Each week, a professional investor tells us where he’d put his money. This week: Ben Goldsmith, CEO of Menhaden Capital Management, highlights four favourites.
Investors have struggled for several years to find opportunities offering good returns. And now a new threat is looming over the investment landscape: climate change, which is starting to pose a tangible and significant risk to businesses across industries.
Meanwhile, the pace of technological innovation has never been faster, with whole industries changing the way they function – voluntarily or not. By their nature, these risks are difficult to quantify and evaluate. Investors should therefore seek to own businesses that are both environmentally sustainable and boast durable competitive advantages that should serve to shield them from evolving risks in a rapidly changing world.
Dominating the internet
In our view, one such business is Alphabet (Nasdaq: GOOGL). The group occupies the dominant position in internet searches and possesses the ability to monetise an unparalleled level of interaction from users, which should underpin revenue growth for many years to come.
Furthermore, there should be significant potential to expand margins as YouTube, Cloud and other business lines mature and Alphabet’s start-up investments bear fruit.
Importantly, with the tech industry’s carbon emissions growing rapidly, the group’s management has been proactive in ensuring that the company is right at the forefront of the industry’s initiative to develop environmentally sustainable business models. Alphabet contracts three gigawatts of renewable power capacity, which makes it the world’s largest corporate buyer of renewable power in 2017.
Two Canadian railroads
There are few businesses that enjoy such high barriers to entry as the Canadian freight railroad duo Canadian Pacific Railway (Toronto: CP) and Canadian National Railway (Toronto: CNR). Prohibitive start-up costs and building regulations ensure that no one is building railroads today.
Transporting goods by rail is up to four times more fuel-efficient than doing so by road, which helps provide rail operators with a significant cost advantage over their main competitor, lorries, on longer-haul routes. Provided the economy remains stable, both CP and CN should be able to grow volumes and raise prices, aiding incremental margin expansion and delivering strong earnings growth.
A superior broadband provider
Connectivity services such as Charter Communications (Nasdaq: CHTR) are set to play a key role in enabling significant improvements in resource and energy efficiency with the development of the “internet of things”. Charter’s hybrid fibre-coaxial network is critical infrastructure; the group is a key broadband provider to more than 20 million households. Cable operators such as Charter offer a superior internet product. Traditional telecom firms still rely on copper telephone wires.
High up-front capital costs limit fibre network construction by both the incumbents and new entrants. Charter’s scale allows it to benefit from growing margins while offering a high-quality product at a lower price than competitors. As a result, Charter should deliver substantial free cash-flow growth thanks to a combination of modest revenue growth, falling capital intensity and lower customer turnover.