Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Tom Walker, manager of the Martin Currie North American fund.
Bad news travels fast. Modern communications mean the Atlantic Ocean is no defence against the barrage of grim data from the US: news of plunging growth and rocketing unemployment arrives here almost instantaneously. And because ill tidings are inherently dramatic, they tend to crowd out good news, especially during a recession. When half a million Americans are joining the unemployment lines, a company reporting single-digit sales growth doesn’t make much impression. For investors, however, these less eye-catching pieces of news show there are still companies thriving through the downturn.
Take Monsanto (NYSE:MON), which produces technologically advanced seeds and herbicides. As consumers become more price-conscious, Monsanto’s yield-boosting products are in greater demand than ever. Over the last quarter, its sales rose by 26%, while earnings per share rose by 114%. Monsanto’s sales will, I believe, continue to grow. In particular, its success in seeds and genomics is more than offsetting concerns about falling margins on sales of Roundup, its sector-leading herbicide. Monsanto is also a high-quality stock: it will soon be debt-free. Given its financial quality, a price/earnings ratio of 15 times next year’s earnings looks far too cheap.
Monsanto isn’t alone. The US market is so diverse that, even in the teeth of a recession, there are plenty of interesting stocks in which to invest. I’m focusing on the ‘survivors’ – firms that can emerge from the downturn stronger.
The recession, coupled with the reduced availability of credit, is flushing out financially distressed stocks. And because their weaker rivals will either shrink or go out of business, high-quality companies like Google (NYSE:GOOG) will actually benefit from the recession. Although it’s the dominant player in its industry, Google is still grabbing market share from its competitors. The migration in advertising spending from offline media (newspapers, radio, TV) to the online world is a long-term, structural shift whose significance far outweighs any short-term slowdown. While Google’s domestic position remains strong, in less developed markets its growth has been little short of spectacular. Next comes the monetisation of YouTube, its online broadcasting service.
My third pick, and another long-term winner, is natural gas producer Ultra Petroleum (NYSE:UPL). It carries little debt and its production costs are the lowest in its industry. That means that even as low gas prices call the continued existence of rivals with higher production costs into question, Ultra is enjoying handsome margins. Its Wyoming gas fields are of the highest quality, have great growth potential and are expected to have a drilling life of around 30 years. Proven reserves are being replaced at a significantly faster rate than they are being depleted. The very modest valuation of Ultra’s shares seems to be discounting a belief that US natural gas prices will remain at their current, depressed level for good. The gas futures market, however, tells a very different story: commodity traders expect US natural gas prices to rise. Work done by the energy specialists at Martin Currie corroborates that view.
So despite the grim headlines, the growth prospects – and modest valuations – of stocks like these mean that, for investors, America remains the land of opportunity.
The stocks Tom Walker likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| Monsanto | $145.80 | $63.47 | $86.24 |
| $602.45 | $247.30 | $347.70 | |
| Ultra Petroleum | $102.81 | $28.85 | $38.86 |