Here's how Saira Malik, up 20% this year, picks stocks

Saira Malik, who heads global equity portfolio management at TIAA Global Asset Management, a retirement fund with more than $860 billion in assets, sat down with CNBC's Mike Santoli for an in-depth interview on stock selection, portfolio management and developing long-term strategies.

"What we're trying to do is take out some of the macro risk, by trying to get rid of those factors that can really sway portfolios," said Malik, pointing to the Brexit vote as an example of when investors overreact to headlines and sell too soon.

"We're trying to make portfolios where we can see through that kind of noise, stick to our investment thesis and own those companies throughout those periods of volatility, because we know that those companies have strong fundamentals," she added.

During the interview, Malik shares her investment thesis behind her stock picks for CNBC PRO's "Platinum Portfolio" competition, which have placed her in first place, up more than 20 percent this year. Other topics include:

  • How to navigate the volatility in the market.
  • Emerging markets and how to value them.
  • Her thoughts on Apple and what the tech behemoth needs to advance.
  • Her picks for the second half of the year, and why she chose those names.

PRO subscribers can also read the entire transcript of the exclusive interview below.

MIKE SANTOLI:

Saira Malik is an investor known for her acuity as a money manager and a stock picker. She's currently the head of global equity portfolio management at TIAA Global Asset Management, a financial services firm with more than $860 billion in assets under management. She was formerly the managing director of active equity research at TIAA, and has been with the company since 2003.

Prior to that, she was a vice president at JPMorgan's Asset Management Group, where she managed portfolios for Small Cap Growth Fund. Saira's also a member of CNBC PRO's "Platinum Portfolio" competition, where she's leading the way right now with a gain of more than 20 percent, so far this year. She joins us now here at the Nasdaq to discuss her investment approach, market outlook and favorite stocks right now. Saira, thank you very much for being with us here.

SAIRA MALIK:

Thanks for having me.

MIKE SANTOLI:

So, we went through your basic background there, but I'm interested to hear about I guess, some of the principles that drive your investment approach at TIAA right now. Obviously, it's a firm with lots of retirement assets, or your long-term investors. But how do you, I guess, strive for bits of outperforming in the equity side of things?

SAIRA MALIK:

Well, we have this team of seasoned equity research analysts and portfolio managers, and we're building bottom up portfolios, and really looking for similar characteristics across the board. We like companies that have strong free cash flow, identifiable catalysts, cost-cutting opportunities, tail winds in their industries, and where we have an investment edge. And when we find those companies across the globe, that's how we build our portfolios.

MIKE SANTOLI:

So, you say, bottom up. That means that you're not necessarily starting out with some kind of broad view of the global macro economy, and deciding therefore, you know, how to play the cycle? You're really looking for company by company, stock by stock?

SAIRA MALIK:

We are. I mean, actually, what we're trying to do is take out some of the macro risk, by trying to get rid of those factors that can really sway portfolios. A recent example would be the Brexit — if investors got too caught up in the Brexit news, they would've been selling right when the Brexit vote occurred, and then looking to buy back right after when the market rebounded. We're trying to make portfolios where we can see through that kind of noise, stick to our investment thesis and own those companies throughout those periods of volatility, because we know that those companies have strong fundamentals.

MIKE SANTOLI:

And, I guess, how broad a net would you cast? So, just take me through the process of screening for companies, and then therefore, drilling down into which ones seem more attractive?

SAIRA MALIK:

Well, I mean, we're looking across the globe, across all kinds of sectors. We like to generally stick to equities in our group, but we do think that equities are still the most attractive asset class out there because of low interest rates and low inflation, and central bank stimulus.

And we're again looking for those companies that have really strong, for example, free cash flows, companies that have business models that can survive throughout a cycle. A great example would be Albemarle. It's in our "Platinum Portfolio" this year, it's been a rocket ship. They dominate their industry, very few global players in the lithium business, industry tail winds, that market's been hot this year because of uses in electric car batteries, in electronics.

They're selling businesses, they sold Chem Metal (PH) recently for proceeds of $3 billion, and paying down debt with those proceeds. So, that's a company that's making some great decisions, that really fits the characteristics of the types of companies that we like to own.

