May 30,2025 issue recommended excellent stock list

We are adding FMC, a pure-play in crop chemicals, to our Best Ideas list. We believe FMC shares are significantly undervalued, currently trading in 5-star territory well below our fair value estimate of $95 per share. FMC's competitive advantage stems from its patent-protected and differentiated premium crop protection products, which farmers are willing to pay a premium for due to their effectiveness in combating pests such as insects, weeds, and fungi that can harm crops and diminish yields. FMC shares have declined as the market questions the company's growth outlook, following two years of declining profits and management's guidance for lower results in the first half of 2025. This decline is primarily attributed to inventory destocking, as farmers and retailers accumulated excess supply during 2021 and 2022 due to concerns over COVID-related supply chain disruptions. As supply chains began to normalize in 2023, this excess inventory started to unwind, negatively impacting sales. This inventory fluctuation was particularly pronounced in Brazil, FMC's largest market. Consequently, while FMC outperformed its crop chemicals peers in 2021 and 2022, it has underperformed since. A near-term challenge is that FMC's diamides, a class of insecticides that target ryanodine receptors in insects, will begin to go off patent in 2025. Diamides accounted for 35% of sales in 2024 and represent FMC's largest product category. However, the company has a robust pipeline of new products, including those recently launched and others set to launch in the coming years. We anticipate that these new products will more than offset the decline in diamide profits in the future. We expect the end of inventory destocking and growth from new product sales to drive FMC's sales and profits back to growth starting in the second half of 2025. Increased profits should serve as a catalyst for share price appreciation in the upcoming quarters.

James Hardie has significant growth potential. The aging housing stock in the US creates a steady stream of repair and renovation customers, while the company's strategy to secure contracts with large homebuilders is boosting volumes in new construction. We believe the current depressed share price is exaggerated, stemming from concerns regarding the acquisition cost of Azek and the realization of synergies. In our assessment, Azek’s products provide comparable durability and low maintenance advantages to Hardie’s offerings and can be effectively bundled. We see a solid opportunity for sales of the acquired products and are optimistic about achieving substantial cost savings from the merger. Although we may not share management's level of optimism regarding the benefits, we believe the lower share price more than offsets this.

We believe Nutrien shares are undervalued compared to our fair value estimate of USD 70 (CAD 96). Since reaching an all-time high in 2022, the stock has experienced a decline and now trades at a significant discount to our valuation. For income-focused investors, Nutrien currently offers a 3.6% dividend yield. We attribute the market's reaction to tariff-related uncertainties that may impact profits. However, we anticipate that US farmers will continue to invest in essential crop inputs, such as seeds, crop chemicals, and fertilizers. We expect potash prices to increase, and a reduction in overhead costs within the retail segment will contribute to profit growth in 2025. Nutrien's competitive advantage stems from its cost-effective potash and nitrogen production. As the largest potash producer globally by capacity, potash represents the firm's most significant profit source. Its Canadian mines benefit from favorable geological conditions, resulting in lower mining and processing costs compared to competitors. We project an increase in potash prices in 2025. The onset of the Russia-Ukraine conflict in 2022 caused potash prices to spike to record levels due to restricted exports from Russia and Belarus, which together account for 40% of global potash exports. In response to these high prices, potash demand declined significantly. However, the supply shock was temporary, as Russia and Belarus quickly restored exports through shifts in global trade. Supply rebounded more rapidly than demand, causing prices to drop to cyclically low levels. We expect demand to fully recover in 2024, with further growth anticipated in 2025. Additionally, both Belarus and Russia are planning to reduce potash production this year to support higher prices. Even if the US, EU, and Russia reach an agreement allowing Russia to sell potash to these regions, we foresee minimal impact on the supply and demand dynamics. Higher prices are likely to benefit Nutrien. Lastly, we anticipate a recovery in retail profits. Nutrien is the largest farm retailer in the US. As more farmers adopt online farm management tools, Nutrien intends to decrease its US store count, which will help lower overhead expenses. This strategy is expected to enhance profits in 2025.

Comcast’s shares have faced significant pressure due to challenges in retaining broadband customers. We anticipate that these losses will worsen before they improve, as competition from fixed-wireless providers and expanding fiber networks intensifies. Nevertheless, we believe Comcast has the potential to grow its customer base in the long term as these challenges subside. Although 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 pressures on its customer base. Our outlook for NBCUniversal is less optimistic, though it remains a valuable media asset. Comcast’s strategy to spin off its traditional television networks appears to be an 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 narrow-moat Hanesbrands is an attractive investment, trading at approximately a 70% discount to our fair value estimate of $16.30. Our moat rating is based on the company's strong 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. In 2024, 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 enables Hanesbrands' management to concentrate on enhancing its core brands and products. Additionally, the divestiture is expected to positively impact margins, as innerwear has historically demonstrated more consistent profitability compared to Champion. Hanesbrands generates over 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 advantageous for shareholders. The firm has eliminated its quarterly dividend and is utilizing nearly all of its available free cash flow for debt reduction. Proceeds from the Champion sale have also been directed towards retiring debt. In the first quarter of 2025, Hanesbrands refinanced debt maturing in 2026 with new loan facilities that mature in 2030 and 2032. The company ended the quarter with $2.3 billion in debt, down from $3.3 billion at the end of the first quarter of 2024. During the same period, the firm reduced its debt/adjusted EBITDA ratio from 5 times to 3.6 times.

Shares of VF, the owner of The North Face, Timberland, Vans, and eight other brands, are currently trading at approximately a 70% discount to our valuation following a sharp decline due to tariff and other concerns. 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 to revamp Vans, launch a new platform in the Americas, cut costs, and manage debt more effectively. Over the past year, VF has reduced its debt by $2 billion, bringing it down from $6 billion to $4 billion, primarily through free cash flow generation and the sale of Supreme for $1.475 billion in cash in 2024. 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 modest 5.9% in fiscal 2025, an increase from 4.8% in the previous fiscal year. We anticipate that operating margins will return to double-digit levels within three years, driven by more stable sales from Vans and other brands, cost reductions, and various initiatives. During its October 2024 investor event, VF established 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 changes, although the company seems inclined to retain its remaining brands for the time being. In the future, we believe that Dickies and potentially other brands may be sold.

