You are here: Home - Investing - Experienced Investor - News -

Fund manager view: Look beyond consumer staples as valuations hit 20-year high

0
Written by: Colin McQueen
15/07/2016
Sanlam’s Colin McQueen says that investors today are paying a pretty full price for what they love at present, however he argues there are some wide discounts on offer for companies out of favour.

The spread of valuations across the market is very wide at the moment. Back in February, the spread of valuations was almost as wide as what we witnessed during the technology bubble. When you find this sort of phenomenon, typically it suggests investors need to pay a lot more attention to valuations.

For example, the forward price/rate ratio of the consumer staples sector is at a 20-year high. Free cash flow yields for most consumer staples, such as Nestle, are trading in the range of 4-5%. While this is not catastrophically low, it is very low by historical standards.

However, if you cast the net wider and look at companies such as Microsoft, Oracle or some of the healthcare services names – there are free cash flow yields in the region of 6-7% or more.

Unlike many other strategies in this space, which hold significant positions in the consumer staples area, the largest exposure in our fund is healthcare. The implementation of Obamacare has opened up a lot of opportunities, but as for Hillary and her position on healthcare, what we have found over many years watching this space is that it is often very difficult for any President to get any major changes through the US Congress and Senate – despite it being a hot topic for candidates to mention.

US political views are incredibly polarised right now, which means it is difficult to enact any meaningful change one way or the other when these people come together. We believe the rhetoric is much louder than what the reality will be.

More and more healthcare services have been outsourced by both Democrat and Republican administrations over recent years and we see no reason why this trend will not continue. Healthcare is a great demographics story, but it imposes a cost on society to deliver it. Our positions in this space are quite evenly split between pharmaceutical and biotech names, medical device companies and services businesses. While you could argue pharma companies are often held up by politicians as increasing costs associated with healthcare, services companies are part of the solution in keeping costs down – so we like to have a spread of names in our portfolio.

One company we are bullish on right now is Medtronic, which is seeing its top-line growing at about 5-6% per year. Its penetration into emerging markets is at an early stage – accounting for about 15% of its business, but this is growing at 15-20% a year. People seek out better healthcare as their wealth increases and these markets are far less penetrated for healthcare than for companies offering shampoo, for example. We see a strong growth path for the company and a free cash flow yield of about 6%.

Outside of healthcare, we continue to have high conviction in the prospects for Oracle – which is managing the migration of customers from license-based revenue to higher margin Software as a Service (SaaS) revenue. Oracle is a stable company with a wide economic moat and strong free cash flow. It is currently being priced for zero to low growth. Even if Oracle’s economic moat is slowly being eroded, the stock is too cheap. The market is underestimating stickiness of the customer base and the extent to which Oracle has expanded its product portfolio to encompass new technologies, new platforms, and the way it is managing its transition to the Cloud. While in an earlier stage of its transition, we believe Oracle can see a similar shift in market perceptions as Microsoft.

Colin McQueen is the manager of the Sanlam FOUR Stable Global Equity fund

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Flight cancelled or delayed? Your rights explained

With no sign of the problems in UK aviation easing over the peak summer period, many will worry whether holida...

Rail strikes: Your travel and refund rights

Thousands of railway workers will strike across three days this week, grinding much of the transport system to...

How your monthly bills could rise as the base rate reaches 1.25%

The Bank of England has raised the base rate to 1.25% as predicted – the fifth consecutive rise in just six ...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week