Each week, a professional investor tells us where he’d put his money. This week: Chris Garsten of the Waverton European Capital Growth Fund picks four favourites.
The most common equity investment-style categories are value and growth. Value is based on multiples such as the price/earnings or price/book ratios rising from unjustifiably depressed levels. Growth stocks’ earnings grow faster and for longer than the market, so they often trade on high multiples.
We believe these labels are simplistic and restrictive. Good stockpickers should buy both growth and value stocks based on the manager’s assessment of a stock’s fundamental appeal. We are capital cycle investors who can invest in both value and growth. We focus on understanding and quantifying the supply and demand balance in an industry. Supply-short industries are generally attractive ones to invest in. Most active fund managers and commentators apply their energies to demand only and are then caught out when supply increases, wrecking prices.
Assessing supply and demand
All industries and companies go through capital cycles, albeit to varying degrees. The duration and severity is dependent on the barriers to entry for new entrants and the behaviour of existing competitors. There are industries (basic steel, for instance) with lower barriers to entry that swing very quickly from excess demand to excess supply.
Others, such as pharmaceuticals, have a capital cycle that can take decades. As companies or industries shift from excess pessimism to consolidation and structural change, big returns are achievable. Generally, these businesses trade at attractive valuations as the market is slow to understand the changing industry dynamics. As profitability improves the increased earnings typically prompt a re-rating of the stock.
Nearly 10% of the Capital Growth portfolio is in industrial gas stocks, split between Air Liquide (Paris: AI) and Linde (NYSE: LIN). Gas has been a very stable industry and is about to become even more so. Earlier this year the industry consolidated from four to three big players as Praxair merged with Linde. Pricing improved and management became more responsive to shareholders. We believe this will be a low-risk, multi-year stockmarket winner.
Cashing in on cash machines
Loomis (Stockholm: LOOM-B) operates in three business segments. Firstly, cash in transit: transporting cash to and from retailers, banks and cash machines. Secondly, cash management services – centres where notes and coins are sorted before distribution. Finally, it is also active in higher-value areas such as foreign-exchange cash machines at Norwegian airports, and Safepoint. The latter is like a “reverse ATM”: retailers insert money for collection by Loomis. The average monthly price paid per Safepoint is around $450. The key is that while cash usage is flat the stock is attractive on a capital-cycle view as players are leaving the industry faster than cash usage is declining.
Deutsche Post DHL (Frankfurt: DPW) is one of the largest global express freight, logistics, parcel and post companies. It serves a very diverse base of industrial and commercial customers across all regional and intercontinental trade routes. Its strong market position, high IT spend and increasingly efficient network means it is benefiting at the expense of the smaller players.