Value Investor Bill Nygren Sees Undervalued Gems in Merck and AI-Powered Companies

Veteran value investor Bill Nygren, portfolio manager at Oakmark Funds, has identified what he believes are compelling investment opportunities in the pharmaceutical sector and the burgeoning field of artificial intelligence (AI). His firm has significantly increased its holdings in pharmaceutical giant Merck (MRK), viewing it as undervalued, and has also placed strategic bets on companies leveraging AI to improve efficiency and customer experience, including Capital One (COF) and Charter Communications (CHTR). Nygren’s insights offer a valuable perspective on navigating the current market landscape, highlighting opportunities beyond the typical tech-focused AI investments.

Key Takeaways: Why Nygren’s Picks Are Worth Watching

• Undervalued Pharmaceutical Giant: Nygren sees Merck (MRK) as significantly undervalued, despite recent market underperformance, primarily due to slowing Gardasil sales in China. He highlights Merck’s strong existing drug portfolio and the potential for expansion of its Keytruda franchise as key drivers of future growth.
• Beyond the Hype: AI Investments in Established Companies: Instead of focusing solely on pure-play AI companies, Nygren is finding value in established firms effectively integrating AI into their operations. This includes Capital One’s use of AI in underwriting and Charter Communications’ implementation of AI in customer service.
• Offsetting Portfolio Risk: Nygren’s investment in Merck serves as a strategic move to **diversify his portfolio and offset the pro-cyclical tilt** inherent in his holdings in financials and durable goods companies.
• Strong Management Team: Nygren underscores the importance of strong leadership, praising Merck CEO Rob Davis’s unique blend of financial and scientific acumen as a significant factor in his decision to invest in the company.
• Market Timing: Nygren emphasizes the **importance of patience and valuation**. Oakmark Funds waited for a dip in Merck’s stock price before investing, highlighting a disciplined approach to value investing.

Merck: A Value Play in Pharmaceuticals

According to Nygren, “Merck is attractive on a standalone basis, and it’s got really good portfolio characteristics.” This sentiment reflects a deep dive into the company’s fundamentals, beyond the recent negative impact of slowing Gardasil sales in China. The underperformance of MRK shares this year, slumping more than 5%, presents, in Nygren’s view, a buying opportunity. He believes the existing drug portfolio, coupled with the potential for Keytruda expansion, offers significant long-term growth prospects.

Keytruda’s Potential and Portfolio Strength

The Keytruda franchise, a leading cancer treatment, stands as a cornerstone of Merck’s future growth. Further expansion of its uses and potential breakthroughs in related treatments could significantly drive future revenue and profits. The existing portfolio also provides a solid foundation, mitigating some of the inherent risks in the pharmaceutical industry. Nygren’s assessment signifies a long-term outlook, looking beyond short-term market fluctuations to identify underlying value.

Management’s Role and Due Diligence

Nygren’s decision to invest in Merck was not impulsive. He conducted thorough due diligence, meeting with management, including CEO Rob Davis. He singled out Davis, stating that he was **”unusually good” at understanding both the finance and science languages**. This emphasizes the importance of strong leadership and the ability to effectively translate scientific advancements into successful business strategies.

AI’s Impact Beyond Tech Giants: Capital One and Charter Communications

Nygren’s investment strategy extends beyond traditional pharmaceutical players. He is also capitalizing on the transformative power of artificial intelligence, but with a unique twist. Instead of focusing solely on tech companies developing AI, he’s identifying established businesses strategically using AI to enhance their operations and gain a competitive edge.

Capital One: AI-Powered Underwriting

Capital One’s (COF) adoption of AI in its underwriting process represents a perfect example of Nygren’s approach. By leveraging AI to improve efficiency and risk assessment, Capital One is optimizing its lending practices, leading to potential cost savings and increased profitability. Nygren’s investment signals his confidence in Capital One’s ability to effectively integrate AI into its core business model.

Charter Communications: AI-Driven Customer Service

Similarly, Charter Communications (CHTR) is implementing AI in its call centers to streamline operations and enhance the customer experience. This initiative demonstrates a commitment to utilizing technology to improve efficiency, reduce costs, and ultimately enhance customer satisfaction. Nygren’s investment here highlights the potential for significant returns from companies strategically adopting AI solutions.

A Balanced Approach to Portfolio Management

Nygren’s overall investment strategy underscores the importance of a balanced portfolio. While his portfolio leans towards cyclical stocks in financials and durable goods, the investment in Merck provides a necessary counterbalance. **”We’re heavy in financials, we’re heavy in the durable names — our portfolio tends to have a little bit of a pro cyclical tilt to it and Merck helps offset some of that risk,”** Nygren explained. This diversification reflects a sophisticated approach to risk management, mitigating potential downturns in other sectors.

Looking Beyond the Headlines

Nygren’s strategy serves as a reminder that **value investing is not just about finding undervalued stocks, but also about understanding the underlying business fundamentals and choosing companies with strong management and well-defined growth strategies.** His focus on Merck and AI-driven companies outside the typical tech limelight showcases a discerning eye for opportunities overlooked by many. He anticipates that **”we’ll see examples like that of where traditional companies nobody thinks about when you say the word AI, end up being some of the bigger beneficiaries.”** This forward-looking perspective offers intriguing insights into the future of investment opportunities, moving beyond the immediate hype and focusing on long-term value creation.