We find the shares of Bath & Body Works to be attractive, currently trading at approximately a 50% discount to our fair value estimate of $63. 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. A strategic emphasis on international expansion is likely to benefit both physical and digital sales channels, enabling an average international sales growth of 7% over the next decade. This will assist Bath & Body Works in enhancing its brand intangible asset on a global scale. We project that these opportunities will contribute to an average sales growth of 3% in the long term, aligning with global growth forecasts (according to Euromonitor) for the bath and shower and soap industries. Consequently, this will lead to additional market share gains for Bath & Body Works, further solidifying its already dominant position.

Nike is currently trading at approximately a 45% discount to our fair value estimate of $112 per share. The company is facing one of its most challenging periods in decades, with concerns over tariffs contributing to a 30% decline in its shares over the past year. However, we believe that new CEO Elliott Hill is taking the right steps to enhance the brand's value, which underpins our wide moat rating. Hill's overarching strategy, termed "Win Now," focuses on strengthening the firm's connections to global sports—its greatest advantage—while implementing cost-cutting measures in other areas. In the long term, we anticipate that Nike can achieve mid-teens EBIT margins by increasing full-price sales, launching new merchandise, and expanding sales in high-margin markets. Under the previous leadership of John Donahoe, Nike emphasized direct selling at the expense of product development, inadvertently opening 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 has extensive insider knowledge from his 32 years at Nike, including his last role as president of consumer and marketing before retiring in 2020, has significant work ahead. He needs to strengthen relationships with wholesale partners and boost full-price sales through company-owned digital channels, but we are confident in his capabilities. 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. As a result, we expect near-term results to be weak. Nevertheless, we project that Nike will return to growth in sales and operating margins by fiscal year 2027.

Polaris' shares are currently trading at over a 40% discount to our fair value estimate of $70 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 is projected to achieve a 17% 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 tariffs, which are expected to have an incremental impact of nearly $225 million in 2025, as well as slowing consumer conversion rates and cautious dealer behavior—factors we consider to be temporary. Consequently, the company has retracted its previous 2025 outlook, which anticipated a sales decline ranging from 4% to 1% and adjusted earnings per share of $1.10. The updated tariff expectations now suggest a potential EPS loss in 2025. With dealer inventory largely optimized, we expect wholesale shipments to align more closely with consumer demand. We are optimistic that long-term demand driven by new product launches will support shipment growth and profit enhancement beyond 2025. From 2026 to 2034, we project the company will achieve an average sales growth rate of 3.5%, while earnings per share (EPS) is expected to grow at a high-single-digit rate over the long term.

Sealed Air specializes in flexible resin packaging, protective shipping materials, and integrated packaging systems. The demand for packaging surged in 2021 due to pent-up consumer demand and supply chain challenges, leading to strong end-market demand. Consequently, the company achieved record financial performance during 2021-2022. However, as supply chain disruptions eased, inventory levels began to rise. Many retailers faced excess inventory and had to implement destocking measures, which negatively impacted the packaging industry. As a result, Sealed Air’s stock has significantly declined from its peak in January 2022 due to end-market weaknesses. Nevertheless, the company's unique business model remains a key strength. Sealed Air provides packaging equipment and automation solutions, which are utilized by clients for years, thereby mitigating the price-taker model that affects other packaging manufacturers. Given Sealed Air's competitive advantages and positive long-term outlook, we are confident that the currently undervalued share price will ultimately benefit long-term investors.

Hasbro's shares have outperformed the broader market year to date, increasing approximately 20% compared to a 6% rise in the Morningstar Global Markets Index as of May 27. We continue to consider the shares undervalued relative to our fair value estimate of $83. We believe investors have not fully recognized 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 significant improvement in revenue mix, with the high-margin Wizards of the Coast and digital segments projected to account for about 41% of sales by 2025, 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 optimize working capital. Moreover, due to a rigorous focus on expenses, Hasbro aims to reduce gross costs by $1 billion from 2021 levels by the end of 2027, which will support profit growth. The company exceeded its 20% operating margin target in 2024, and we believe it has the potential to reach 23.5% by fiscal 2028. Therefore, we see a strong opportunity for Hasbro to exceed expectations, driven by renewed emphasis on product innovation, cost management, and a lean operating structure.

We believe that narrow-moat Kraft Heinz should be on investors' shopping lists, as it is currently trading at a 50% discount to our fair value estimate of $53 and offers a 5% annual dividend yield. Market skepticism appears to focus on concerns about the company's ability to avoid significant and lasting volume contraction in the face of ongoing cost pressures (including potential impacts from upcoming tariffs), subdued consumer spending, and increased competition following recent price hikes. However, we consider this skepticism to be unfounded, as the company has moved away from previous management's focus on short-term profitability and cash flows. Since mid-2019, Kraft Heinz has strategically pursued sustainable efficiencies, increased brand investment (with spending on product innovation and marketing at a mid-single-digit percentage of sales, aligning more closely with industry peers), improved its capabilities in category management and e-commerce, and utilized its scale to adapt more effectively to changing market conditions. We believe the company is committed to maintaining this approach. We anticipate that these initiatives will allow Kraft Heinz to achieve low-single-digit annual sales growth while maintaining operating margins in the low 20s.

Shares of wide-moat Estée Lauder have declined by 48% over the past 12 months, primarily due to ongoing weak demand in China and investor skepticism regarding the firm's profit recovery strategy. Recent changes in top management, including the CEO and CFO, have added to the uncertainties. We believe the shares, currently trading at a 46% discount to our $120 fair value estimate, 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 in regaining market growth, 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 capitalizes on 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 now project a high-single-digit sales decline in fiscal 2025 due to ongoing issues in China, we anticipate revenue growth will accelerate to a mid-single-digit average for the remainder of the 10-year forecast period. This growth is expected to be driven by Estée's focus on the structurally appealing premium skincare market. Additionally, we forecast that the operating margin will rebound to 16% by fiscal 2034, supported by an improved channel mix (moving away from heavy promotions in department stores), manufacturing efficiency gains, and cost-cutting measures.

