James Gard: So, European stocks have sold off so far in August, but does this crisis offer opportunities? Investors have been focused on the Granolas this year. With me today is Michael Field. We're going to have a look at some stocks that maybe are looking undervalued after this sell-off. Are there any sort of opportunities that have been thrown up by this recent market wobble?
Michael Field: Absolutely. So, you know, it's difficult after the dust settles on this sell-off to kind of assess where we should be looking for opportunities. And one of the places investors are interested in are the Granolas, so our kind of equivalent of the Magnificent Seven, if you will, which have been expensive prior to the recent fall. But now, as we're seeing, there's at least four names in the Granolas that are actually looking interesting at the moment. So, there's a few of them we can talk about today. I think the first one, maybe the standout one is Nestle. So, it's now a four-star stock offering roughly kind of 20% upside. You know, there's some, they've had results recently as well. So, share price has fallen a little bit on the back of that and the momentum from the sell-off has carried it down further. So, it's not to say there's no problems with the consumer sector currently. You know, inflation has been quite high in the last year or so. That's impacted the volumes the company's shifting at the moment. You've got the challenge from white-label goods, et cetera. But ultimately, this is a wide-moat stock. You know, it's highly durable, et cetera. And now what you're seeing is an opportunity to pick it up at something like 20 times earnings and a dividend of almost 4%. So, it seems like a very good opportunity from that perspective.
Gard: Sure. I mean, it feels like a short-term wobble for Nestle, which after all is kind of a brand leader and a sort of company that's going to be around in say 20, 50 years time.
Field: Absolutely.
Gard: So, moving on from the consumer sector to pharmaceuticals and GSK has cropped up on your screen. You know, it's had an okay year share price wise, but there are litigation worries overhanging the stock. Why do you think this is an opportunity for investors maybe to have a nibble at GSK?
Field: So the pharma sector has been on a little bit of a high in the last year or so until this recent sell-off is an interesting one. So three of the Granolas have kind of flagged up now as undervalued as a result of the recent sell-off and they've all been in the pharma sector. And one of the reasons behind this or the rationale, if you will, is that these stocks are heavily exposed to the U.S. pharmaceutical market, the domestic market. And that's where the concerns lie in the global sell-off in the beginning, that the U.S. domestic market, the growth isn't going to be as strong or if indeed there are recession worries in that. So that kind of explains the background. But look, ultimately, and you mentioned litigation issues there as well. You've got litigation issues you've got some patent concerns as well. People are worrying that the pipeline of drugs that they have, you know, some of them are coming off patents, some things aren't coming on as quickly as people would like. So there's definitely concerns there, and I wouldn't want to dismiss them outright. But at the same time, you've got a company with a very diverse pipeline and a very strong pipeline at that as well from everything from HIV to respiratory drugs.
So you've got these drugs coming on to replace the drugs coming off patent. And generally, speaking in the recent update, growth has been strong. They're still experiencing very strong revenue growth and margins are moving in the right direction also. So I would say it's definitely not all bad news with the company. And as with Nestle, again, it's a wide-moat stock. So we definitely see the durability there and the ability for that company to actually produce these outsized returns into the longer term.
Gard: Sure, that makes sense. And also, if there is a weaker market this year, pharma can have defensive qualities in that sort of market.
Field: That's definitely how it's kind of panned out in the past, certainly.
Gard: So let's move on to luxury. And I know LVMH is one of the Granolas. Our next stock isn't one of the Granolas, but you could say that it's kind of a sister stock to Granolas. Burberry, it's a big pick of Nick Train, one of the UK's most famous fund managers, but it's had a really terrible time this year. July, profit waning, dividend cancelled, shares lost 20% in one day, and shares are kind of halved this year. That screening is undervalued, but are there serious problems there at the business?
Field: So you mentioned the shares are down by 50% so far this year, and they're down two thirds off their peak. So it's definitely one of the most beaten up fashion stocks that we cover. There are some issues underlying the company. It's not to say that everything is just macro related. I would say three things, if you will. One is China, so the slowdown in Chinese luxury good consumption is affecting the fashion industry in general. Second of all, it's the cyclicality of the fashion industry as a whole as well. This fashion industry goes through cycles, and we're just in the negative part of the cycle at the moment, and that's hitting more or less all the fashion companies at the moment. But really there are esoteric issues as well as you mentioned. So I think ultimately the company has strayed somewhat from its core competencies, core areas, and it's tried to branch into that really higher end of the fashion industry and compete with the likes of Gucci's and the likes of the LVMH's, as you mentioned, going up market, and that hasn't really panned out as the company would have liked.
They've parted ways with the CEO recently. So for investors buying in now, you are buying into a company and a stock going through a transition period. So there's no getting away from that. But at the same time, it is a five-star stock on our fair value estimate. The stock could almost double from here. And it's a 100-year old global fashion brand with a narrow moat. So that's our pro argument, if you will.
Gard: Sure. Sounds like what you're describing here is a special situation stock and a very early turnaround story. So it takes a bit of bravery to buy into that. One curveball I might throw at you today because I like doing that is, is Burberry vulnerable to a takeover, do you think? And should that feature in investors' minds if they're buying the stock?
Field: So I wouldn't bank on it. I think it's always dangerous to bank on someone, kind of a white knight scenario coming in and boosting your share price. But at the same time, look if any share falls by two thirds in a relatively short space of time, it's going to attract some kind of bigger investor attention. So from that perspective, you know, it's certainly possibility that it could be taken over. But at the same time, the bigger question is who would take it over one of the other fashion brands, private equity, et cetera. So that's one kind of question you need to ask yourselves. And two, if a bigger fashion brand did indeed swallow Burberry, how would they be able to integrate that? It's not always been easy historically to integrate such large brands into another brand. So there are difficulties, but it's not to say that it couldn't happen.
Gard: Sure. Yeah. Well, excellent. Thanks very much for your insights, as ever, Michael. And let's catch up in a few weeks. And the market would have done something completely different by then. So looking forward to catching up then. Thanks very much.
