Each week, a professional investor tells us where she’d put her money now. This week: Lucy Macdonald, Brunner Investment Trust.
Global equity markets have had a volatile start to the year and this looks set to persist for the foreseeable future. Earnings growth overall is being held back by the strong dollar and falling profits in the energy sector. Setbacks to some major merger deals, such as Pfizer’s acquisition of Allergan and Halliburton’s purchase of Baker Hughes, have also unsettled investors.
The valuation of the US market remains high by historical standards, although it looks more reasonably valued relative to other asset classes. Against this background, we continue to focus on long-term stockpicking, durable growth drivers and quality companies.
Adidas (Frankfurt: ADS), the sportswear group, is well positioned in the growing fashion for leisure sportswear. The company has a strong brand, structural growth, improving returns and the potential for corporate restructuring and better management. The shares had been weak due to exposure to Russia and disappointing sales in golf supplies, but we concluded that these were one-off issues and invested in the stock.
Since then its recovery has been aided by the hiring of a new chief executive, Kasper Rorsted, whom we rate highly from his tenure at consumer products group Henkel, another firm in which we have previously invested. His focus on margins and profitability was very beneficial for Henkel’s shareholders and we believe he is a great choice for Adidas.
Nielsen (New York: NLSN), the market research company, has both a stable business measuring market share in consumer goods, and growing audience measurement and analytics capability across digital and traditional media platforms. Media fragmentation is providing a tailwind for growth as advertisers and content publishers alike attempt to establish the value of digital space.
Barriers to entry are high as Nielsen ratings are the standard used by media companies and advertisers to determine advertising rates. Visibility and quality is strong, since the company benefits from long-term contracts with favourable pricing terms. Nonetheless, the valuation remains attractive, since there is residual nervousness about competition in online measurement.
TSMC (Taipei: 2330, New York: TSM), the largest independent semiconductor foundry, is a long-term beneficiary of the proliferation of technology devices and the resulting demand for computer chips. TSMC’s business model is to drive around 20% of revenues from its leading-edge manufacturing processes, which allow semiconductor nodes on the latest generation of chips to be made ever smaller, while profitability is driven by the previous generation of chips with older nodes.
This creates barriers to entry: it’s hard for competitors to migrate straight to the latest processes without cash generation from older ones to fund necessary capital expenditure. TSMC has increased market share and profitability, yet trades on a price/earnings ratio of 13 and has a yield of nearly 4%.