By James Thomson
Amid the usual wisecracks and one liners at the Berkshire Hathaway annual general meeting last weekend, Warren Buffett’s wingman, Charlie Munger, struck a sombre note about the outlook for value investors like him and Buffett.
“I think value investors are going to have a harder time now that there are so many of them competing for a diminished set of opportunities,” Munger said. “My advice to value investors is to get used to making less.”
Munger’s concerns about returns have been building. A week before the Berkshire circus, he bemoaned an investing environment with higher rates and a more crowded field of investors chasing a smaller group of bargains.
“[At] the exact time that the game is getting tougher we’ve got more and more people trying to play it,” he told the Financial Times.
At an event run earlier this month by the philanthropy-focused, listed investment company operator Future Generation, Chanticleer asked Nick Griffin, chief investment officer at Munro Partners, whether Munger was right.
Griffin agrees the investment field is more crowded than ever, and index makers have become much more efficient at shifting the best performing companies into benchmark indices, meaning it’s harder to beat a benchmark index. But Griffin says investors should remember that the best companies make for the best investments.
“The reality is you can spend the last 20 years in Australia looking at macroeconomics. You could have tried to work out what interest rates were going to do, what the government was going to do, or what was going to happen to the budget deficit,” he said.
“Or you could have worked out blood plasma was going to be pretty useful to cure diseases, and you could have just bought CSL.”
In this spirit – and the spirit of Munger, who likes to say investors only need to buy a handful of great companies in their investing lifetime – Chanticleer has collected 16 investment tips from investors who appeared at the Future Generation events around the country.
Tom Richardson – Paradice Investment Management
Housing was the first sector hit by rising rates, but Paradice portfolio manager Tom Richardson sees a return to more positive conditions, with housing stock for sale likely to head back to more normal levels. Domain Holdings (majority owned by AFR Weekend publisher, Nine Entertainment Co) should be well-placed to ride this recovery, he says.
Earnings may fall further this year, but the 10 per cent price rises Domain recently announced, and a healthier property market should mean 2024 looks better.
Richardson is also intrigued by beaten-down, online retailer Kogan.com. Having cleared a post-COVID-19 inventory overhang, he says the group now sits on a large cash balance and will return to “being the cost-focus online retailer they were before COVID. At $3.50 the risk-reward looks asymmetric.”
Kyle Macintyre – Firetrail Investments
CSL needs little introduction, but Macintyre believes it could strengthen in the vital US plasma collection market. Not only are collections rebounding after COVID-19, but he says CSL stands to gain market share as a key competitor closes collection centres to cut costs.
Macintyre also likes sleep apnoea giant ResMed. While the company should enjoy strong underlying growth – about 80 per cent of people with sleep apnoea are undiagnosed – he also says ResMed can increase revenue, earnings and market share in the short term as one of its key competitors deals with a product recall of its devices.
Jacob Mitchell – Antipodes
The move to electric vehicles won’t just be good for producers of critical minerals such as lithium. Antipodes founder Jacob Mitchell says a high-end EV with what’s called level two autonomy might contain more than $US2000 ($2985) worth of semiconductors, compared with about $US560 in an internal combustion engine.
European semiconductor giant STMicroelectronics, which has relationships with the likes of Tesla and Apple and a Western manufacturing base, is well-placed to ride this trend.
He also likes French pharma giant Sanofi, which he argues can become independent of the economic cycle thanks to the fact it gets one third of its revenue from the vaccine business as one of the three, major global manufacturers of the flu vaccine.
While investors have been fretting about the potential costs of litigation involving a discontinued heartburn drug called Zantac, Mitchell is confident recent court rulings have reduced this risk.
Bill Pridham – Ellerston Capital
The manager of Ellerston’s global small and mid-cap strategy likes two US companies that should hold up well in a recession. GFL Environmental is the fourth-largest waste management business in North America, and as in Australia, Pridham says a scarcity of waste management assets means pricing is strong. But while the waste business should deliver good cashflow in the coming years, Pridham also sees opportunity from the company’s move into renewable natural gas generation.
He also likes Option Care Health, which provides blood infusion services at home for patients. The entire infusion market is valued at $US100 billion a year, with at-home services representing just 15 per cent of the market, despite the fact it’s up to 70 per cent cheaper than a hospital visit.
Nick Markiewicz and David Prescott – Lanyon Asset Management
The uncertainty surrounding the gas price cap introduced by the government late last year has taken its toll on ASX-listed Cooper Energy. But Lanyon portfolio managers Nick Markiewicz and David Prescott see an undervalued gem that can recover as it improves the operational performance of its Orbost gas plant and get further clarity on the government’s intervention, from which Cooper’s medium- and long-term gas sale contracts were exempted.
The pair also likes copper junior AIC Mines. With BHP’s takeover of OZ Minerals, they see AIC as one of the few ways local investors can get exposure to the critical role copper is going to play in the energy transition.
David Allen – Plato Investment Management
Danish pharma group Novo Nordisk’s focus is diabetes and obesity treatment, and Allen believes anti-obesity drugs will be the blockbuster story of the next decade given worldwide obesity has tripled since 1975. “Novo Nordisk have some of the most promising new treatments in this area,” he says.
Allen also favours a pick-and-shovel approach to the artificial intelligence revolution via Dutch semiconductor equipment titan ASML, which he says has a near-monopoly on the deep ultraviolet, lithography machines to the manufacture of chips for AI technology.
Nick Griffin – Munro Partners
On a similar theme, Munro CIO Nick Griffin likes Nvidia, which has emerged this year as the crucial supplier of semiconductors to participants in the AI arms race. The stock has doubled since the start of the year, but Griffin sees a runway of growth that gives Nvidia the “potential to one day be the largest company in the world given they are a key enabler of AI functionality.”
A more racy pick is Liberty Media, the company that owns the Formula One franchise. It makes revenue from fees from teams, media rights and licensing fees from selling events to local governments and promoters, and while Griffin sees an opportunity to grow all three, the latter opportunity might be the most interesting. For the first time, Liberty will run and promote a race itself (the Las Vegas event) thus opening the potential for it to do this more frequently, and grab a bigger slice of the profit available from each race.
Michael Carmody – Centennial Asset Management
ASX-listed industrial services small cap SRG Global, whose shares have climbed 33 per cent in the last 12 months, has guided the market to expect high double-digit earnings this year, but Centennial’s Carmody won’t be surprised if it beats that forecast.
Not only is the backdrop solid for the asset services and infrastructure sectors, but he expects SRG to further make smaller bolt-on acquisitions to drive growth.
Shares in automotive and personal finance company Solvar have fallen 13 per cent as interest rates have surged in the past year, but Carmody thinks its performance will improve as interest rates near their cyclical peak. A recent increase in the company’s dividend payout ratio has put the stock on an estimated yield above 10 per cent.