractive relative to our fair value estimate of $490 per share. We believe the stock is well-positioned for 2025, following relatively stagnant performance over the past 12 months. Our long-term thesis focuses on the expansion of hybrid cloud environments, the growth of artificial intelligence, and Azure. The company continues to leverage its on-premises dominance, allowing clients to transition to the cloud at their own pace. Our growth assumptions are centered around Azure, the migration to Microsoft 365 E5, and traction with the Power Platform for long-term value creation. With its leadership in the public cloud through Azure, partnership with OpenAI, and unmatched distribution capabilities, we view Microsoft as a current leader in AI and expect it to maintain this position in the coming years. We anticipate a catalyst in accelerating Azure revenue in the second half of fiscal 2025, which we believe investors will welcome after capacity constraints limited growth, impressive as it was, over the last several quarters. Given early demand signals, strong AI revenue traction, and the significant success of similar Azure investments over a decade ago, we believe the current wave of capital expenditure investments will benefit both the company and its investors. Microsoft’s ability to maintain margins despite increasing Azure investments, challenges from the Activision acquisition, and accounting changes for server depreciation is commendable. We believe this positions the company well for margin improvement as Azure capacity comes online, which should alleviate these pressures and drive multiyear margin expansion.

We believe NiSource presents investors with the chance to acquire a high-growth utility that is currently 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, potentially reaching $35 billion over the next decade, which should result in 7% annual growth in earnings and dividends.

Electricity demand growth in Evergy's Kansas and Missouri service territories has been surprisingly robust. Year-to-date, residential demand has increased by 2.2%, and new industrial demand from companies like Google, Meta, and Panasonic is expected to sustain total demand growth above 2% for at least the next three years. This heightened demand is likely to create additional growth investment opportunities. Improvements in regulatory ratesetting in Kansas, along with anticipated rate increases in Missouri, should enhance earned returns. We project a 6% annual earnings growth at least through 2028. As of late October, Evergy's dividend yield stands at 4.3%, making it one of the highest among US utilities. We anticipate another dividend increase in the fourth quarter. Evergy's price-to-earnings (P/E) ratio of 16 as of late October represents a 15% discount compared to the median P/E for the US utilities sector.

The market responded negatively to New Fortress Energy's inability to achieve key production milestones at its inaugural liquefied natural gas production facility, raising concerns about near-term debt. However, we believe this reaction is an overreaction to short-term setbacks, as there is a clear trajectory for volume growth and debt reduction through 2027 and beyond. While tight LNG markets currently limit the company's business model, we anticipate that as these conditions improve by 2027, the company will generate sufficient cash flow to manage its debt and enhance the utilization of downstream power generation.

Tencent's business is characterized by enduring competitive advantages, a proven track record of success, and a strong financial position. WeChat, with its extensive user base of 1.3 billion in China, still presents significant opportunities for enhanced advertising monetization, especially through its additional services like video accounts and WeChat search. With anticipated growth and margin improvements in its gaming, financial technology, and cloud segments, Tencent is well-positioned to achieve a comfortable mid-teens compound annual growth rate in earnings over the next five years. Importantly, the company's valuation remains highly attractive. Furthermore, Tencent shows a strong commitment to returning value to shareholders, distributing approximately 80% of its earnings through a combination of around 30% in dividends and 50% in share buybacks, highlighting its focus on shareholder value.

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 in the long run.

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's emphasis on the mass market, combined with its largest room inventory in Macao and a proven track record in nongaming activities, positions it as the primary beneficiary poised to capitalize on the ongoing demand recovery in the region.

We are optimistic about Tongcheng Travel, which presents a 40% upside potential, as spending in China's service sector continues to outpace that in the retail goods sector. In our analysis of the China travel market, we find that Tongcheng is often overlooked in comparison to Trip.com, primarily because it lacks an ADR secondary listing and has lower brand recognition, despite offering similar domestic travel options. Our fair value estimate suggests a price/earnings ratio of 27 times, while the shares are currently trading at a high-teens P/E. We believe Tongcheng has limited exposure to international revenue, which is on the rise and is expected to triple its contribution to total revenue to 15% over the next three years, indicating faster growth compared to Trip.com. Furthermore, we anticipate that the company will benefit from operating leverage, as strong revenue growth leading into 2025 is likely to enhance operating margins.