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 of 2024 (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. However, in its fiscal third quarter of 2025 (ending February), Lamb Weston reported some improvement, with higher sales and wider profit margins. Notably, the company managed to regain the market share lost due to the previous year's ERP issues. Despite this progress, sluggish restaurant traffic continues to hinder a more robust near-term recovery. Additionally, the industry is currently undergoing an investment cycle aimed at expanding capacity, which poses risks to Lamb Weston's utilization rates and margins in the longer term. The outlook for the near to medium term remains uncertain, as these challenges are not expected to resolve quickly. Nevertheless, long-term valuation catalysts are still in place, with shares trading approximately 35% below our fair value estimate. Even with declining traffic, attachment rates for fries remain high, and they 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 growth in fry sales. Furthermore, while the company is currently facing excess capacity, we believe that long-term demand growth and industry capacity rationalization will help restore utilization rates to the high-90% range. Lamb Weston's recent struggles have also attracted acquisition interest from Post Holdings, as well as involvement from activist investors Jana Partners and Continental Grain, who collectively own over 5% of the company's shares and are advocating for significant changes. Under the leadership of CEO Michael Smith, who previously served as COO under former CEO Tom Werner, Lamb Weston has adopted a more collaborative approach with these activists. An acquisition at an appropriate price or changes driven by activist investors could serve as near-term catalysts for the company. Additionally, Lamb Weston has engaged Alix Partners to explore potential operational improvements, indicating a path for meaningful upside. Importantly, the challenges related to traffic and the ERP system do not diminish Lamb Weston's cost advantage 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. Although Lamb Weston lost some market share due to its ERP difficulties, we believe its customer relationships remain robust, as demonstrated by its ability to recapture lost share.

From the beginning of 2022 to late October 2023, Tyson Foods’ shares declined nearly 50%, underperforming the Morningstar US Market Index (down 5%), as well as protein-centric peers Pilgrim’s Pride (down 7%) and Hormel (down 33%). Although Tyson's shares have rebounded approximately 20% since then, they remain significantly below our fair value estimate, presenting attractive risk-adjusted upside potential along with a healthy dividend yield exceeding 3.5%. Tyson's adjusted EBITDA fell by 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 pricing. This has been particularly challenging recently due to rampant cost inflation and supply/demand issues in the beef market. Additionally, the recovery of the US cattle supply will take time. However, we believe the current share price suggests that these difficult conditions will persist. Meat markets are cyclical, and a return to a more normalized operating environment is all that is necessary to support our valuation. The chicken market has already shown signs of recovery, with 12-month trailing adjusted EBITDA increasing by over 40% at the end of the second quarter of fiscal 2025 (ended March). Furthermore, we do not anticipate any structural changes in meat markets that would necessitate a permanent alteration in profitability. Consequently, we project a 2% growth in revenue over the next five years, with adjusted operating margins recovering to our 2029 estimate of 6.9%, aligning with historical averages and improving from the fiscal 2024 estimate of approximately 3.4%.

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 after the substantial pandemic-driven demand 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 shares are currently trading at a significant discount to their intrinsic value. Despite the near-term market concerns related to the company's recent management change and potential tariffs, we believe there is a considerable margin of safety in the shares. In recent quarters, demand for many of Baxter's products has been on the rise due to increased medical utilization. Additionally, new product launches, such as the Novum IQ pump platform, are contributing to this demand. Assuming that tariff exposure remains manageable, as management has indicated, Baxter presents a compelling margin improvement opportunity. Most inflationary pressures in its supply chain are subsiding, and important new group purchasing organization contracts will take effect in 2025, which should enhance product pricing. We anticipate that profits will grow at a relatively rapid pace in the near term before stabilizing at a more normalized growth rate in the high single to low double digits over the long term.

Fortune Brands Innovations is a narrow-moat-rated manufacturer of building products, featuring a portfolio of well-established brands such as Moen (plumbing fixtures), Master Lock (security), Therma-Tru (doors), and Fiberon (composite decking). Although Fortune Brands operates globally, around 90% of its revenue is generated from the US and Canada, with two-thirds of North American housing-related revenue linked to the repair and remodel (R&R) market, which is less cyclical compared to new construction. Over the past two years, Fortune Brands’ stock has notably underperformed the Morningstar US Market Index due to concerns regarding near-term US housing fundamentals amid rising mortgage rates, as well as the company’s exposure to tariffs. With tariff exposure projected to account for approximately 11% of 2024 revenue, there is potential for profit margins to be impacted if not addressed. However, management is confident in their ability to fully offset these incremental tariff costs through price increases, cost-reduction initiatives, and supply chain adjustments, and we find their mitigation plan credible. We maintain a positive long-term outlook for the US housing market, anticipating a significant rebound in US residential construction by 2027, along with a forecast of mid-single-digit percentage growth for R&R spending over the long term. The R&R market is expected to benefit from favorable trends such as an aging housing stock and the increasing adoption of smart home and energy-efficient products. We believe Fortune Brands will outpace growth in the US R&R and new construction markets, particularly due to its expanding range of connected products, including smart plumbing fixtures, leak detection devices, and home security solutions. Currently, we view Fortune Brands’ stock as undervalued, with the firm’s valuation suggesting that operating margins may not exceed 17% in the future. However, we believe that the company can achieve operating margins closer to 18% with improved demand. During its 2022 investor day, management outlined a strategy aimed at reaching a long-term operating margin of 20%-22%. Our valuation approach is more conservative, but there is considerable upside potential if management successfully realizes its long-term profitability goals.

