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By Leslie P. Norton

It’s time for the rubber to meet the road. In the latest installment of Barron’s annual investment Roundtable, five of our panel-ists give—and defend—their views on spe-cific stocks and other investments.The Roundtable members spend half of their daylong meeting each January pro-posing stocks, bonds, and funds that they believe will race ahead or fall on their faces, and this year was no different. There was a clutch of compelling picks, some persua-sive pans, and even what one of our new-est panelists views as a couple of likely 10-baggers.Weighing in below is Rupal J. Bhansali of Ariel Investments.

Barron’s: Can you share some of your picks, Rupal?Rupal J. Bhansali: Over the next decade, equity returns will be challenged. Divi-dends will play a far bigger role, so my picks are high dividend yielders, with the potential for dividend growth. All are in-ternational stocks, which speaks to the U.S. market being very rich. And with market returns hard to come by, inves-tors will have to look for absolute return. I started my career at the hedge fund Soros and have always thought about the long and short side of a thesis, so I thought I might talk about some stocks that I would personally short.

Great. Let’s start with a stock you own.Bhansali: Subaru [FUJHY] is in the auto sector, which is extremely out of favor, but the company is doing very well. Auto sales are peaking, and there is a trend toward low combustion-engine-oriented compa-

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Time to Short Apple, Says Rupal Bhansali. Yes, Short Apple.

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nies like Tesla. However, Subaru is one of the lowest-cost producers of the types of cars it sells, and yet one of the most prof-itable, with 9% margins. People focus on the peak in car-sales volumes, but fail to appreciate that the value of the car -- or average selling price -- is increasing as we see a shift from cars to sport utility vehi-cles, which tend to cost more. Therefore, the economics are far better.Subaru is growing revenue, partly through upgrading existing customers to the high-er-priced seven-seater Ascent, and partly because their cars are taking more mar-ket share -- currently roughly 4% -- in this country. The stock trades at nine times next year’s earnings, has a 5.4% dividend yield, and 30% cash-to-market cap.

What else are you finding?Bhansali: Baidu [BIDU] is more opportu-nistic. Baidu is the Google of China. The stock fell 50% from its 2018 high because the [Chinese] digital-advertising market became “TikTok’d” when [TikTok owner] ByteDance introduced a lot of ad inventory amid an industry slowdown. The bear case has been that so much of search in China is done in apps, which is fair. It’s not dif-ferent, though, than how we search for a flight within Expedia or certain products on Amazon, but when you don’t know what you are looking for, you still go to Google or Bing. Internet penetration itself is very low in China, and smartphone broadband penetration will cause greater usage.Baidu also owns a stake in iQIYI [IQ], the Netflix of China, and a growing news-feed business. Adjusting for net cash and a publicly traded stake in Trip.com Group [TCOM], Baidu trades at about 14 times next year’s earnings, which is very low, with consensus expectations calling for EPS to rebound to more than 25% growth in the next two years.

Anything else in China?Bhansali: China Mobile [CHL] is the dominant wireless franchise, making tons of money, and completely undervalued. We can’t do without our cellphones, which con-stitute the bulk of the company’s revenue. China Mobile has 900 million subscribers, and telecom is a scale business.

This is a repeat from last year. The American depositary receipt is down 12% over the past year. Why do you still like it?Bhansali: There have been tremendous headwinds for a variety of one-off reasons. Several regulatory measures kept a lid on average revenue per user, even as usage rose, including directives to lower prices across regions in China, and China Mo-bile’s rapid market-share gains in fixed

line caused competitors to cut prices ag-gressively in mobile services to retain share there. But monthly cellphone prices in China are amazingly low; there’s oppor-tunity to upsell consumers to higher data packages. As they build out fiberoptics for internet broadband, it will be a new and growing revenue stream. The stock trades at 11 times earnings, with a 4.5% dividend yield, and it has a net cash balance sheet despite its investments, which will be an important attribute as markets start to price in increasing credit risk.