Geely is one of China’s leading automakers, having sold nearly 1.7 million cars in 2023. We maintain a positive outlook on Geely as its new energy vehicle (NEV) initiatives continue to make significant progress. The NEV-focused brand Galaxy has successfully gained traction since its launch in 2023, while the premium brand Zeekr is steadily increasing its delivery rates. With strong vehicle sales year to date, management has raised its 2024 full-year vehicle volume guidance to 2 million units, reflecting a 21% year-over-year growth. The company anticipates a 70% year-over-year expansion in NEV sales. With a robust model lineup from Galaxy and Zeekr, we believe Geely is well-positioned to further enhance NEV penetration, which is crucial for its advancement in the electrification transition. The increase in sales volume, coupled with lower battery costs, could help mitigate pricing pressures amid industry competition. We believe investors may be underestimating the long-term earnings potential of the company’s diverse new energy brands. Key near-term catalysts include strong monthly sales momentum from Galaxy and Zeekr, as well as a recovery in profitability.

Within China's e - commerce coverage, we favor JD.com with a wide moat. It'll be a key beneficiary of the government - subsidized home appliance and electronics trade - in program. Given China's weak economy, we think the program will last at least a year.JD.com gets 47% of revenue from electronics and appliances. Its comprehensive services like installation and old appliance disposal draw customers. We still believe JD.com will see long - term margin expansion due to lower procurement costs and a rising share of high - margin third - party platform business.

Budweiser APAC is the leading beer brewer by sales value in China, holding approximately 40% of the premium segment market share. The company benefits from a comprehensive nationwide distribution network and a diverse portfolio of international premium beer brands, supported by the substantial resources of its parent company, Anheuser-Busch InBev. Budweiser APAC has also shown proficiency in digitalizing its channel management, which we believe gives it a competitive advantage over its peers and is crucial for seizing premiumization opportunities as volume growth stabilizes. We anticipate that the long-term premiumization trend in China's beer market will persist, despite current sluggish consumer sentiment, due to a favorable competitive environment and the shared objectives of major brewers to pursue price growth in the long run.

Near-term macroeconomic headwinds have negatively impacted baijiu (clear liquor) demand and the sector’s profitability, resulting in slower year-over-year sales growth across all segments in recent quarters. We anticipate that sluggish baijiu sales will continue into 2025, prompting us to shift our preferred baijiu investment from Luzhou Laojiao to Moutai. Demand for Moutai remains relatively resilient, while Luzhou Laojiao faces greater challenges in boosting sales. We believe Moutai's unique cultural significance, unparalleled brand image, and exceptional product quality position it well to navigate the current challenges in baijiu sales. These attributes also enable Moutai to capitalize on China's beverage premiumization trend over the mid- to long term. Furthermore, Moutai's commitment to increasing its regular dividend payout ratio to 75% from 51.9% over the past six years, through 2024-26, sends a positive signal to the market, which should enhance shareholder returns and bolster investor confidence. Our estimated dividend per share for 2025 is CNY 57.44, reflecting a 75% payout ratio and implying a current dividend yield of 3.7%.

CNOOC serves as the upstream division of China National Offshore Oil, the third state-owned oil company in China. Consequently, it represents the most direct investment opportunity for those looking to engage with China's energy security policy and its long-term objectives to enhance oil supply. The absence of downstream operations has allowed the company to sidestep a significant legacy labor force. Additionally, none of CNOOC's sales are subject to government price controls. We believe CNOOC is currently undervalued due to its cost efficiency. Our projections indicate that CNOOC will maintain an average all-in cost of approximately USD 30 per barrel over our explicit five-year forecast period, reflecting the company's strong track record in cost management. Therefore, we anticipate that the firm will remain profitable in the long term, even under our midcycle Brent oil price forecast of USD 60 per barrel.