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 uneven quarterly results, which we believe have impacted the stock. Nevertheless, Huntington Ingalls' strong connections to the US Department of Defense, its role 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 and Arleigh Burke-class destroyers for the US Navy position the company for consistent profits well into the future. The long-cycle shipbuilding business does not yield the highest margins in the defense contracting sector. However, it exemplifies the conditions that create a durable competitive advantage and provide decades of revenue and profitability visibility. The large shipbuilding sector offers extensive planning horizons and budget visibility for decades, although minor timing shifts in significant programs, such as aircraft carriers, can lead to uneven quarterly results. We anticipate some potential fluctuations later this decade, contingent on forthcoming 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 counterbalance 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 construct and are typically produced in small quantities. The potential for margin improvements as the company progresses down the learning curve is limited, especially since the government negotiates the price (and consequently, the profit margin) of each ship upon agreement to purchase. This close relationship between the buyer and the company distinguishes Huntington Ingalls from other defense contractors, as it is largely insulated from macroeconomic or market risks. In 2024, the company reported only $7 million in revenue from commercial customers out of a total of $11.5 billion. 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 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 that long-term investors will be rewarded, particularly with the anticipated growth in submarine and destroyer revenue.

We believe Fluor is currently at an attractive entry point for patient investors willing to endure short-term volatility. Investor impatience regarding the lengthy process of monetizing Fluor’s equity interest in NuScale has grown, yet we feel the market is undervaluing the potential upside. Presently, Fluor is trading at what we consider a fair price for the company, excluding its NuScale stake, effectively providing investors with a free call option on NuScale’s success at the current stock price. Additionally, although there is a projected decline in backlog for 2024 and ongoing cash burn from legacy projects extending into 2025, we believe the market fails to recognize the company’s operational improvements. Fluor has significantly mitigated the risk associated with its backlog, and we think the enhancement in cash flows positions the company to accelerate share repurchases and possibly reinstate the dividend.

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, the company sees growth opportunities in international markets, particularly in China and India, as well as in water treatment products. Since late 2024, the company's stock price has faced challenges due to weaker-than-expected sales in China, which represented 20% of total sales last year, alongside sluggish water heater sales in North America. This trend of lackluster growth has persisted into 2025. Nevertheless, we consider A.O. Smith to be a high-quality firm with a significant economic moat. The North American water heater and boiler segments, which account for approximately 70% of sales, benefit from strong brand recognition that supports robust profit margins, as well as a transportation-related cost advantage that deters potential foreign competitors in the tank-style water heater market. The difficult operating environment in China may weigh on the stock, despite the fact that China contributes less than 10% to overall profits. The decline in North American water heater shipments in 2024, coupled with management's expectations for continued softness in 2025, has likely dampened investor enthusiasm for the stock. However, we anticipate that sales will grow at a mid-single-digit percentage rate, with earnings per share increasing by a high-single-digit to low-double-digit percentage from 2026 to 2029, driven by a rebound in water heater demand in North America, a recovery in the Chinese market, and the expansion of the water treatment business. We believe that the recent announcement of heating, ventilation, and air-conditioning manufacturer Lennox entering the North American water heater market through a joint venture with Ariston Group will not significantly alter the competitive landscape.

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, a no-moat company, presents an attractive investment opportunity due to its high-quality office portfolio, which appears 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. 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 among the best in the publicly traded REIT sector, with an average age of just 11 years, compared to 30 years for its peers. Additionally, Kilroy excels in other important metrics, such as rent spread and sustainability. The company is well-positioned to capitalize on the growing flight-to-quality trend, as employers increasingly seek to bring employees back to the office. However, there are risks to consider. The recovery in physical office occupancy levels has been slow; according to Kastle Systems' weekly work barometer, average occupancy remains around 50% of pre-pandemic levels. Furthermore, Kilroy's geographic concentration in California and significant exposure to the technology and life sciences sectors present additional risks.

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 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 their focus 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 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 higher than the average interest rate of around 5% on the debt issued for these transactions. The $9.3 billion acquisition of Spirit Realty, finalized in January 2024, is expected to enhance shareholder value. We are optimistic that 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.

Sabre has effectively managed the factors within its control despite a challenging macroeconomic and geopolitical landscape. Its investments in technology have contributed to gains in air booking market share. Additionally, Sabre has enhanced its debt profile. As of early 2022, the company had $3.8 billion in debt maturing in 2024-2025, but it has since eliminated major debt maturities until 2027 through successful tender offers and refinancing efforts. We anticipate that Sabre will pay down its 2027 debt in 2025 by issuing new, longer-duration debt. Sabre's cash reserves, free cash flow generation, proceeds from its hospitality IT sale, and a gradual recovery in platform demand position the company well to manage this upcoming debt. Replicating Sabre's distribution platform would encounter significant aggregation and processing challenges. In 2024, American Airlines reported a decline in sales due to its decision to reduce focus on global distribution system platforms. The airline is now returning to GDS networks to recover lost corporate business. Investments in cloud technology, new distribution capabilities, and sales opportunities in ancillary services, hotel IT, and airline IT further solidify Sabre's customer base, reinforcing its competitive advantages. Ongoing uncertainty related to US trade policies, particularly under President Donald Trump, is negatively impacting consumer sentiment and raising inflation expectations, which poses a risk for Sabre's stock. Nevertheless, investors who can navigate the short-term uncertainty and volatility in US policy may find an opportunity in a company that possesses network advantages, efficient scale, and significant switching costs.

Marvell Technology is one of our top picks in the networking semiconductor sector, currently trading at an attractive discount to our $90 fair value estimate. We view Marvell as a long-term leader in artificial intelligence infrastructure, driven by its custom accelerator chip designs for clients such as Amazon and Microsoft, as well as its optical connectivity chips, where it stands out as best in class. This strong positioning is supported by valuable intangible assets in chip design, which we believe will fuel robust long-term growth. As of May 30, Marvell's stock has declined 40% year to date, largely due to market concerns regarding potential share losses in its custom accelerators. We believe these concerns are exaggerated. Marvell's involvement in Amazon's Trainium chips and Microsoft's Maia chips is expected to remain strong, contributing to the company's overall growth. While we anticipate some multi-sourcing with competitors like Alchip or GUC, we consider these firms to be design consultancies rather than full-fledged chip designers like Marvell. We believe Marvell's strong core intellectual property will maintain its status as a preferred supplier for these custom chip clients, even as they engage Alchip for certain production aspects. We do not view multi-sourcing as a concern; rather, we see it as a strategic approach for customers to mitigate vendor lock-in and diversify their supply chains in a constrained supply environment. Our projections are not dependent on Marvell being the sole supplier for these chip programs or securing new contracts, but rather on the growth of the existing programs in which Marvell is involved, which we expect to continue into future generations. We anticipate a positive catalyst for Marvell in June 2025, when the company will host a custom AI chip webinar to provide further insights into its customer engagements and technology. We also expect sustained strong growth through calendar 2025, which should gradually alleviate investor concerns that have impacted the stock.

