Nervous about stock market valuations? You’re not the only one. Even the professional investors are becoming cautious. The Morningstar Silver Rated Rathbone Global Opportunities fund may be fully invested at the top of its 40-60 stock range, but manager James Thomson reveals he feels worried about markets.
Thomson looks for “under-the-radar” growth stories at reasonable, but not cheap, valuations. He describes himself as a growth-orientated investor and is a believer that, despite popular opinion, valuation is a poor predictor of performance.
Often, investors are desperate to buy the cheapest stocks, he says, but many times these firms are cheap for a reason and he believes investors should “pay up for quality”.
He says that the outperformance of growth over value will continue because we are now in a different era where the types of stocks that fall into the value bucket have changed significantly. “Value stocks at the beginning of my career were the boring consumer staples companies that were overlooked by the market,” he explains.
“I don’t think those are the value stocks today; I think the value stocks today are the most economically sensitive companies – the commodities, the banks, the industrials. I think the nature of value stocks have changed, so perhaps the argument that value is a better performer over the longer term may be breaking down.”
While value investors will cite studies that show the cheapest stocks in the market will outperform over the longer term, Thomson says that price to earnings multiples tend not to have any correlation with subsequent returns over a 12-month period. Despite that, valuation is still “the fundamental building block of investment management”.
A more reliable predictor of performance, he counters, is the economic cycle. And that’s where his nerves kick in. New orders are in the 98th percentile, earnings estimates are at 20-year highs and investor sentiment is at its highest point in 15 years.
“All of these ingredients mean that GDP growth should be running hot, but it’s not. That says to me that the market and economic growth is more fragile than people think. If you’re not shooting the lights out now, when will you?”
Despite this nervousness, Thomson says he still has plenty of ideas – for now. Here are a few.
Match (MTCH)
Match was added to the fund late last year and is already a top 20 holding. There’s still a stigma attached to online dating in some quarters, but its popularity has boomed over the past decade. The number of people in a relationship who met online has increased from 3% 10 years ago to 33% today, according to Thomson.
And Match is the largest player in the area by far. While it’s best known for its match.com website, it also owns competitors OKCupid and Plenty of Fish. But the jewel in the crown of Match’s portfolio is Tinder, the online dating app.
Last year, the app launched Tinder Gold, a premium feature which “provides an executive summary of all the girls or guys that have already swiped right on you”, meaning they have expressed an interest in your profile. It’s already been a great success, says Thomson, and is key in converting free users onto a paid-for subscription service.
And he believes there is plenty of scope to increase the number of Tinder Gold subscribers: “There are 500 million singles around the world, but only a tiny fraction of them pay for any kind of subscription online dating service.”
The stock was up 50% in the year to May 1, but an unexpected announcement that Facebook (FB) was exploring branching out into online dating shocked the market and wiped around $3.5 billion off Match’s market value.
The manager admits the news “adds some complexity” to the investment case, but Thomson is not convinced the social media behemoth will succeed.
He thinks there is a chance users will want to keep their Facebook world and online dating world separate, “probably out of fear and embarrassment if it goes wrong and suddenly those two worlds are entangled”.
“Facebook might find a seamless way to do that, but it probably means going to a different part of the site and we know people are creatures of habit – they go to the news feed and that tends to be the place that they go,” he adds.
“They’ve tried to launch these features and different services before and it’s not been a great experience – gaming is a good example of that. They obviously dominate in social media, but the burden is going to be on them to prove that they can succeed in online dating.”
Orpea (OPA)
Orpea runs nursing homes in continental Europe. They have no operations in the UK as they believe it is one of the worst markets to operate in due to the heavy reliance on funding by local authorities, who, Thomson says, are "notoriously skint and late in paying”.
Its main exposure is in France, but also has a presence in nine other European countries including Germany, Spain and Italy. It recently announced it would be branching out into the Portuguese market, as well as venturing into South America, through Brazil.
Historically, most care homes were based in the countryside, where land was cheap to build on, as was the labour. However, Orpea decided 20 years ago to focus on city centre locations, where it is more expensive to build and pay staff.
However, Thomson says this idea was “genius” because that’s where the money is. In the city, the care home is close enough for regular visits from family members; “and mum and dad want to be in a place they know rather than being shunted out into the country”.
Meanwhile, they also offer single rooms, rather than double or triple rooms where people have to share. “That’s a no-brainer because people want to have their own rooms.” The food is also of good quality, and one of their homes is so central you can see the Eiffel Tower from some bedroom windows.
“That’s a good theme – the demographic story and the ageing population,” adds Thomson. He adds that while it’s similar to a hotel business, you don’t have the occupancy issues that comes with the latter – “it’s full every day of the year”.
Bunzl (BNZL)
While Thomson likes the US, his enthusiasm over the UK has waned. Before the European Union referendum in June 2016, his fund had a quarter its portfolio invested here. Now, that number has been brought down to just 4%.
The reason for this is because he has “no idea how Brexit is going to play out”.
"So why bother swamping myself in that conundrum when I have so many good ideas outside the UK,” he asks.
However, he does have a few good ideas in the UK, one of which is distribution and outsourcing firm Bunzl. He says it’s a world-class, mission-critical business that is “outstanding in how boring it is, quite frankly”.
“When you go to the butcher’s counter in a supermarket, Bunzl provides the Styrofoam tray they put the meat on, the cling film, the mask, the hair net, the apron, the cleaning spray, the loo rolls for the staff. It is boring stuff and usually not-for-sale goods, but critical to the operations,” Thomson explains.
It is also a company that is not too reliant on the UK for its revenues, as it operates globally. In fact, the UK is a relatively small part of its business.
Equiniti (EQN)
The most recent UK-listed holding Thomson has initiated is Equiniti, which provides outsourced financial and administrative services for corporations, mainly in the UK. It is another “mission-critical business” that Thomson thinks is a defensive business that can grow over time.
Equiniti runs many different projects for companies, including the pensions businesses, employee share schemes and the shareholder register – “boring but essential services that corporates need”. They also have great technology skills, which is key for Thomson, as he notes many businesses are now heavily investing in their IT capabilities.
The acquisition of Wells Fargo’s Shareholder Services business, completed in February, gives it a way into the US market, too. “I think it’s a very well-managed, safe, steady grower in an area that is growing.”
