I make no secret of the fact that I pay very close attention to what the big private equity (PE) and alternative asset managers are doing with their cash. I am frankly shocked that more people are not paying attention to what the giants of alternative investing, like KKR & Co. Inc. (KKR), Blackstone Inc. (BX), Apollo Global Management Inc. (APO), Carlyle Group Inc. (CG), and other leading alternative investment firms, are doing.
And right now, they are telling us we should all be investing right here…
It is not just the fact that these PE giants have stellar track records, although that is certainly part of the equation. One of the best-kept stock-picking secrets is that private equity firms do not just excel at buyouts—their public equity portfolios tend to be top performers as well.
I have stolen as many wildly profitable ideas from Leonard Green and Partners and Apollo as I have from Seth Klarman and Jeffery Smith of Starboard Value.
The other reason I pay close attention to the leading private investment firms is that they have boots on the ground all over the world. Employees of these firms are talking to corporate executives and looking under the hood at companies everywhere from Baltimore to Bangladesh and everywhere in between.
This allows the big alternative asset managers to form macroeconomic opinions on data and inputs most economists do not see.
By far, the private equity macroeconomist that makes the most of the collected information is Henry McVey of KKR. Mr. McVey is not only the head of global macro, balance sheet, and risk at the firm but also the chief investment officer of the KKR Balance Sheet investment portfolio.
The firm invested billions of its capital based on Mr. McVey’s macroeconomic insights, and there is a good reason for it: I have been reading his quarterly macro-outlooks for years, and they have been a road map through the last several years of economic and geopolitical turmoil.
Thanks to McVey’s outlooks, I have been able to sharpen my own macro-outlook and combine that with my valuation and fundamental analysis to steer through much of the madness of the past few years. In his 2023 initial outlook piece released as the year got underway, McVey reiterated a common theme of the past few years. He favors companies that are generating increasing cash flows that can be used to increase dividends.
He is not necessarily looking to own the highest overall yielding company, but rather for those that can grow their payouts at a high rate for extended periods of time.
I used McVey’s criteria to build a list of stocks, and then put on my value hat and looked for companies that fit the theme—undervalued, with a wide margin of safety in their financial statements.
One of the first to come up is Comcast Corp. (CMCSA). I hear all the hollering about how horrible Comcast is and how rotten customer service can be. But I am a Comcast customer myself—I am getting older, so I still have cable as I find it far more convenient than the cord-cutting services—and other than occasional minor problems, I am quite satisfied.
I have the highest speed internet connection Comcast makes available, so all in all, I am a pretty satisfied Comcast customer.
While there is a lot of talk about cord-cutting, the truth is that for most Americans, access to a fixed-line internet service is only available from phone companies and cable companies.
For almost half of the country, that cable company is Comcast.
Cable companies, including Comcast, have a significant advantage over phone companies, having led national expansion of high-speed internet by installing fiber networks back in the late 1990s and early 2000s.
Phone companies are trying to roll something similar out now. However, the high cost of running fiber to homes is one reason that services like Verizon Communications Inc. (VZ) with their Fios network have yet to be able to compete on either price or speed.
Looking at free cash flow-based valuations, I can use some fairly conservative projections and come up with a valuation for Comcast of twice its current stock price. And if results come up within a horseshoe or hand grenade of Wall Street expectations for 2023 profits, the stock should gain 50% or more this year.
Comcast shares yield about 2.8% right now—but more importantly, free cash flow has been growing by 13% over the past five years, and the dividend has been boosted by 12.8% a year.
The free cash and dividend growth story should be big in 2023, so we will revisit this theme later with some more stocks that fit McVey’s criteria and pass my analysis.
I would be remiss if I did not point out two more things about KKR’s 2023 outlook…
First, many free cash flow and dividend growth stocks are banks that need just a little more selling pressure to qualify for my The 20% Letter portfolio. To learn more about that investment service, click here or see below.
McVey also recently mentioned that small-cap stocks are as cheap as they have been since 1990, which is an excellent reason to consider my newest service, The 2023 Turnaround Project. You can see all the details of how this service could have your portfolio beat the market by double-digits right here.