What else?Bhansali: GlaxoSmithKline [GSK] con-tinues to do well. Glaxo has a respiratory franchise dealing with asthma. They also have an oligopolistic franchise in vaccines -- a way to play the higher birth rates in emerging markets, without the risk of emerging markets. They are coming up with vaccines for aging people: A commit-tee that advises the Centers for Disease Control and Prevention has recommended Glaxo’s Shingrix as the preferred vaccine to treat shingles, which affects those older than 50. I call that bankable demand. I don’t have to worry about the economy, in-terest rates, or disruption.And while consumer staples are very overvalued, consumer businesses within pharma companies, including Glaxo, are doing extremely well, yet aren’t valued commensurately. You pay about 15 times forward earnings for Glaxo and get a 4.4% dividend yield.

What’s earnings growth like?Bhansali: It’s growing earnings at 7% to 8%, which is very healthy for a multina-tional megacap -- and it’s mostly organic, an important differentiator.

Let’s hear your shorts.Bhansali: The caveat is you have to be careful. Softbank [SFTBY] is the poster child of the excesses in the venture-capital, private-equity, and credit markets gone wrong, with no checks and balances. What started as a person investing in great busi-ness models -- Alibaba, an example -- has pivoted, sadly, to investing in buzz models, not business models. That’s the beginning of the end.This company has invested in WeWork and Sprint -- concepts, not companies, that don’t have a viable path to profitability. The best short tends to be a business-model short. And if you have financial leverage on top, that can be a house of cards. Soft-bank epitomizes these risks. The second company is Apple.

What’s your concern about one of the most widely held stocks?Bhansali: Apple is viewed as a technology company, but it is actually a consumer-elec-tronics company. They can have either a hit or a miss product, and that has enor-mous implications for revenue. The iPhone was an iconic, revolutionary smartphone. Today, it is no longer as competitively ad-vantaged and, in fact, disadvantaged on many fronts and trying to play catch-up. For its pivot to services, iPhone sales mat-ter. And in the bulk of the services, they are competing against well-endowed com-panies -- Spotify on music and Netflix, Am-azon, and Disney on content. They neither have content nor a first-mover advantage. The fact that they are spending $6 billion to build a content library to keep [their] consumer tells me how difficult the core business is.Think about [Apple] as a blue chip of yes-terday, as opposed to a blue chip of to-morrow -- the worst kind of investment because all the good news is priced into the stock, while the bad news is not.

What else is worth avoiding?Bhansali: Netflix [NFLX] is viewed as Teflon, but the stock is not factoring in the competitive risks today. The definition of a franchise is one that can raise prices if costs go up. Netflix’s costs are going up, but it cannot raise prices, due to increasing competition, which eats into profitability. In fact, it will have to lower prices because Disney has just said they will offer the ser-vice at a much lower price point. This is the beginning of the end of that franchise. And the international opportunity is overrated.

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Most [people abroad] prefer to consume local content, and the local companies are extremely strong, which is why Bollywood is No. 2 to Hollywood. Netflix also has a lot of debt -- a recipe for disaster. Financial leverage on top of operating leverage can become a death spiral.

What’s your last short idea?Bhansali: Global Payments [GPN]. We’ve heard about the transition from cash to card, and a lot of dollars have flowed into that theme. This company has been quite acquisitive, which has allowed the stock to perform extremely well. But this is a below-investment-grade company, not be-cause of its debt/Ebitda level, which is just 2.5 times, but because the rating agencies have concerns about the business model.

While the company is trying to transi-tion to the digital-payments world -- and the market believes it will because they

have acquired software companies -- his-tory shows that when you come up with a next-generation payments platform, you want to have a clean slate and not be en-cumbered by legacy technologies, which is what this company seems to have acquired, for the most part.At seven times revenue and 26 times en-terprise value/non-GAAP net operating profit after tax, or Nopat, you need very high growth to justify that valuation. Plus, there’s a big divergence between GAAP [37 times] and non-GAAP Nopat, where companies are shifting expenses below the line so it looks like they are making more money than they do.

Thanks, Rupal. n

BARRON'S Roundtable: RJB 2020 Stock Picks (EPRINT) ©1/20 (exp 7/21/20) AI-568