We believe the market has a differing perspective on the outlook for lithium prices, which is a crucial factor in valuing IGO. In our view, lithium prices are approaching a cyclical bottom, presenting an appealing 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 demand from end markets 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 driven by the growth in electric vehicle sales. To accommodate this demand, IGO intends to expand Greenbushes' capacity by approximately two-thirds by the end of the decade.

Shares in no-moat TPG Telecom are currently undervalued. The benefits of a more rational mobile market are becoming evident. In a three-player mobile network landscape, each player is increasingly focused on achieving returns on their substantial capital investments, particularly in the rollout of 5G. We anticipate that this rational competitive behavior will persist, supported by ongoing growth in fixed wireless services. The completion of the AUD 5.3 billion sale of the corporate telecom unit will enhance the advantages of being a mobile-centric entity, while the proceeds from the sale will alleviate any remaining concerns regarding TPG’s balance sheet. The positive effects of cost-cutting and business simplification initiatives are already starting to materialize, coinciding with a moderation in the current capital expenditure pressures associated with 5G and IT modernization. The presence of major shareholders whose holdings have recently come out of escrow following the Vodafone merger may be causing some unease among investors. However, these concerns are adequately reflected in the current share price, particularly in light of the long-term growth prospects for the telecom industry as it transitions to 5G.

Domino's Pizza Enterprises is a high-quality company with substantial growth potential. We project a 20% compound annual growth rate in earnings over the next five years, driven by the global expansion of its store network. While Domino’s sales growth has experienced volatility, the share price often reflects short-term trading conditions rather than its long-term prospects. The near-term outlook remains uncertain and depends on enhancing store economics. Nevertheless, we believe the market is undervaluing Domino’s significant long-term growth potential. We anticipate the network will reach nearly 6,000 stores by fiscal 2034, up from approximately 3,800 as of June 2024, 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 led to an underappreciation of the fundamental strength and resilience of Bapcor’s automotive-parts business. A slowdown in discretionary spending is impacting retail in the near term, and the new management team will need to demonstrate its capabilities. Additionally, the rise of electric vehicles presents a long-term challenge for the trade business. Nevertheless, we believe that the current pessimism overlooks the inherent resilience in automotive spare parts, and Bapcor is well-positioned to adapt to the ongoing technological transition.

We believe the market has a short-sighted perspective on IDP Education, influenced by recent declines in volumes and regulatory uncertainties. While we acknowledge that the short-term outlook appears weak and forecast a decline in IDP’s earnings for fiscal 2025, we anticipate that the company will continue to gain market share as the industry favors quality operators like IDP. We see significant long-term value, as the caps on foreign students are temporary and address short-term cyclical issues. The pricing outlook is also positive in the near term, with IDP negotiating better terms and universities planning to increase tuition fees due to an undersupply. We expect IDP to benefit from the long-term macroeconomic factors that support the international education sector.

Endeavour shares are currently trading at an attractive valuation with a fully franked yield. We believe the market is underestimating the company's 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 underlying Australian liquor retail sales will increase by mid-single digits following minimal growth in fiscal 2024. In the long term, liquor demand remains resilient, supported by inflation and population growth. 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 like Dan Murphy’s and BWS, Endeavour's liquor sales are expected to grow in line with market trends. Additionally, we believe that concerns regarding regulatory risks associated with the group's gaming operations are overstated and already reflected in the current share price.

Sumitomo Mitsui Trust Group has underperformed compared to other major Japanese banks, possibly due to its perceived lower exposure to the benefits of rising yen interest rates. Nevertheless, the sale of equity holdings is expected to generate more capital for SMTG than for its peers, facilitating increased dividend growth and share buybacks.

