Investing ideas, an eye on the future

Without a crystal ball, how do you spot the next best thing? Well, that all depends on your style of investing. James Carr, our Investment Analyst, explains more and looks at three companies that fund managers currently have their eyes on.

Hindsight can often be a wonderful thing!

It’s great to have the benefit of experience and perspective, however, with investing, hindsight can often be tarnished by regret and a feeling of ‘what could have been.’

Have you ever felt like you have invested in something you wish you hadn’t? Or taken profits too soon in a stock like

Amazon or the next generation growth company?

While the future can often seem uncertain, with hindsight the life-changing returns from organisations which have since become household names can seem so obvious. Surely Amazon was always going to be a success? How could I have missed that one?

However, we forget that during the early 2000s Amazon’s value fell nearly 94% from peak to trough, leaving investors underwater for nearly a decade. This was because the company was spending aggressively to build out the infrastructure that powers it today. Holding or adding to Amazon during this uncertainty would have been a challenge for even the most long-term of investors. Despite this it would only have taken a £600 investment in them at the Initial Public Offering (IPO) in 1997 to be a millionaire today!

Bringing all this back to today and as we look forward to the future, there are tens of thousands of companies listed globally across different geographies, regions and industries. So, how can you decide what to invest in if you are picking individual stocks? Broadly speaking, most of the fund managers that we invest with have a distinct

‘style’ of investing with the main ones being growth, value and quality.

Growth: Managers invest in companies that they think can grow sales and earnings faster than the market.

Value: Managers believe that companies which are cheaper than average can outperform.

Quality: Managers believe companies that are operationally superior to the market can do best.

While the companies that the managers invest in may look completely different, they all share the belief that the expectations the market has for the company is incorrect and they can perform better than is currently ‘priced in.’

We asked three of our fund managers across the investing styles for an idea each that they are particularly excited about within their portfolio.

Growth

The Baillie Gifford American Fund is the one with the most growthoriented approach in our portfolios. They were one of the earliest institutional investors in Tesla and have generated exceptional returns over the last decade.

They believe social media company ‘Snap’ is one of the most interesting propositions at the time of writing.

“For most of us, Snap is better known for its instant messaging app ‘Snapchat’, one of the most popular social networks for the Gen Z, with 90% penetration of the 13-24 demographic in the U.S. and over 80% in Europe.

“But despite the popularity of this social media platform and its huge potential in the advertising market, Snap does not see itself as an advertising company looking to sneak a few more dollars from its rivals. Instead, they are at the forefront of the Augmented Reality (AR) revolution and that is an exciting potential future.

“AR has evolved to a point where it is no longer only in the realm of fun and entertainment. It has utility. It can help people virtually try on shoes, clothes or make up, scan labels to find ratings, reviews and prices, tell you the name of the song you are listening to or even explore virtual artwork. Therefore, we think Snap is positioning itself to build the next big platform.

“And what makes this all particularly exciting is that Snap has a big, engaged base of users who are precisely the right age to pioneer a new platform. A super platform that blends the physical and digital worlds.”

Value

Within our UK portfolio we hold the Miton UK Multicap Income Fund and, while not the deep value style that was made popular by Warren Buffett at the start of his career, the fund looks to buy cash-generative companies that can grow dividends and that are trading for less than they are intrinsically worth.

The fund is managed by Gervais Williams, whom some readers may recognise from our investment dinners or investment panels. Gervais has built up a stellar track record investing in smaller companies and is currently excited about the prospects for ‘iEnergizer’:

“iEnergizer is an integrated software and service pioneer, that helps global business with customer service and technical support, such as chatbots. It has a culture of delivering very high levels of customer satisfaction, that has led it to progressively take market share from others. It also offers a very competitively priced service, due in part to its Indian and Mexican cost base.

“The combination comes together in a company that generates abundant cash surpluses with a generous dividend policy. Despite its ongoing sustained growth, it still offers a yield of 4.5% and stands on what we consider to be an overlooked price/earnings ratio of only 14.5x for the year to March 2022 and 12.1x for the current year. When markets stagnate, often the best returns come from compounding of a stream of good and growing dividend income, from stocks such as iEnergizer.”

Quality

While most of us will be aware of a growth company or a value company, a ‘quality’ company may be considered a less common term. Quality is more subjective; however, some of the common metrics many quality managers will use are strong balance sheets, high margins or recurring revenues.

One of the purest plays on this discipline is the Morgan Stanley Global Brands Fund we own in our portfolios. This focuses on companies generating high returns on capital employed. They are particularly excited about their top holding, ‘Microsoft’:

“Under Satya Nadella (CEO), Microsoft has transformed into a vibrant company leading key technological changes. Cloud revenue across Office 365 and Azure is over $60bn. Microsoft is largely free from the privacy, data and antitrust controversies affecting other leading tech players.

“In our view the company is expected to grow revenues at above 10% for the next few years, benefiting from the acceleration to the digital economy accelerated by the COVID crisis. We believe Cloud (Azure and Office 365) growth is a strength and a source of higher revenue.”

While all these companies will be driven ultimately by the fundamental performance of the business, at times markets can behave irrationally. A great company can be a poor investment if bought at the wrong price. Meanwhile, a poor company can be a great investment if bought (and sold) at the right price.

Few of us around the world would have heard of Zoom two years ago as we approached the pandemic, whereas now it has become a verb in a similar way that Google has. At the start of March 2020, Zoom traded at around $150 a share and since then they have grown revenues from $622m in 2020 to profits (not revenues!) for 2022 estimated to be $1.38bn. The current share price? It now trades for around $107 a share, substantially below its prepandemic price.

This article is intended as an informative piece and does not construe advice. Please contact your financial planner before taking any action.