Many investors have seen the return of volatility to global stock markets as a bad sign. But others will insist that it throws up opportunities to buy companies you like at cheap prices.
“It’s never good to see the value of your investors’ investments go down,” says Michael Dillon, co-manager of the Brown Advisory Global Leaders fund. However, February’s market correction did provide some good opportunities for the Brown Advisory team.
“It’s been a highly active start to the year for us,” he adds. The majority of Dillon and co-manager Bertie Thomson’s time is spent saying “no” to companies they like on valuation grounds. However, it got much easier to say “yes” in the first quarter of 2018.
Below, the pair outline two good value stocks they added to their portfolios recently. Both have taken steps to provide better customer outcomes and improve their offerings for those that consume their products - a key requirement for firms in their portfolio.
The fund delivered returns of over 34% in 2017 and is up 3.17% year to date.
eBay (EBAY)
There have been two big shifts that have reinforced the investment case for e-commerce firm eBay, according to Dillon.
The first is a move away from a one-sided network effect, where the more users are on a network the more useful that network is for everyone else, to the two-sided network, where there’s a supply and demand effect. So, the more suppliers there are, the more attractive the network is for users; the more users there are on the network, the more attractive it is for suppliers to join it.
“It’s self-reinforcing,” explains Dillon. “And that two-sided network has just gone through industry after industry after industry over the last 25 years.”
eBay has been taking advantage of this change ever since it was formed as what was essentially a flea market 13 years ago. But another change has been to the eBay platform itself. Back in 1995, and for its formative years, the platform basically allowed Joe Public to sell his or her unwanted wares to fellow consumers, many times in an auction format.
“That was great,” says Dillon, and gave eBay its competitive advantage – one of the criteria the Brown Advisory team looks for in its investee firms. But the real game changer has been the move to fixed-price selling.
Now, around 90% of goods sold on the platform are fixed price, and around 85% are sold by recognised branded merchants. “This is not me selling my car radio; this is a proper merchant, like Macy’s, selling a fixed-price good on the network.”
With this has also come a change in the coding for eBay’s website to make its data more structured. So now, product pages are more tailored, giving easy visibility to all suppliers selling that particular product.
“That gives a much better customer outcome to the buyers on the network, because now when I search I don’t get 15 different spellings of what I’m looking for,” continues Dillon.
The number one thing the team likes about eBay is its improvements to customer experience. But there are still lots of ways in which eBay can “fundamentally improve its network” and extract more value.
Currently, “eBay is growing at half the rate of e-commerce in the US in terms of the gross merchant value on the network and yet it is the only viable option outside of Amazon”. That means, having sunk 17% since the start of February to a five-month low, it’s now cheap.
Wolters Kluwer (WKL)
Dutch information services company Wolters Kluwer may have recovered from its dip earlier in the year to reach a record high, but the Brown Advisory team reckons there’s still more to come. The stock fell to a five-month low in mid-February to trade at less than €40, but has since run up quickly to over €46 today.
“It may be slightly less exciting, but it’s a really good business,” says Thomson. Wolters provides text and reference books for the medical, legal, tax and accounting professions. “If you want, say, to be a lawyer in Belgium you will need to have bought their reference books to be able to still practise being a lawyer,” Thomson adds.
The company has been able to, over time, migrate from just producing physical books to digital solutions. They also now provide workflow solutions that allow, for instance, doctors to make diagnoses and outline treatment options easily.
“They’re changing their products to what the customer wants to make their lives easier, more accessible. It means that doctors can get more people through their surgeries, it means surgeons can diagnose people better and it’s obviously a much better outcome for the patient.”
As Wolters goes through this process of tailoring its product range to its customers, Thomson expects the firm to generate higher growth and, as a result, higher profits. “These products are stickier and they have less operating costs attached to them,” he continues.
Further, Wolters has a big profit margin difference – around 600 basis points – between itself and its peers. “Over time, as they go more into this digital arena, we hope that will catch up.”
The team bought into the stock after it had come down from what was previously an expensive looking level. While it has now shot back up to higher than before, they reckon there’s still plenty of upside left.