United Overseas Bank seems to have greater potential for enhancing shareholder returns, including buybacks, than we had previously anticipated. Although it has less potential for growth in wealth management compared to some of its competitors, we believe its net interest margin will remain strong even if interest rates decrease.

We believe that Harmonic Drive Systems shares are undervalued, as the market has overreacted to several factors: worries about order peaks due to the component supply shortage; uncertainty regarding 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.

Narrow-moat-rated ST Engineering is a prominent global independent provider of aircraft maintenance, repair, and overhaul (MRO) services, and serves as Singapore's primary defense contractor. We project that ST Engineering's earnings will grow at a compound annual rate of 13% from 2024 to 2027, driven by the expansion of its MRO capacity, increasing demand for passenger-to-freight conversion, and savings in costs and interest expenses. The company maintains a stable annual dividend of SGD 0.16 per share while continuing to pursue bolt-on acquisitions.

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 believe that the demand for residential properties in affluent cities will remain resilient, resulting in stronger sales growth for COLI. Furthermore, we anticipate 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 favor Wharf REIC due to its premier retail properties, Harbour City and Times Square, which are the largest retail assets in their respective regions. 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 prime shopping destinations like Harbour City.

GlobalWafers is well-positioned to capitalize on the upcoming cycle as non-AI semiconductor demand rebounds.

We maintain our outlook that the supply and demand for multilayer ceramic capacitors (MLCCs) will remain strong and tighten, driven by the recovery in smartphone production and increased content in automotive applications. While we consider all passive component suppliers in our coverage to be undervalued, we believe that shares of narrow-moat Taiyo Yuden present the best 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 used in smartphones, while automotive MLCCs will require larger capacities, higher reliability, and greater breakdown voltage. We believe Taiyo Yuden will be well-positioned to benefit from this trend.

We are optimistic about Grab Holdings due to its leading market position in Southeast Asia's ride-hailing sector. The ride-hailing segment has reached a pivotal moment and is now cash flow positive, marking a notable improvement compared to last year. Furthermore, the delivery business is achieving higher operating margins, and Grab has increased its long-term margin expectations for this segment. We see several new long-term growth drivers, including its advertising business, which remains underutilized.

We favor Sony due to its strategic emphasis on acquiring and utilizing appealing content to create recurring-revenue streams that facilitate long-term monetization from customers, particularly in gaming, streaming music, and movies. The company maintains a disciplined approach in its consumer electronics sector to safeguard profitability and cash flow through careful inventory management. Overall, Sony's business portfolio is significantly less susceptible to economic fluctuations, allowing it to generate robust earnings growth even in uncertain conditions. The company is targeting double-digit operating income growth as part of its three-year midterm plan.

Woodside shares have declined approximately 30% since mid-2023, significantly underperforming the broader market. Although oil prices have also dropped by over a third from their previous levels, this reaction appears unjustified. The shares are currently the most undervalued relative to our fair value estimate since the end of the COVID-19 bear market. While some believe that the era of hydrocarbons is coming to an end, demand for oil and gas continues to grow. Predictions of an imminent peak followed by a rapid decline in demand are likely to be premature. Substantial investment in hydrocarbons is necessary in most demand scenarios to compensate for naturally declining supply. Our valuation of Woodside is based on two key assumptions: a hydrocarbon production growth of 15% to 225 million barrels of oil equivalent (mmboe) and a Brent crude price of USD 60 per barrel. We anticipate a marginally negative five-year EBITDA compound annual growth rate (CAGR) of 2.0%, resulting in an EBITDA of USD 8.1 billion by 2028, considering our midcycle Brent price is 20% below current levels.

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.

Ramsay is experiencing robust patient revenue growth; however, group profitability is being affected by inflationary pressures, reduced government support, and increased investment in digital initiatives. Despite these challenges, we anticipate long-term margin expansion as Ramsay reduces its reliance on agency staff, normalizes case mix and volumes for nonsurgical services, improves capacity utilization, and realizes efficiencies from digital investments. Notably, labor shortages are beginning to ease, and Ramsay is actively investing in recruitment and training. The company has also negotiated higher reimbursement rates to address cost inflation and has improved its balance sheet by divesting its stake in Ramsay Sime Darby. For further details, please refer to our Ramsay Stock Pitch published in December 2023.