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, 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 noteworthy. 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 Eversource is undervalued and should not be overlooked by investors. While the company may miss out on much of the excitement surrounding data center growth due to its Northeast service territory, it has numerous investment opportunities that can sustain earnings growth of 6% annually at least through 2028. We feel the market is overlooking this potential. Eversource has significantly reduced its exposure to offshore wind and is projected to generate all its earnings from rate-regulated utilities by 2025. We believe the company can mitigate regulatory challenges in Connecticut by pursuing projects in Massachusetts, where the regulatory environment is more favorable. Additionally, a positive shift in Connecticut's regulatory landscape could provide further earnings and valuation upside.

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 sectors, 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 mix of around 30% in dividends and 50% in share buybacks, highlighting its focus on shareholder value.

In our analysis of China's e-commerce landscape, we express a preference for JD.com, a company with a formidable competitive advantage. It is poised to be a principal beneficiary of the government-subsidized trade-in program for home appliances and electronics. Given the prevailing economic slowdown in China, we project that the government will sustain this program for a minimum of one year. JD.com derives 47% of its total revenue from the electronics and home appliances category. Its comprehensive suite of services, encompassing installation, dismantling, and disposal of outdated appliances, serves as compelling reasons for consumers to choose JD.com for their electronics and appliance purchases. We reiterate our conviction that JD.com will achieve long-term margin expansion, attributable to declining procurement costs and a growing share of high-margin third-party platform transactions.

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 has demonstrated a robust recovery from COVID-19 disruptions. As of the fourth quarter of 2024, the industry's gross gaming revenue reached 79.6% of 2019 levels, 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 the company as a primary beneficiary of the ongoing demand recovery in the region. With the adverse effects of renovation disruptions expected to conclude in the first half of 2025, we anticipate a resurgence in sales growth and margin expansion starting in 2025.

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 demonstrate 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 favorable for its transition to electrification. The increase in sales volume and declining battery costs may 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. Near-term catalysts include strong monthly sales momentum from Galaxy and Zeekr, as well as a recovery in profitability.

We are optimistic about Tongcheng Travel, 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 believe Tongcheng is undervalued compared to Trip.com, primarily because it lacks an ADR secondary listing and has lower brand recognition, even though both companies offer similar domestic travel options. Our fair value estimate suggests a price/earnings ratio of 27 times, while Tongcheng's shares are currently trading at a high-teens P/E. We also note that Tongcheng has limited exposure to international revenue, which is on the rise and is expected to triple its contribution to total revenue, reaching 15% in the next three years; this growth is anticipated to outpace that of Trip.com. Furthermore, we expect Tongcheng to experience operating leverage, as strong revenue growth leading into 2025 should enhance its operating margins.

Budweiser APAC is the leading beer brewer in China by sales value, holding approximately a 40% share in the premium segment. The company boasts a nationwide distribution network and a diverse portfolio of international premium beer brands, supported by the significant 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 in the long term as volume growth stabilizes. We anticipate that the long-term premiumization trend in China's beer sector will persist, despite current sluggish consumer sentiment, due to a favorable competitive environment and shared objectives among major brewers in pursuing price growth over the long term.

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; however, demand for Moutai remains relatively strong. Moutai's unique cultural significance, unparalleled brand image, and exceptional product quality position it well to navigate the current challenges facing baijiu sales. These characteristics also enable it to capitalize on China's beverage premiumization trend in 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 is likely to enhance shareholder returns and boost investor confidence. Our estimated dividend per share for 2025 is CNY 57.44, reflecting the 75% payout ratio.

CNOOC serves as the upstream division of China National Offshore Oil, the third state-owned oil company in China. This positioning makes it the most direct investment opportunity for those looking to gain exposure to China's energy security policy and its long-term objectives for increasing oil supply. The absence of downstream operations has allowed the company to avoid inheriting a large 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. Consequently, we anticipate that the firm will remain profitable in the long term, even with our midcycle Brent oil price forecast set at 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.

Challenging economic conditions in New Zealand, along with structural headwinds affecting the mobile and IT sectors due to budget constraints from government and enterprise customers, have revealed Spark NZ’s inflated cost base. While earnings are currently cyclically weak, they are expected to recover as the New Zealand economy improves. Additionally, there is likely to be a renewed emphasis on cost management, with achievable cost-reduction targets. Based on our earnings and dividend forecasts, we believe the balance sheet will remain stable and may improve through asset sales. However, none of this is reflected in the current share price, nor in Spark’s competitive mobile business. This is underpinned by a stable and rational mobile industry structure, with Spark holding the leading market share.

Domino's Pizza is a high-quality company with significant growth potential. While there has been recent softness in same-store sales growth and a slower pace of store openings, this does not diminish the vast growth opportunities within the company's global network. We project a 20% compound annual growth rate in earnings over the next five years. A substantial portion of our long-term earnings growth forecast is dependent on franchisees launching new stores. The profitability of franchise locations and the demand for new stores are closely linked to same-store sales growth, which we anticipate will rebound starting in fiscal 2026, alongside a broader recovery in the fast-food sector.

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; the new management team will need to demonstrate its capabilities; and 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 of the automotive spare parts industry, and Bapcor is well-positioned to navigate the gradual technological transition effectively.

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 foreign-student caps are temporary and a response to cyclical concerns. The pricing outlook is 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.

The market tends to undervalue Endeavour's long-term earnings outlook, which is inherently defensive. Consumers are opting for more affordable options and purchasing in bulk for at-home liquor consumption. We believe that the current performance in liquor retailing is indicative of a cyclically weak trading environment, primarily due to heightened cost-of-living pressures. Nevertheless, we anticipate that liquor sales momentum will improve, with sales growth expected to stabilize at durable levels in the mid-single digits starting from fiscal 2026. Over the long term, we view liquor demand as defensive, supported by factors such as inflation, population growth, and a structural shift towards premiumization. Additionally, in the smaller hotels segment, earnings have shown resilience despite the recent implementation of gaming regulations in Victoria.

