Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Cormac Weldon, head of US equities, Artemis Investment Management LLP.
How much higher can US stocks go? Even after a strong 2014, we remain optimistic. The US economy’s ongoing recovery should translate into earnings growth of around 5% for American companies.
Investors are right to be worried about uncertainties outside the US – but exports account for only 14% of the economy. That makes it relatively resilient to any wider global slowdown.
We are also conscious that valuations (the multiples that investors are willing to pay for any company’s earnings) could be affected by turbulence overseas. For example, weak oil prices are great for US consumers, but by destabilising geopolitics (witness Russia), cheaper oil also brings risks.
Given the renewed uncertainty over Greece and the eurozone, we see some similarities between today and the summer of 2012, when events overseas hit sentiment towards US stocks. However, we would view any weakness as a buying opportunity.
If prospects for the American market as whole are reasonably encouraging, within that there are also a number of very attractive individual opportunities. In the world’s largest and most diverse equity market, there always are.
Take McGraw Hill Financial (NYSE: MHFI). This is a holding company for two fine businesses. The first is Standard & Poor’s, the debt-rating agency. When companies issue debt (corporate bonds), their borrowing costs – the coupons on their bonds – are lower if they have an S&P rating. So companies benefit from paying S&P to rate their bonds. It’s a lucrative business, yet the barriers to entry are high.
The second business in McGraw Hill’s portfolio is Platts, which provides reference “benchmark” prices for commodities, such as Brent crude oil. In the wake of recent controversies surrounding the pricing of financial benchmarks such as Libor, investors are turning to independent benchmarks priced by trusted third parties.
Platts is meeting that demand by launching new benchmarks. One charts the global market for iron ore. Together, the combination of Platts and Standard & Poor’s makes McGraw Hill a formidable business.
More familiar is Apple (Nasdaq: AAPL). Its products need no introduction, but its potential is being overlooked. Many analysts on the buy side have all but given up analysing Apple. They seem to believe that its size and market share will make it harder for the shares to rise any further. We disagree strongly.
Apple’s business is as analysable as it’s ever been, and the results of our analysis are encouraging. Apple’s earnings power is far greater than the consensus expects, both this year and next. One of its strengths was in evidence in its latest set of results. Although the rise of the US dollar has posed problems for some US exporters, Apple was able to raise its selling prices overseas – so the impact of currency on its revenues has been smaller than for many other multinationals.
Finally, we still see opportunities among the beneficiaries of the shale energy revolution. Thanks to fracking, the US has a glut of cheap natural gas. Firms using this to produce globally traded goods or commodities are in a strong competitive position. CF Industries (NYSE: CF) makes fertiliser, using natural gas. We look forward to seeing the capacity expansion it has invested in coming online later this year. That will transform the company’s free cash flow and, we believe, see the price of its shares rise further.