Aurizon shares 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 volumes are gradually recovering after an extended period of wet weather. Earnings are expected to benefit from Consumer Price Index-linked tariffs, along with recent developments and acquisitions. We believe that environmental concerns are exaggerated, creating an opportunity for investors to acquire a higher-than-average-quality company 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.

Brambles, the world's largest supplier of reusable wooden pallets, typically leads the markets in which it operates. This leadership is attributed to its scale and first-mover advantage, which limit competition and create a cost advantage, resulting in our wide moat rating. A significant portion of the company's earnings comes from large beverage and food companies, which we view as defensive, thereby reducing Brambles' correlation to the economic cycle. Consequently, we project steady revenue growth at a compound annual rate of 6% over the next decade. Additionally, earnings are expected to improve due to enhanced operating margins, driven by the company's efficiency initiatives in pallet repairs and transportation, as well as the adoption of new digital technology.

Dexus boasts a high-quality office portfolio, enhanced by the growing trend toward hybrid working. The majority of its office towers are classified as premium or A grade, predominantly situated in the central business districts of major Australian capital cities, with a notable concentration in Sydney. As the demand for quality real estate persists, well-located, high-grade buildings like those in Dexus' portfolio are expected to remain in high demand. Additionally, the industrial portfolio is currently undervalued in terms of rent, positioning Dexus to implement significant price increases upon the expiration of current leases. We anticipate that the funds management segment will continue to attract investor inflows, thanks to its scale, management expertise, and strong track record. Currently, Dexus is trading significantly below its net tangible assets of AUD 8.97 per security and offers a fiscal 2025 distribution yield of 5%, providing a solid margin of safety for investors as they await recovery.

We consider SiteMinder to be a well-positioned 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 expect that SiteMinder's new platform products will raise switching costs and foster network effects, leading to considerably higher terminal margins.

Narrow-moat APA Group is a high-quality company offering an attractive yield. We anticipate strong near-term revenue growth as elevated inflation drives up Consumer Price Index-linked tariffs and ongoing developments are finalized. APA is well-positioned to benefit from the transition to renewable energy, with continued investments in wind and solar farms. Additionally, the group's core gas transmission networks are expected to gain from the increasing use of gas to support intermittent renewable power supply. APA is also 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.

Kering, the second-largest luxury group by revenue, is currently trading at 16 times consensus earnings, which we believe are nearing trough levels, indicating a potential 90% upside to our fair value estimate. While the momentum of Kering's flagship brand, Gucci, is slowing, the brand's strong recognition, substantial marketing resources, control over over 90% of its distribution, and access to top managerial and creative talent position Gucci to sustain its pricing and desirability over the long term.

Richemont owns the largest, fastest-growing, and most profitable brands in luxury jewelry, specifically Cartier and Van Cleef & Arpels. This industry is characterized by high entry barriers. These brands cater primarily to affluent clientele, which helps mitigate cyclical risks. Additionally, Richemont has adopted a more cautious pricing strategy compared to its leather goods peers following the pandemic, making jewelry a compelling choice for luxury buyers. The company boasts a robust balance sheet, with over EUR 7 billion in net cash, positioning it well to navigate economic downturns.

Prudential is a long-term savings and insurance company primarily operating in Asian markets. The company's share price is currently depressed due to uncertainties surrounding its earnings and dividends, which have been exacerbated by divestments and a rapid turnover of chief executives. We believe that the strategic plan in place will yield financial benefits, allowing the company to reinstate its dividend.

