Fund manager picks: stocks to fall for this Valentine’s Day
To mark the day of love, fund managers reflect on some of their most cherished investments.
Diageo – Jeremy Lang, partner and co-founder of Ardevora Asset Management
Diageo has built up a range of brands almost impossible to replace – including Smirnoff, Johnnie Walker, Baileys and Guinness. The secret to a successful international drinks company is obviously owning the brands, but also having an efficient distribution network. Achieving this on a global scale is not simple and takes a long time. The result of all its hard work has only recently started to bear fruit.
Diageo is a rare beast in the world of consumer staples today – a company able to grow sales organically without sacrificing margins. However, analysts are in a dilemma. They can see the attractions of a company like Diageo but are traumatised by the difficulties faced by peers in the sector.
The compromise is that Diageo is on a modest premium to the staples sector. We think this is churlish and underestimates Diageo’s ability to keep generating modest real growth and strong cash flow well into the future. The company is also using excess cash flow to buy back shares. This is an attractive cocktail of factors, as long as investors have the patience to let the impact of long-lived, low growth work its compounding magic.
Carnival Cruise Line – Colm Harney, global equities analyst at Sarasin & Partners
Carnival is one of our purest plays on the ageing theme. Cruising is particularly attractive to older travellers and the number of retirees aged 50 to 80 is growing twice as fast as the wider population. The large ‘baby boomer’ generation is approaching prime cruising age, and despite significant increases in longevity and health, average retirement ages remain relatively young.
Carnival is investing heavily to meet this demand, with a further 15 ships due to come into service between 2019 and 2022. The steady improvement in fleet efficiency, alongside investments in technology that improves on-board spending and more sophisticated booking management systems, means Carnival’s profitability and returns should improve over the coming years. Moreover, Carnival has led the cruise ship industry in tackling climate change, fitting scrubbers to all its ships to reduce sulphur emissions and introducing the first LNG-powered cruise ship last year.
Booking Holdings – Tom Fitzgerald, co-manager of the EdenTree Amity International fund
The global travel industry, which includes hotels, air, cruises, experiences and rail, generates $1.6trn per annum in gross bookings – having expanded at a CAGR (compound annual growth rate) of 6% since 2012. We believe the overall market will continue to expand, albeit at a moderated CAGR of 5% through to 2021. This is supported by shifting trends in consumer preferences, with leisure spend taking share from retail, as well as strong growth in emerging economies, with rising income levels and passport issuances.
More importantly, online travel bookings still only represent approximately 41% of the overall market. Due to the benefits in cost, efficiency, accessibility and security online travel agents provide both the consumer and the vendor, we believe this will shift towards approximately 50% by 2021. Ultimately, this drives our assumption the online travel market will grow at a CAGR of 9% through to 2021. As a global leader within this industry, we believe Booking Holdings will benefit from this secular trend.
Inspired Energy – Ken Wotton, manager of the LF Gresham House UK Micro Cap and Multi Cap Income funds
While large-cap businesses are generally impacted by macro factors, the agility and niche positioning of smaller companies may allow them to react positively to broader economic headwinds. One such company, Inspired Energy, is poised for strong performance in 2019. The company is one of the UK’s leading independent energy consultants, advising mid-sized corporates and higher-end SMEs on how best to optimise utility expenditures.
The appeal of Inspired Energy is its revenue largely comes from energy providers. While it advises mid-sized corporations, Inspired Energy is paid in commission from contracts with large energy suppliers, with payments based on the energy usage companies incur. This guarantees multi-year revenues and high earnings visibility for the business. We believe Inspired Energy understands its customers, and it has been one of our long-term holdings.
Elekta – Claire Shaw, manager of the OYSTER European Mid & Small Cap fund at SYZ Asset Management
Elekta invests in game-changing technology to improve the precision and accuracy of cancer radiation therapy through its product, Unity. Unity’s high-quality MRI technology enables clinicians to observe real-time changes in the location and shape of a tumour – improving treatment of tumours with a tendency to move. However, market-leading technology is merely the ‘jewel in the crown’ of the investment case.
Our main thesis is based around the fact Elekta operates in a stable duopoly with Varian. There are high barriers to entry from a regulatory and technological point of view and a large installed base, which gives the company a long-term revenue stream.
Elekta sold off substantially in 2015 as a result of multiple profit warnings, management changes, concerns around market share losses and the emergence of cheap competition in China. For us, as contrarian investors with a long time horizon, this presented an interesting opportunity. By investing in Elekta when it was out of favour, we have made substantial returns now the market is excited about the pipeline of new orders for Unity.