11 stocks driving this fund's double-digit returns

A focus on picks-and-shovels companies rather than crowded trades is how Catriona Burns and her team play market mega-trends. Burns notes this approach during her sit-down with Ally Selby in the latest episode of the Rules of Investing.

The approach has served the team well, with the WAM Global listed investment company returning more than 20% in the 12 months to the end of April and almost 16% in calendar 2024 so far.

How to find double-digit EPS growth

As Burns explains, they start on a broader level, looking at the industry structure of an underlying business and where the company lies within this.

“Because strong industry position leads to things like pricing power, which has been paramount in an inflationary environment…and even in recessions, because these are the companies that win share when times are tough,” Burns says.

The quality of the management team is a non-negotiable attribute of companies included in the portfolio.

“Honesty and trust in the management team for us is paramount,” Burns says.

Some of the key questions they consider before adding a company are, “Have they hit their targets? Have they done what they said?”

“If we have any doubts around that trust factor and that they will deliver on what they say, then it's just non-negotiable.”

WAM Global also targets companies that can consistently deliver double-digit earnings growth. If a company is delivering below that, there must be a clear pathway toward this level of growth.

And of course, all the above are overlaid by a consideration of the share price at which the firm is currently trading.

“We have very strict valuation discipline based on what we think the earnings growth will be, coupling that with valuation, and then a catalyst that we think will drive the share price higher,” Burns says.

Red flags to watch for

And because successful investing is as much about avoiding under-performers as picking winners, Burns shares some red flags. They look at the track record of individuals running firms, including whether they have successfully built and run other businesses.

Burns also singles out the alignment of company management, noting the intrinsic link between incentives and outcomes. She cites here the common example of boards motivated solely by growing earnings per share. This can lead to companies chasing acquisitions purely on the back of anticipated earnings growth, without thinking about the returns that are being generated.

“That happens time and time again and is a massive red flag,” Burns says.

“The Ticketek equivalent of Germany, Switzerland and Austria”

Burns names Cts Eventim (ETR: EVD) as the current holding with the strongest prospect for share price growth.

A founder-led company headquartered in Germany, management retains a 30% stake in the business, which Burns describes as: “The Ticketek equivalent of Germany, Switzerland and Austria.”

She notes it also has a net cash balance sheet – something that Burns counter-intuitively says can be a “dangerous thing” for the wrong management team.

“It can be tempting to go and burn that cash on value destructive deals,” Burns says.

“But when you have a founder-led business coupled with a net cash balance sheet, we think that's an amazing setup because they're not going to destroy the value of their own investment and they're very well aligned with you.”

How WAM is investing in AI

WAM Global holds Google owner Alphabet (NASDAQ: GOOGL), having added to the position recently when shares pulled back earlier this year. In its March quarter results, management reported declining advertising revenue. The firm also faced criticism surrounding its ChatGPT Gemini, which was launched in December.

Burns explained the fund has also owned Microsoft previously, though it has sold out of the position currently with a view its valuation is too high.

“We can own and will own the AI winners,” Burns says but cites a strong preference for the lesser-known beneficiaries.

SAP SE (ETR: SAP)

A German multinational enterprise resource planning software firm, SAP is currently transitioning its client base to the cloud. A key to enabling clients to properly harness the benefits of AI software, Burns believes this will drive multi-decade earnings growth.

“They’re also integrating AI tools into their product set and have amazing data,” she says.

Quanta Services (NYSE: PWR)

A US company that provides infrastructure services for electric power, pipeline, industrial and communications industries, Quanta has been a beneficiary of the net-zero energy transition.

It’s now also riding the tailwind of AI investment, its Quanta Cloud Technology business unit is involved in the design, manufacture, and servicing of data centres. Quanta’s central role within the power grid is increasingly important for technology firms rolling out data centres to support AI uptake.

“These guys are the biggest players in the US in what they do. They maintain and upgrade the grid and connect all the renewables to it,” explains Burns.

“It’s an interesting way to play AI that hasn’t been so well loved or well covered.”

Owning Financials (but no banks)

Many of the companies in this category look like technology firms, but in many cases, they’re Financials, according to their GICS classification. That’s part of the reason why this sector is the biggest allocation of WAM Global: “We don’t actually own a single bank,” says Burns.

WAM Global’s focus here is primarily on companies providing business services and exchange services: “Monopoly or duopoly businesses, in most cases. Wonderful compounders over time in terms of earnings growth.”

Other holdings in this sector – though they’re also widely known for their technology credentials – include the following AI beneficiaries:

• Intercontinental Exchange (NYSE: ICE) – a technology firm a global exchange, clearing, financial data and technology company that operates energy markets and soft commodity exchanges
• CME Group (NASDAQ: CME) – The parent company for some of the world’s largest financial derivatives exchanges, it operates the Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, and The Commodity Exchange
• Intuit (NASDAQ: INTU) – A California-based accounting software provider
• MSCI (NYSE: MSCI) A – A global provider of indices and multi-asset analysis tools across equity, fixed income, and real estate markets..

“Picks-and-shovels” in healthcare

Healthcare is the second-biggest sector weighting in WAM Global, comprising 18.2% of the total portfolio as of 29 April.

Burns emphasises her team largely avoids the biopharmaceutical space – WAM hasn’t been trying to back the next winning GLP-1 drug manufacturer, for example.

“We really love picks and shovels type investments,” she says, preferring more general plays on the large global volume of investment in health and wellbeing .

“Our view is that for picks and shovels plays, it’s not binary in terms of whether the trials work or not, and you’re not making a big call on the competitive landscape.”

Companies she cites here include:

• Thermo Fisher Scientific (NYSE: TMO)– a US-based provider of analytical instruments, equipment, software, services, and consumables to pharmaceutical and biotechnology companies
• Avantor (NYSE: AVTR)– a biotechnology and pharmaceuticals firm.
• Gerresheimer (ETR: GXI) – a German manufacturer of medication packaging and drug delivery devices, this company markets the auto injector pens that deliver GLP-1 drug treatments.

More from The Rules of Investing

Listen to the full interview with Catriona Burns by clicking the link at the top or via the video player below.