MIKE SANTOLI:

You say that, in general, you do think equities remain somewhat attractive across the board? Or at least relative to other options. Do you think that this is going to be the status quo for a while, in terms of ultra-low interest rates, and all the stimulus, and relatively slow global growth? I mean, how do you navigate that environment?

SAIRA MALIK:

We do see interest rates staying lower for longer. And until we see inflation in wage growth really take off, probably wage growth crossing about 4 percent, that's when we would start to become concerned about the attractiveness of equities and the potential for a recession. We're not seeing that yet, so we think that this could last for quite a few years.

Which keeps equities in the attractive camp. And just looking around the world, we see some interesting pockets even outside of the U.S. Take the European Union as an example, people became very worried about Brexit. But if you take a step back, the EU was really chugging along before we saw the Brexit vote. We had strong ISM data there, which was showing that the country, the region was in expansionary territory. We also had unemployment numbers at a five-year low. And so, beyond Brexit, we think the EU could be interesting. It's trading at 12 times forward earnings, versus the S&P, which is trading at about 18 times forward earnings.

MIKE SANTOLI:

It's interesting, because-- most times when you hear the European Union discussed in economic or financial terms, it's mostly about-- well, obviously, you mentioned-- the Brexit vote, and the risks of-- the monetary union perhaps getting disrupted. But also, you hear about central bank policies-- or you hear about potential bank rescue. So, in other words, these kind of macro stress issues-- but yet, on-- I guess, baseline economic level-- you're saying that basically, it looks okay?

SAIRA MALIK:

We do think it looks okay, from an economic point of view, we actually think there were some strong economic data points coming out of that area. And there's also some companies you can buy there if you're a patient investor. For example, Beskybe (PH), which is a U.K. based company, has a subscription cable business model, which is very repeatable, or Tesco, which is in consumer staples, which is something that consumers will always-- you know, need to have. So, companies like that you can own, and if you're patient, and you can wait, you can wait until the European Union continues to recover, like we were seeing before the Brexit vote.

MIKE SANTOLI:

If you're patient from here on, but of course, events like the-- the market selloff in response to that vote-- I guess, would've given you the opportunity to-- to get these-- these companies at cheaper levels?

SAIRA MALIK:

Yeah, and that's one thing we really advise to investors, is to really take the emotion out of investing. Because when you see these periods where the market breaks, like with the Brexit vote, that's when you need to have your homework done on your companies, and you're ready to buy them, Rather than being afraid. And so, being able to look through that noise, do your analysis, know the companies that you want to own, that's very important. And we've used something like the Brexit vote as an opportunity.

MIKE SANTOLI:

You mentioned that the S&P 500, right now, looks like it's trading roughly, at 18 times forward earnings. It does seem expensive, relative to the rest of the world. Do you think it's a premium that's justified, based on the market dynamics here?

SAIRA MALIK:

We do think the premium is justified, because low interest rates, low wage inflation-- all of that is a positive. We have positive GDP here. We are one of the most attractive developed markets, strong jobs numbers that we saw last week, housing still looks pretty good, in the U.S. All of that we like. And-- we believe, you can find companies, though, in all kinds of areas. For example, energy stocks have done great this year, and a lot of people-- feel like, also, a lot of the high yield and defense-- have also done really well.

But you can still find great consumer staples companies, such as Molson Coors. This company, while it's in consumer staples, which has done well, we're waiting for them to buy the rest of Miller Coors, as they don't already own. When they do that later this year, it'll provide a catalyst for them to cut costs, which we think will come in greater than expectations, and expand their Miller brand in various countries that they're not already strong in.

MIKE SANTOLI:

True. You know, it's interesting, you mentioned that within consumer staples, it's a group that's run so much. One of the reasons-- of course, is because they're perceived as being very stable businesses, and they typically have good dividend yields. Is this a shift that you think we're going to have to contend with for a while, this idea that investors are looking for income through stocks, more than through bonds? In other words, treating stocks almost as a bond substitute? Is that going to continue? Is that a healthy thing?