Daiichi Life stands to gain significantly from an increase in Japanese long-term bond yields, and we currently see substantial potential for growth in our cash flow-derived fair value.

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.

Daiichi Sankyo is a global leader in antibody-drug conjugates (ADCs) for cancer treatment. Its flagship product, Enhertu, is a HER2-targeting ADC that has become a transformative therapy for certain HER2-expressing cancers. Additionally, Daiichi has a pipeline of other ADC candidates targeting various cancers. We consider the shares to be modestly undervalued based on our cautious evaluation of the currently available clinical data, although we anticipate share price volatility due to the company's reliance on future clinical readouts. In September, a disappointing result for Dato-DXd (a TROP2-targeting ADC) in second-line lung cancer negatively impacted Daiichi’s near-term growth outlook. Nevertheless, we believe the company will continue to experience strong growth, primarily driven by Enhertu.

Yaskawa, a wide-moat company, is the largest global supplier of servo motors, holding approximately 20% of the market share, and ranks among the Big Four industrial robot manufacturers. We project that Yaskawa's earnings from 2024 to 2028 will grow at a compound annual growth rate of 5.5%, primarily fueled by the increasing demand for robotics products amid ongoing labor shortages. The company is evolving from a traditional product manufacturer to a comprehensive solution provider. We believe Yaskawa's shares are undervalued, as the market appears overly focused on competition from local rivals, particularly in China. Nevertheless, we anticipate that Yaskawa will maintain its market share in critical sectors such as automotive and semiconductor manufacturing, bolstered by its significant intangible assets, including a long-standing reputation and partnerships with leading customers, as well as the high switching costs faced by its clients.

We believe that Hitachi Construction Machinery shares are currently undervalued, as the market is overly focused on the challenges facing the North American business, which is experiencing sluggish demand due to high interest rates and ongoing restructuring efforts. However, the temporary decline in new machine sales is a natural aspect of the cyclical nature of capital investment in the construction and mining sectors. This situation will eventually be resolved, as the growing population and the resulting increased demand for buildings, infrastructure, and energy will continue to drive the need for construction and mining equipment. We believe that Hitachi Construction Machinery will benefit from this trend, thanks to its established track record and enhanced aftermarket services. In the long term, the company is poised for stable growth, primarily fueled by its mining and value chain business, bolstered by its strong reputation and improved parts and service support resulting from recent acquisitions.

China Overseas Land & Investment (COLI), with its significant presence in Tier 1 and Tier 2 cities in China, is well-positioned to capitalize on the ongoing recovery in homebuyer sentiment. We anticipate that demand for residential properties in wealthier cities will prove to be more resilient, resulting in stronger contracted sales growth for COLI compared to its smaller competitors. Furthermore, we believe that high average selling prices, combined with effective cost control measures, will allow COLI to sustain healthy profit margins and a solid balance sheet over the long term. In our opinion, investors have not fully recognized COLI's potential for consistent top-line growth and margin enhancement, as the company continues to build a strong land bank through acquisitions in major cities.

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.

Nice is the global leader in cloud-based contact center as a service (CCaaS) software, holding approximately 15% market share. We believe the market is overly pessimistic regarding cloud revenue growth, which has led to the stock’s valuation multiples declining to multiyear lows. However, we view this as a timing issue and anticipate a recovery in cloud revenue growth. The industry has shifted its focus from small and medium-sized businesses to large enterprises, a transition that positions Nice favorably. Although Nice has secured numerous large enterprise deals, the conversion from bookings to revenue has been gradual due to the complexities involved in implementing software at large enterprises and the additional delays in decision-making as companies develop their artificial intelligence strategies. We consider this a temporary challenge. We expect robust secular drivers to emerge, including the growing penetration of CCaaS in the market and the advantages of AI for CCaaS providers, as customers seek to reduce their largest expense: labor costs.

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 narrow-moat Taiyo Yuden presents 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.

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

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 more than 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 per day and a Brent 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 that 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 company of above-average quality at a discounted price. Aurizon primarily transports coking coal from globally competitive mines, and a commercially viable alternative to coking coal for steel production remains distant.

We are adding Auckland International Airport, which has a wide economic moat, to our Best Ideas list. A significant capital expenditure for major projects is anticipated for Auckland Airport. Additionally, aeronautical charges are expected to decrease starting in fiscal 2026 due to a regulatory decision. Nevertheless, we consider the scale of the capital investment plan to be reasonable and well-supported by the airport's balance sheet. This plan aligns with those of other global airports and demonstrates appropriate cost management. We anticipate that Auckland International will yield a reasonable return on capital investment, as the proposed airport charges are competitive compared to other airports both globally and domestically. We believe the market is incorrectly pricing in lower returns on regulated expenditures or reflecting perceived weaknesses in unregulated sectors, such as retail and parking. This situation creates an attractive entry point for investors into a rare, high-quality, essential infrastructure asset.

Dexus boasts a high-quality office portfolio, enhanced by the growing trend toward hybrid working. Most of its office towers are classified as premium or A-grade and are strategically 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 under-rented, 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 8.81 per security as of December 31, 2024, and offers a fiscal 2025 distribution yield of 5%. This presents a favorable margin of safety for investors as they await recovery.

We consider SiteMinder to be a strong industry leader with a substantial and 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.

Narrow-moat APA Group is a high-quality company offering an attractive yield. We anticipate strong near-term revenue growth, driven by elevated inflation that enhances Consumer Price Index-linked tariffs and the completion of ongoing developments. 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 will 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 is expected to lower carbon emissions and operating costs for these mines.

Kering, the second-largest luxury group by revenue, is currently trading at an appealing discount. While the momentum of its 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.

