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MS Global Franchise Fund's Top 5 Buys in 3rd Quarter

- By James Li

The MS Global Franchise Fund (Trades, Portfolio), part of Morgan Stanley (MS), disclosed this week its top five buys for the third quarter included increased bets in two companies and three new holdings.

Managing a portfolio of 31 stocks, the nine-person team follows a distinct and disciplined investment process based on bottom-up stock selection. The fund seeks high-quality companies with high and sustainable returns on invested capital, driven by recurring revenues, high gross margins and low capital intensity. For the quarter, the fund's two largest position boosts were Baxter International Inc. (BAX) and Reckitt Benckiser Group PLC (RB.L), while the three new holdings were Clorox Co. (CLX), Church & Dwight Co. Inc. (CHD) and Becton, Dickinson & Co. (BDX).


Having established an 81,262-share stake in Baxter in the second quarter, the fund added 398,838 shares for an average price of $74.18 per share, boosting the position 490.81%. The fund increased its equity portfolio 2.38% with this transaction.


The Deerfield, Illinois-based medical products company provides renal and hospital products such as infusion systems, therapies and surgical products. GuruFocus ranks the company's profitability 6 out of 10: while profit margins are outperforming over 60% of global competitors, Baxter's three-year revenue growth rate of -1% underperforms 69% of global medical instruments companies. The website also warns Baxter's profit margins have contracted over the past five years.


Despite declining margins, Baxter's return on invested capital of 11.94% exceeds its weighted average cost of capital, suggesting value creation. The company's financial strength ranks a solid 7 out of 10 on strong Piotroski F and Altman Z scores.


Third Point manager Daniel Loeb (Trades, Portfolio) owns 36 million shares of Baxter, his largest holding in terms of portfolio weight. Other gurus with holdings in Baxter include Bill Nygren (Trades, Portfolio) and the Vanguard Health Care Fund (Trades, Portfolio).

Reckitt Benckiser

The fund added 189,565 shares of Reckitt Benckiser, a U.K.-based consumer health and hygiene company. Shares averaged 66.43 British pounds ($85.25) during the quarter; the fund increased its equity portfolio 1.34% with this transaction.


Reckitt Benckiser manufactures and sells branded products like Lysol, a disinfectant, and Mucinex, an oral treatment for cold and flu symptoms. GuruFocus ranks the company's profitability 8 out of 10 on several positive indicators, which include expanding profit margins, consistent revenue growth and a return on equity that outperforms 97% of global competitors.


Other gurus with holdings in Reckitt Benckiser include David Herro (Trades, Portfolio) and the Invesco European Growth Fund (Trades, Portfolio).


The fund invested in 94,852 shares of Clorox for an average price of $142.06 per share, giving the holding 1.10% equity portfolio space.


The Oakland, California-based company sells a wide variety of household products through grocery stores, e-commerce channels and medical supply distributors. The company's profitability ranks 7 out of 10 on several positive indicators, which include net profit margins near a 10-year high of 13.59%. Even though the company's three-year revenue growth rate ranks just near the industry median of 2.70%, GuruFocus ranks Clorox's business predictability four stars out of five on strong and consistent revenue and earnings growth over the past 10 years.


Church & Dwight

The fund invested in 236,472 shares of Church & Dwight for an average price of $56.55 per share, giving the position 1.08% equity portfolio space.


The Ewing, New Jersey-based company manufactures and markets personal care products under brands like Oxiclean, Spinbrush, First Response and Trojan. GuruFocus ranks the baking soda producer's business predictability a perfect five stars. Other factors contributing to a profitability rank of 8 include expanding profit margins and a return on equity that outperforms 94% of global household and personal products companies.


Church & Dwight is listed as an undervalued predictable company as of Wednesday. Other gurus riding the company's strong profitability and value potential include Ron Baron (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio).

Becton, Dickinson and Co.

The fund invested in 51,244 shares of Becton, Dickinson and Co. for an average price of $252.49, giving the position 1.03% equity portfolio weight.


Despite declining profit margins, the Franklin Lakes, New Jersey-based medical supplies company's profitability still ranks 8 out of 10, primarily due to a 4.5-star business predictability rank.

Disclosure: No positions.

Read more here:

  • MS Global Franchise Fund Buys 1, Sells 4 in 2nd Quarter
  • So, Baking Soda?
  • Glenn Greenberg's Top 4 New Buys in 3rd Quarter

This article first appeared on GuruFocus.