SAIRA MALIK:

I think as long as the ten year interest rate stays low, people will continue to search for yield, and equities will be the most attractive place to find them.

MIKE SANTOLI:

Yeah? And-- that's okay, that-- you know, you're not necessarily looking at-- big consumer staple companies, because of what's going on at the company? You're just sort of looking at them as a source of income?

SAIRA MALIK:

I think some people are doing that, however, we're always looking at the fundamentals. We think that's very important, because-- as we mentioned earlier, you don't want to just chase these, what we call, macro factors that are diving companies-- because you can get in trouble that way. 'Cause I mean, we're not trying to make a call on the ten year interest rate.

We're trying to find those companies that can do well in any kind of environment. So, something like Molson Coors is a good example, because they have a lot of internal levers going on, buying the rest of the Miller business and cutting costs, which is very positive for them. And as you'll hear from most of our companies, especially the ones in the Platinum Portfolio, they all have company specific themes going on, which will make the stocks hopefully do well over time.

MIKE SANTOLI:

True. It's interesting, you know, so, we just got to the first new high in the S&P 500, in something like 14 months. A lot of people probably-- it didn't feel like it to them, right, 'cause we've been waiting around awhile, and the market's been going sideways. But the specifics underneath the surface of the index have changed quite a bit since then, right? I mean, you talked about those factors that are driving performance? Well, in 2015, it was handful of very large growth stocks. Is it a more democratic market now? Do you think that there are more opportunities to find individual stocks that work at the moment?

SAIRA MALIK:

We actually do. We did recently see that correlations between stocks were starting to go down, which we think is a positive for stock pickers out there. So, we actually are starting to see, this isn't a market that's just being driven, last year for example, by some of these FANG stocks, as people call them, Facebook, Amazon…

The market's being driven a little bit more by stocks with strong fundamentals, and we're really finding ideas across the board in lots of different industries, from cyclicals to defensive companies like Raytheon, and even gaming companies like MGM, all of those look interesting to us. And they're really across the board, all different types of companies.

MIKE SANTOLI:

Is there an area-- I mean, I know this would be a company by company thing, too. But-- are you finding things that seem neglected? Right, I mean, whenever there's a dominant theme, there's something that's being left behind. Is there-- you know, I noticed, for example, that a lot of-- consumer-- cyclical type stocks-- they've been faltering, and people feel like, maybe that's giving us some kind of a signal about the U.S. economy? If not, that would seem to be an opportunity?

SAIRA MALIK:

So, at the end of 2015, when momentum stocks had done so well for a period of years, we really thought cyclicals looked quite undervalued. You know, they've done-- some of them have done all right this year, like an Albemarle, was a great example of a company that we found that looked really undervalued, versus the rest of the market.

We're not seeing so much of just one area of the market looking extremely cheap right now. So really, for us, it's-- back in that bottom up, stock by stock, do your homework, find something that's mispriced, something like, for example, MGM Grand, we think is just a bit mispriced, because they have a new casino opening up later this year. They're cutting costs faster than people were expecting them to. And we think Las Vegas is improving, and there's a lot of visibility there, because of the conventions business. It's coming back online. So, all of that together, we think, leads to MGM being mispriced. But I wouldn't say that we're making a call on the gaming sector. We're just making a call on MGM.

MIKE SANTOLI:

It's not just about, you know, consumers are going to be throwing their money at gambling, right? Got you. You know, there's another market dynamic that's been dominant for a while, and I wonder how-- it bears on what you do? Which is-- investor flows toward index strategies? So basically, deciding to just passively take whatever the market gives you.

That being said, even though a lot of money has flowed in that direction, it's not necessarily become terribly easy to beat those indexes. So, that's what you try to do. Has that created any-- you know, any effects, or any distortions that you observe?

SAIRA MALIK:

Well, in terms, for TIAA, we have a broad array of offerings, and so, this is also just talking about how can investors diversify well? I mean, as a firm we offered a broad-- we offer a broad index funds, active equity funds, fixed income, real estate-- life cycle funds, and all of that. So, for us-- you know-- whatever investors find attractive, we feel like we can offer them that. And as for active management-- specifically, I think it's the same game it's always been-- which is, you know, you need to be able to beat your benchmark, and if you can do that, you should attract the flows.