Renault ranks approximately 12th globally in vehicle sales, with 2.3 million units sold annually. Despite this position, the company has successfully implemented a transformation strategy that allows it to achieve operating margins comparable to larger competitors. Currently, Renault operates at 90% capacity. The company benefits from a favorable mix, including the rapidly growing, higher-margin Dacia brand and an increasing proportion of C models, moving away from its historically dominant B model portfolio. Additionally, Renault is gradually reducing its shareholding in Nissan, which provides a cash buffer and potential upside if the entire stake is acquired. Notably, Renault has no exposure to US import tariffs.

LVMH is the leading luxury group globally by revenue, and its significant competitive advantage makes it appealing during industry-wide selloffs related to tariffs. The direct effects of tariffs on the luxury sector are minimal, thanks to long-term pricing power and high gross margins. While the economic repercussions of tariffs pose a greater risk, the luxury market has historically shown resilience despite cyclical fluctuations, characterized by no technical obsolescence, robust pricing power, and substantial entry barriers. LVMH boasts some of the most prestigious brands in the industry, along with unparalleled scale and financial strength.

We are adding Reckitt Benckiser to our Best Ideas list, anticipating approximately 20% upside for this wide-moat company. Our investment thesis focuses on the robust fundamentals of its core business, which boasts peer-leading gross margins. Additionally, we are optimistic about its transformation journey, particularly in reducing the operating cost base that has inflated over the past five years. We also expect a favorable resolution to the ongoing litigation concerning the infant nutrition business in the US. Further details can be found in our Stock Pitch dated December 5, 2024.

We believe that investor confidence in the industry is currently low due to the demand reset following the COVID-19 pandemic. However, we are optimistic about the industry's recovery, and we see Diageo as well-positioned to benefit from long-term trends, such as the rising consumption of spirits and the shift towards premium products.

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. However, we believe that the strategic plan in place will yield financial benefits, allowing the company to reinstate its dividend.

We have recently upgraded Philips' moat to wide, recognizing its leadership in imaging and image-guided therapies. The company's history is mixed, marked by several self-inflicted setbacks that have damaged its reputation and eroded 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 positively. Our valuation indicates that Philips trades at a discount compared to larger competitors 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 present. A focus on profitability is crucial. The company's operating margins have been severely impacted by the sleep care challenges, along with substantial component sourcing difficulties and margin compression in imaging. Currently, Philips significantly trails its imaging peers in profitability, but we anticipate that the company will begin to close this gap, though it may not fully achieve parity.

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 believe that Melrose, with its wide economic moat, is an attractive investment opportunity as it currently trades at approximately a 65% discount to our fair value estimate of GBX 800. Melrose Industries, through its subsidiary GKN Aerospace, is a prominent supplier of engine and structural components, with 70% of its revenue derived from long-term contracts where it serves as the sole-source provider. In the engine segment, the company boasts a well-diversified portfolio across both narrow-body and wide-body aircraft, functioning as a Tier 1 supplier with established positions on 90% of active engines, and engaging in risk and revenue-sharing partnerships for 74% of these engines. The company maintains long-term partnerships with all major engine original equipment manufacturers, including Pratt & Whitney, GE, Safran, and Rolls-Royce. With its RRSP contracts, Melrose is well-positioned to capitalize on the recovery of the civil aerospace sector post-pandemic and the substantial growth anticipated in the engine aftermarket. Despite the pandemic's challenges, air travel has demonstrated resilience, particularly in the leisure segment, alongside a rising demand for narrow-body aircraft. By 2023, global flight hours had returned to 2019 levels and are projected to grow at an average rate of 8% throughout our forecast period. Aerospace manufacturers have ramped up production efforts, and we expect this trend to persist in the long term to meet the soaring demand for aircraft and engines, a situation exacerbated by a shortfall of approximately 2,500 aircraft due to the pandemic and issues surrounding the Boeing 737 MAX. By 2029, we anticipate that 57% of the engine segment's future profits will be derived from the aftermarket, up from an estimated 53% in 2024. While the majority of GKN's portfolio consists of non-rotating parts that last the entire lifespan of an engine, the RRSP contracts entitle the company to aftermarket sales generated by its partners. Furthermore, profit growth in the engine division is expected to be bolstered by a doubling of repair service sales by 2026 and enhanced defense partnerships, particularly with the Swedish Gripen and F-35 jets. Lastly, we foresee the structures division also benefiting from positive trends in both civil and defense markets, along with improved profitability as GKN restructures its portfolio and exits unprofitable contracts.

Cyclical rather than structural weakness has created a buying opportunity in wide-moat Spirax, presenting approximately 60% upside from current levels. Analyzing fiscal 2024 results between the first and second halves indicates that the business is on track to achieve 250 basis points of EBIT margin expansion in the medium term, driven by a recovery in biopharma end markets. This recovery supports our projected 9% EPS compound annual growth rate through 2028. The shares are currently trading at 24 times depressed earnings, a conservative valuation for a company that has historically grown at about twice the rate of global industrial production and possesses a strong competitive moat. Additionally, valuation multiples are significantly below their long-term average.

We find Rentokil to be an attractive investment opportunity, as it is currently trading at approximately a 30% discount to our fair value estimate of GBX 490. Our narrow moat rating reflects the company's cost advantage, stemming from its superior operational scale and route density, which enable it to distribute fixed costs over a larger revenue base. The stock has faced challenges due to inadequate integration following the 2022 acquisition of Terminix, which positioned Rentokil as the largest pest control firm in the United States. This poor execution, along with issues in employee and customer retention, has adversely impacted lead generation and organic sales growth. Nevertheless, margins have improved due to increased route density. Furthermore, retention metrics showed improvement in 2024, bolstering our confidence that Rentokil can revitalize its organic growth and leverage its regional scale in the US over the next five years.

We anticipate a compound annual growth rate of 10% for Veolia's earnings per share and dividend from 2023 to 2028. This projection represents the second-highest EPS growth and the highest dividend growth within our coverage. The expected earnings growth 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.

