2 stocks fundies would bet the house on (and the biggest risks to Value investing over the next 12 months)

Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're joined by two global heavyweights for the secret to finding Value in today's volatile market. To do that, we're joined by PM Capital's Paul Moore and Antipodes' Jacob Mitchell. Thank you so much for joining me. Really excited for today's episode.

It's going to be a series of two steps forward, one step back. Every time you go one step back, that's a time you can actually put more money to work in the so-called Value stocks.

I think irrespective of what's happening short-term, just go back to your long-term thesis. So just be patient when you're going through situations like this.

Where Paul Moore and Jacob Mitchell are finding opportunities today

Paul Moore: We don't focus too much on geography because it's about the stock that you buy. For example, Visa (NYSE: V) is in the US, but it's an international stock, it's not a US stock. Basically, the US has outperformed because it's got a lot of Growth stocks, and over the last 10 years with low interest rates, Growth stocks did very well. So the composition of the index will determine how it performs going forward. 

So if you believe our thesis on Value, Value is typically more found in Europe. So I would expect that over the medium to longer term, you actually might have a cycle where Europe outperforms. But again, when you're looking for opportunity, don't focus on the index, focus on the stock.

Jacob Mitchell: I think you're going to find quite a lot of agreement between Paul and I, given we're both Value bias managers and we're double overweight Europe. I would add to that if you think about what powered mega-cap tech, it was Growth and the adoption of digital advertising, the cloud. Some of that can keep growing, but there are new cycles that are emerging, whether it's around the energy transition, onshoring or reshoring. I think that plays to a broader group of companies. Europe has good representation in many of those capital equipment-type sectors.

So I think it could be a broader market, and a market where starting multiples do matter a bit more. And hands down, that's where the rest of the world wins versus the US. 

The average multiple in the rest of the world is 13 times. The US is roughly 19 times. And actually, the benchmark in Europe is more oriented towards multinationals than it is in the US. 

Investors forget there are a lot of really domestic-facing stocks in the US and they're also relatively expensive. So I think it could be a very different regime going forward.

Earnings outlook 

Jacob Mitchell: Yes and no. I mean, it was probably too low in some of those mega-cap tech stocks that have done a decent job, and given the moats that those businesses have, they've been able to cut costs and protect margin even as their top line has slowed. But in the rest of the market, arguably it's a different story, right? You do have a lot more misses, and it's showing up in the lack of share price performance, and derating. And so it's really a tale of two stock markets in the US at the moment. 

Paul Moore: I think the market made the mistake of expecting this recession too quickly. It takes time for interest rates to work their way through the system, because they've gone up a lot and very quickly, so it will take time. And you've seen the cracks, SVB and things of this nature. But the counter to that is in a higher inflationary environment with the balance sheets of the consumer actually pretty good. They're all employed. They're all earning wages that are going up. We always thought that the economy was probably going to be better than people expect in nominal terms. It's going to behave differently in a rising interest rate environment than it would have in a lower interest rate environment or declining interest rates. 

It hasn't surprised us that it's hanging in there, but the slowdown's coming. But that's why you've got to really focus on valuation. Because if earnings are getting tougher, guess what? Valuation becomes exposed if it's too expensive. Likewise, if it's a good valuation, you'll be relatively well-protected. 

So just wait a little while. I think earnings will be a lot tougher over the next 12 months.

The biggest risks for Value investors over the next year

Paul Moore: That's really easy. It's the same risk that's always present in Value investing. Patience. The biggest problem with most investors is that they're actually driven by emotion, and therefore they make short-term decisions. If you go back to my earlier comment, when you get these really big opportunities, they tend to play out over 10 years. Two steps forward, one step back. Now, what happens in the early days is every time you have a step back, people get scared of going into that new opportunity because of their experiences of the past. No, that's when you actually buy into it. 

Jacob Mitchell: It's hard to argue against patience. I think Value investing, which is really trying to pay the right price relative to a company's growth and the underlying business resilience, right? So I think in this environment where the economy is slowing, probably the big risk is what people mean when they use the label to mean low multiple. That's not how we think about Value investing. We just think about paying the right price. But to the extent that it also typifies typically buying businesses on lower multiples, arguably sometimes they also come in a cyclical package. And in a slowing economic environment, the danger is to go too early, when you're still in the downturn. It's patience around the cycle and then being prepared to act with conviction at the bottom of the cycle when investors are pretty miserable and you can buy really resilient cyclical businesses or you can buy the next structural winners at attractive multiples.

If you had to bet the house on a stock, what would it be and why? 

I might start with you, Jacob, and I will be here in a year's time to collect the keys to your house if the stock falls into the red. So no pressure at all. What stock have you brought for us today?

Siemens Energy (ETR: ENR)

Jacob Mitchell: I think a really interesting company is Siemens Energy (ETR: ENR). It's a company we own in our top 10. It's a one-stop shop for energy transition, and that is from gas turbines, which, as you know, gas has roughly half of the emissions of coal. Also, it still has a decent growth runway in emerging markets. Often, investors forget that renewables need standby power. And gas is the cheapest standby power. There's still a runway of demand for gas turbines. But on top of that, the company also has the next step in the transition. It's one of the leaders in wind turbines, and it is the market leader in offshore wind. And offshore wind, because there's a lot of fairly persistent wind, is the closest thing renewables have to baseload power.

Ally Selby: If you had to pick one though, what would it be?

Ally Selby: Okay. Well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every single week.