MIKE SANTOLI:

Now, on balance-- even though you're not making big macro calls with the portfolio, you have mentioned that you've tilted perhaps a little more defensive for the back half of the year? What's behind that-- that bias, at the moment?

SAIRA MALIK:

So, we started the Platinum Portfolio this year with a bit more of a cyclical bias, because we did see that disconnect between-- cyclically priced stocks, versus momentum stocks. So, we had names such as, Owens Corning, Albemarle, and Avago, which was a bit of a company specific story, and then Molson Coors, which was defensive. So, what we did recently, is we moved it to be more balanced.

We added one more defensive name in there, Raytheon, and we took out Owens Corning, which is a cyclical company. So, the reason we did that is, we just see a lot more volatility going forward. I mean, you saw it with the Brexit vote, you see sort of anything can spook investors these days. You do have a S&P that's at fairly expensive valuation, which we think can persist. But when you're-- when you have markets that are fairly highly priced, anything can make investors nervous. So, we just wanted to take-- move the portfolio to be a bit more balanced between cyclicals and defensives, to make sure that-- we're not overly positioned in one direction, versus the other.

MIKE SANTOLI:

I mean, one of those things that's perpetually able to shock or jar investors a little bit is this sort of changing view of what the Federal Reserve might do, of course. You know, we came into this year, and people thought, three or four interest rate increases, and then it went down to the market expecting zero. And then the Fed trying to say, no, no, it won't be zero. And now, we don't really know where to play that. Is that a game that the typical investor should pay attention to?

SAIRA MALIK:

I think we do have to all be very aware of what the Fed is doing. I mean, it really impacts financials—- it's been tough in different areas of the world this year. So, I mean, if we were looking at, for example, financials right now, we would probably stick to high quality names, something like Wells Fargo, where you know, you can kind of own something that you know is a good quality company—so you can deal with what the Fed is doing. But I mean-- it's-- obviously, I think, a very important thing for investors to keep an eye on.

MIKE SANTOLI:

Another area that has gotten whipped around with that outlook is emerging markets. I mean-- they've been more stable recently, but of course, the early part of this year this idea that the Fed was going to raise interest rates, and the dollar was going to soar in value, and that was going to hurt emerging markets. You had this real chain reaction. Where does it leave you as an investor, looking at that part of the world-- in terms of equities?

SAIRA MALIK:

Yeah, so emerging markets are pretty interesting. I mean, as you've mentioned, they had a really rough period over the last few years, and then they've done-- some of 'em have done really well this year. And-- one thing that's interesting is with the Brexit vote; actually, emerging markets were considered the safe haven. That's because many emerging markets aren't very dependent on the E.U. for imports and exports. So, it really doesn't impact them.

So, if you see more disruption in the European Union, I think emerging markets would be a great place to put your money. For example, Latin America, Brazil, with-- the new politicians in place, it's starting to put some reforms in place, and do much better. And then, as-- the Japanese yen starts to strengthen again, and then we think some of their competitors, like Korea, could actually benefit. So, pockets of strength in the emerging markets, where we find different countries to be very attractive. And usually, it depends on what's going on specifically in that country.

MIKE SANTOLI:

Sure, right, so unlike several years ago, when the emerging markets really were riding just this big commodity boom, it was really a big macro story, and capital flowing in that direction, right?

SAIRA MALIK:

Yeah, I mean, it's probably not a repeat of many years ago, where you're going to see, just all emerging markets do well. But I think you can look for those emerging markets which internally-- where the countries are making some changes, or reforms, and aren't as dependent on some other disruptions going on in the world. And you can look for great companies in those areas.

MIKE SANTOLI:

Sure. Just to drill in a little bit on one of the specific companies that you mentioned, Raytheon. So, a defense contractor-- in particular areas of-- aerospace, and-- and what not. What are the-- specific dynamics driving that call?