Rheinmetall, a company with a wide economic moat, generates 80% of its revenue from the defense sector, boasting a portfolio that aligns closely with NATO priorities, particularly in artillery, armored vehicles, and air defense. It is recognized as the world's largest fully vertically integrated ammunition producer. The rise in global security threats is driving growth in the defense market, especially in Europe, where military budgets have historically lagged since the Cold War. In light of increasing geopolitical tensions, potential U.S. disengagement, and pressure from Washington, we anticipate that European defense spending will increase from 2.2% of GDP to 3.1% by 2029, and further to 3.5% by 2032. NATO is expected to formalize a new defense spending target in June, with indications suggesting a range of 3% to 3.5% of GDP by 2030. Additionally, EU proposals to relax fiscal rules and unlock up to EUR 800 billion in funding could enable participating countries to elevate defense spending to 3.5% of GDP by 2029. This evolving landscape presents a significant opportunity for Rheinmetall, given its well-diversified geographical presence and product offerings. As Germany's leading defense contractor, Rheinmetall is poised to benefit from a substantial shift in Germany's defense spending, following parliamentary approval of a proposal to exempt defense spending above 1% of GDP from debt limits, effectively eliminating any cap on future military budgets. We project that Germany’s defense spending will reach 3.5% by 2029-30, averaging around 3% in the midterm. The company's weapons and ammunition division is expected to see continued sales growth due to the ongoing Russia-Ukraine conflict and the necessity to build stockpiles for Ukraine and NATO allies in anticipation of a ceasefire. Rheinmetall aims to ramp up production from 100,000 rounds in 2022 to 1,100,000 by 2027, with the potential to double this target if needed. Furthermore, Rheinmetall's electronics division is anticipated to expand, driven by its involvement in German military digitization and NATO's European Sky Shield Initiative. Beyond Europe, Rheinmetall is strengthening its presence in Australia and expanding its operations in the U.S. The Lynx infantry fighting vehicle is a contender in the U.S. XM30 combat vehicle program, which aims to replace approximately 3,800 M2 Bradleys.

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 and 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 foresee 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 $280, offering long-term investors a solid margin of safety. While we recognize that tariff issues and sluggish manufacturing activity—particularly in Europe—may impact the near-term performance of chipmakers with automotive and industrial sector exposure, we expect NXP and its peers to benefit from a cyclical recovery as conditions improve in the medium term. We do not foresee any structural decline in demand within its core markets. We are particularly impressed by NXP’s significant presence in the automotive sector, which accounts for nearly 50% of its revenue. The company boasts a well-diversified automotive portfolio that includes processors, microcontrollers, and analog components. We believe NXP is well-positioned to capture opportunities in electrification and safety-related automotive products, such as radar and battery management systems. Overall, NXP’s automotive business is closely aligned with the long-term trends of increasing chip content per vehicle, and we feel the market is overly focused on a short-term demand slowdown.

ASM International offers a compelling multiyear growth narrative that positions the company for ongoing success. Investors can anticipate above-average growth over the next decade as semiconductor manufacturing continues to evolve. The industry's transition to new 3D transistor structures is expected to significantly increase demand for atomic layer deposition technology, providing strong support for ASM's advanced solutions. The company has exceptional exposure to leading-edge semiconductor nodes, placing it at the forefront of technological innovation within the industry. Furthermore, ASM is backed by a strong management team that has consistently shown strategic vision and operational excellence in navigating complex market dynamics.

ASML offers a compelling long-term investment thesis. It is a high-quality company facing short-term headwinds from its second and third customers, Intel and Samsung, yet it remains strong both technically and operationally. ASML is continuously enhancing its EUV technology and productivity, which is anticipated to benefit its customers. We believe the shares present a favorable risk-reward ratio over the next three years, as the current share price appears to reflect excessive negativity. The company's outstanding management team has consistently shown strategic foresight and operational excellence, further bolstering its market position and future prospects.

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 tariffs, excess inventory, competitive pricing among original equipment manufacturers, and potentially slower growth than anticipated. Despite Infineon’s leadership in power semiconductors for EVs, we anticipate a gradual increase in chip content per vehicle 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 navigate tariff negotiations and 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 high customer switching costs 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 expect Infineon to emerge as a leader in automotive and industrial SiC applications, capable of efficiently utilizing its facilities.

Besi is positioned as a growth stock with a promising outlook over the next decade. We project a 15% compound annual growth rate (CAGR) in revenue over the next 10 years, driven by the rising significance of advanced packaging in the industry. The company consistently achieves the highest gross margins in the semiconductor equipment sector, ranging from 60% to 65%, even during cyclical downturns, which enhances its resilience throughout market cycles. Additionally, the strength of the management team and operational leadership further supports its growth potential.

Adyen boasts a Morningstar Economic Moat Rating of Wide and an Exemplary Capital Allocation Rating. The company features a scalable business model, operates with no debt, maintains wide operating margins, and exhibits strong growth potential. Recently, shares have declined due to the global tariff war and a shift in investor focus from technology to defensive sectors. This current price level may present an attractive entry point for investors aiming to expand their presence in the payment-services industry.

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 capitalizes on commodity price volatility through its trading operations.

Domino's Pizza is a high-quality company with significant growth potential. While there has been recent softness in same-store sales growth and a slower pace of store openings, this does not diminish the vast growth opportunities within the company's global network. We project a 20% compound annual growth rate in earnings over the next five years. A substantial portion of our long-term earnings growth forecast is dependent on franchisees launching new stores. The profitability of franchise locations and the demand for new stores are closely linked to same-store sales growth, which we anticipate will rebound starting in fiscal 2026, alongside a broader recovery in the fast-food sector.

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; the new management team will need to demonstrate its capabilities; and 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 of the automotive spare parts industry, and Bapcor is well-positioned to navigate the gradual technological transition effectively.

The market tends to undervalue Endeavour's long-term earnings outlook, which is inherently defensive. Consumers are opting for more affordable options and purchasing in bulk for at-home liquor consumption. We believe that the current performance in liquor retailing is indicative of a cyclically weak trading environment, primarily due to heightened cost-of-living pressures. Nevertheless, we anticipate that liquor sales momentum will improve, with sales growth expected to stabilize at durable levels in the mid-single digits starting from fiscal 2026. Over the long term, we view liquor demand as defensive, supported by factors such as inflation, population growth, and a structural shift towards premiumization. Additionally, in the smaller hotels segment, earnings have shown resilience despite the recent implementation of gaming regulations in Victoria.