We believe the market has not fully recognized Roche's robust drug portfolio and its industry-leading diagnostics, which together create sustainable competitive advantages. The challenges posed by declining COVID diagnostic revenue and competition from generics and biosimilars for older drugs are diminishing as we approach 2025, allowing the strength of the firm's portfolio of leading drugs to come to the forefront. We also see the firm's research and development expenditures becoming more 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 a safer, more personalized, and cost-effective model. The synergy between its diagnostics and drug development teams provides Roche with a distinctive in-house perspective on personalized medicine. Furthermore, Roche's biologics represent 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 have recently upgraded Philips' moat to wide, recognizing its position as a leader in imaging and image-guided therapies. The company's track record has been inconsistent, with several self-inflicted setbacks damaging its reputation and investor confidence. However, we believe that resolving the sleep care issues, concentrating on its high-performing segments, and the introduction of a new management team can help shift the narrative. Our valuation indicates a discount compared to larger rivals on a multiple basis, which we find justified due to their stronger competitive positions and Philips' broader range of potential outcomes. The company has significant work ahead to regain investor trust, but even with a higher margin of safety, we view the shares as undervalued at current levels. A focus on profitability is crucial. The company's operating margins have been severely impacted by the sleep care challenges, significant component sourcing issues, and margin compression in imaging. Currently, Philips significantly trails its imaging peers in profitability, but we anticipate that the company will begin to narrow this gap, though it may not close it entirely.

We anticipate a compound annual growth rate of 10% for Veolia's earnings per share and dividends from 2023 to 2028. This projection represents the second-highest EPS growth and the highest dividend growth within our coverage. The growth in earnings will be fueled by efficiencies, including the remaining synergies from the Suez integration, as well as growth investments. Recently, we upgraded our economic moat rating from none to narrow. We believe the market is underestimating the company's competitive advantages and the reduction in its cyclicality resulting from its transformation, which contributes to the significant undervaluation of its shares.

We believe Fineos possesses investment merits that are not typically found in unprofitable technology companies. The market appears to underestimate the revenue potential stemming from the adoption of cloud software by insurers and the growing loyalty of Fineos' insurer customers. Fineos is well-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 through client transitions to the cloud, automation of manual processes, and recruitment in emerging economies. We expect Fineos to be able to self-fund its future growth.

NXP Semiconductors, which possesses a wide economic moat, is among our top selections in the analog and mixed signal chip sector. The stock is currently trading at an appealing discount to our fair value estimate of $300, providing long-term investors with a solid margin of safety. We recognize that soft manufacturing activity, particularly in Europe, may impact the near-term performance of chipmakers with exposure to the automotive and industrial sectors. Nevertheless, as conditions improve, we expect NXP and its peers to benefit from a cyclical recovery in the medium term. We do not foresee any structural decline in demand within its core end markets. We are particularly impressed by NXP’s significant exposure to the automotive sector, which accounts for nearly 50% of its revenue. The company is well-diversified in automotive, boasting a robust product portfolio that includes processors, microcontrollers, and analog components. We believe NXP will capture its fair share of the growing electrification and safety automotive markets, including radar and battery management systems. Overall, NXP’s automotive business is well-positioned to benefit from the secular trends of increasing chip content per vehicle, and we think the market is overly focused on a short-term slowdown in demand.

Narrow-moat Infineon Technologies is among our top picks in the technology sector. Our EUR 43 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. However, we do observe some warning signs in the broader EV market, including excess inventory, competitive pricing among original equipment manufacturers, and potentially slower growth than anticipated. Despite Infineon's position as a leader in power semiconductors for EVs, we expect chip content per vehicle to continue rising over time. We believe that 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 term, we are not overly concerned about the expansion of trailing-edge chip manufacturing capacity in China, as domestic chipmakers may attempt to displace companies like Infineon. We believe that Infineon’s diverse product portfolio and the high switching costs for its customers will help the company maintain its relevance in the Chinese market and likely in most other global markets as well. Furthermore, we are not particularly worried about Infineon's significant expansion plans in the silicon carbide (SiC) semiconductor market. Even if overcapacity occurs, we anticipate that Infineon will emerge as a leader in automotive and industrial SiC applications, capable of efficiently utilizing its facilities.

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.