SAIRA MALIK:

So, what we like about Raytheon, is they've got a new CEO in place in 2014. And there reason we think the stock is still misprices is because he hasn't quite built up the credibility with investors that some of his competitors have. And one thing he did when he came in, was he invested very heavily in R&D, and that's really paying off for them now. They're winning these great contracts. There are these franchise valued contracts that should pay off for them over ten or 20 years. And you're seeing that in terms of the numbers they're reporting.

Revenue growth in defense in the first quarter was the best growth rate they've seen since 2007. They have the strongest pipeline they've seen in the last five years. Things are really chugging along for Raytheon, and we think that should continue and the stock should start to have a much better valuation as people begin to believe in the CEO.

MIKE SANTOLI:

One of the things you didn't mention as one of the factors is, who's going to be the president? I mean, does that play into it at all, in terms of the expectations for defense spending, or just market sentiment toward defense contractors?

SAIRA MALIK:

It definitely could. We like Raytheon, though, because it has-- because again, it's a little bit cheaper than other companies. Which gives us a little more protection if politics don't go their way, and also, because I think-- we think the investments that they made in R&D are really going to pay off for them over time, either way, and-- a lot of their demand is coming internationally. For example, from the Middle East, there's huge demand for their products right now. So, a lot of their dependence is on outside of the U.S. anyway, which is good for them.

MIKE SANTOLI:

And just more broadly, I can't imagine you spend a whole lot of time figuring out the investment implications of the presidential campaign. But-- is that just one of the things that could whip around sentiment, as we go into the election?

SAIRA MALIK:

I think it can, and it's these binary events that we're trying work out of the portfolios by owning the right, fundamentally strong companies, and the right companies over the long run. So, a binary event like the Brexit vote, you know, not trying to predict which way it's going to go.

Presidential elections, same thing, not trying to own companies that are totally dependent on which way that's going to go. Instead, trying to own those companies that, whichever way that these events happen, can do well. I mean, gaming in Las Vegas, the convention business is going to keep going. It doesn't matter who becomes the next president. And MGM will keep cutting costs, and that's what we're hanging our hats on.

MIKE SANTOLI:

You mentioned with regard to a couple of companies, Molson Coors-- as well as-- I think, Albemarle, the M and A-- side of things, so in other words, divesting divisions, or perhaps doing an acquisition. It's been relatively active in recent years, maybe had a little bit of a slowdown, in terms of that activity right now. Is that a major input, in terms of what a catalyst might be for companies that you're considering?

SAIRA MALIK:

I would say, we don't usually like to rely too much on M and A, but we like smart decisions. So, Albemarle sold their chemical metal business for a great valuation, and then they are using their proceeds to pay down debt. We love it when companies sell businesses, and either use the proceeds, to pay down debt, or more importantly, even return the cash to shareholders, we think is great.

You know, Molson Coors, we think, Miller Coors is a specific opportunity for them. They already owned a good piece of the company already. Buying the rest of that probably makes a lot of sense for them. And we think that they can get synergies from that, and also grow that Miller brand in countries that Miller couldn't do without them.

MIKE SANTOLI:

Sure. You mentioned returning cash to shareholders, the big trend toward buybacks has-- I think-- two sides to it: One side thinking that it's a tremendous factor in support of the market, the other one maybe that it's two sides of the same coin? That it's maybe not the wisest use of cash in all cases. What distinguishes—a good buyback for investors-- that a company might do, versus one that isn't necessarily as good an idea?

SAIRA MALIK:

Well, it's interesting, buybacks used to be a big factor in outperformance, and that really has slowed down recently. So, I would say, you know, being over dependent on buybacks isn't really something that we would say would predict outperformance of a company going forward. But we generally just like smart uses of cash flow.

So-- a company like Albemarle, that needs to pay down debt, uses that cash to pay down debt. Maybe not going out and making another large acquisition in an area that they're not as experienced in. Or-- and if you don't have a lot of debt to pay down, you know, pay a dividend in a market that's looking for yield-- raising your dividend, that could be a very smart strategy right now, maybe even preferable to buybacks. So, for us, it's just about, whether you are using your cash wisely, or are you wasting on things that aren't really adding good returns to your company?

MIKE SANTOLI:

Sure, yeah. I think that it's hard to avoid that discussion, if you're looking at potential large stocks, specifically Apple, in this regard. I mean, whatever your stance might be on Apple's prospects, it's very striking that they've returned an enormous amount of cash to shareholders-- and-- you know, the stock really has not distinguished itself for the last, three, four years-- at least on a balance. Is that-- are there any lessons in there, in terms of other companies? Or is Apple kind of its own unique animal?

SAIRA MALIK:

I think investors, when they think of Apple, they think of a growth company. So, when you have a company that's traditionally, that's returning a lot of cash to shareholders, while I mean, generally again, it is a good thing. It's probably not a driver of the stock. What people are waiting for with Apple is a new product cycle. What's sort of the next big thing for Apple?

Where's the next iPhone, or iPod for them? And-- you know, I think the questions are still out there. And right now, the iPhone-- you know, growth is probably slowing down. So one of the names we took out of our portfolio was Avago, which we disagree, but investors view it as an Apple Play, which is one of the reasons we took it out. Because we don't think Apple will improve until probably 2017. So, it's not great for investor perception of Avago, which is why we replaced that with MGM.

MIKE SANTOLI:

So, Avago-- has Apple as a customer, but-- the market kind of treated it as if it was a much bigger piece of the business?

SAIRA MALIK:

Yeah, they have-- Apple is a little less than 20 percent of their business. So, it is a large customer for them, but Avago has a lot of other things going on with their Broadcom acquisition, and so, there was a lot of other things about Avago that make it an interesting stock. It had done well year to date, but we just felt like, going through the rest of the year, we're looking for companies that could do well, you know, the second half of 2016. And we think Avago, maybe is more of a 2017 story, at this point.

MIKE SANTOLI:

Sure-- and before we finish up, you've mentioned a couple of times the need for investors to kind of try not to be emotional about the markets? Are there any other lessons or principles that you think that-- ultimate your clients-- ought to constantly keep in mind, or things that you feel you have to remind-- your clients of all the time?

SAIRA MALIK:

I mean, definitely as we mentioned, the-- trying to look through the noise. So, trying not to get too caught up in short term events. It's really important to have a long term focus when you're investing. And also, keep a diversified portfolio, so you're not fully invested in just one sector, or stock, or one area of the world, where you can get-- really get hit by something you can't control, like a Brexit, or some kind of political event. Also, just you know, from our point of view, it's also making sure you have a strong sell discipline, is actually really important when you do own a company, if it hits the price that you thought it should go to, make sure that you do take your profits, or sell it at the time. And also, if the story on your company changes, if you like a company because it's a cost-cutting story, and the management suddenly stops cutting costs-- take your losses and move on, and find something else where you can make more money. Those are some of the lessons that we really try to focus on.

MIKE SANTOLI:

I wonder if the idea of sell discipline, if-- it's always seemed to me that, one of the few-- kind of reliable enhancers of performances is just to rebalance your portfolio. I mean, that in a way, it's just a means of imposing a sell discipline on you, and also kind of buying in the dips, right? If you have an allocation, you know, whatever's done well, maybe just like, rotate back into what hasn't?

SAIRA MALIK:

I think that's a very important way to look at the world. I mean, for example right now, if you-- as we mentioned, if you had been allocated to-- Europe at X percent, and the Brexit happened, it probably would've forced you to buy on that day. Except-- as we saw, those couple of days, most people were selling.

So, you know, making sure if you sort of followed more of-- non-emotional way of thinking, you would've been stepping in to buy some of these great companies. And we all saw what happened in the weeks following-- and that can be a really great way to invest.

MIKE SANTOLI:

Sure, well, something to aspire to for all of us, I guess. Well, thank you very much, Saira. Appreciate it.

SAIRA MALIK:

Thanks for having me.

MIKE SANTOLI:

For CNBC Pro Talks, I'm Mike Santoli.

Transcript Source: Transcript Associates