TOL - 22nd May, 2024
7 stocks for multi-year double-digit earnings growth
...and none of them are in the technology sector!
The world's most famous scientist, Albert Einstein, reportedly once called compound interest "the eighth wonder of the world. He who understands it earns it. He who doesn't pays it." And pay it, you will. Quality companies with market and sector-leading earnings often attract very lofty valuations—and if you haven't caught on early, you'll be paying dearly for that track record.
This is especially true in tech stocks, where the S&P 500 Technology Sector's trailing P/E ratio is significantly higher than that of the S&P 500 index itself (32.51 vs 24.42, according to worldperatio.com).
But if you know where to look and are patient enough, you could find yourself a multi-bagger that you can hold onto for years on end.
With this mission in mind, we asked Chris Smith, Portfolio Manager at Intermede Investment Partners, to share with us some of his views on three non-tech sectors where double-digit earnings growth exists. Then, he shares seven portfolio holdings that he thinks have what it takes to outperform through and beyond the cycle.
EDITED TRANSCRIPT
Tell us about Intermede's approach to investing in global equity markets.
We are looking for high-quality companies that compound year to year, that are well managed, and generate a lot of free cash flow. We look for companies that are currently producing, not expected to produce down the road. We own a fairly concentrated portfolio of those companies - it's around 40 stocks at any given point in time.
Ideally, we'll own them for many years. We've had a number of positions in the portfolio since we started out 10 years ago. Our average holding period is a few years plus.
Financials and healthcare are two of your most significant exposures by sector. How do you find growth opportunities in these two sectors?
I think you have to be quite selective, within the financials in particular. A lot of the benchmark is in names where there isn't as much growth, and where we don't consider there to be a quality angle to it.
A lot of banks, a lot of insurance companies. But also within financials, you have payment companies, you have companies like Mastercard (NYSE: MA). It's been a position in the portfolio for the last 10 years. You have S&P Global (NYSE: SPGI), which is a data company providing very mission-critical information, whether it's indices, data or credit information that's required for bond issuances.
We have exchanges like Chicago Mercantile Exchange (CME Group - NYSE: CME). When you put all that together, we end up typically with an overweight position in the sector that you wouldn't think would offer this sort of opportunities we're looking for.
In contrast, healthcare is an area where there is a lot more growth, generally, given the ageing population, and all the innovation that's happening in that sector. For us, one of our favourite holdings is Novo Nordisk (CPH: NOVO-B), we have the maker of anti-obesity drugs and the GLP-1s. We feel that there is a tremendous opportunity ahead of them there, and their current portfolio of products. They also have a very deep bench of additional pipeline products coming down the road that will have fewer side effects, we believe, and also be easier to take for the consumer. There are lots of opportunities in healthcare.
As an analyst, your primary area of interest is consumer stocks. How do you seek out good quality consumer-facing opportunities in a complex real economic environment?
I would say that the one thing to focus on and what's really key to consumer spending is employment. Unemployment levels have remained quite healthy in much of the developed world - pretty much all markets are at near-record lows. Consumers are feeling relatively good. Now, inflationary pressures have been pronounced in many places also. That does lead to lower consumer confidence. But the spending is still happening.
We see a lot of opportunities in places such as travel. We have Airbnb (NASDAQ: ABNB) in the portfolio. They continue to expand their platform. They have a very high market share. People keep travelling. They want to have more than just a hotel room for certain of their stays. That's been a good area of growth.
We have names like LVMH (EPA: MC), which has a great portfolio of brands in the luxury space. I've seen good growth. There's been depressed spending from Chinese consumers, but that's coming back this year, up 10% in the first quarter of the year. Here in Australia, I'm sure you're seeing a lot more tourists now, and then spending is up. A lot of attractive areas within the consumer space. Overall, we're a little bit overweight in that sector in relation to the benchmark.
The higher-end consumer has been better able to handle the inflationary pressures. There's more freedom in the budget to be able to travel more. The pandemic is now a ways away in the rear-view mirror, but people still want experiences over goods. LVMH is kind of doing both things in the sense of providing luxury experiences. But yeah, I think the higher end is the place to be.
But you also own McDonalds (NYSE: MCD). What is the rationale behind owning that company - which is decidedly less high-end than Airbnb or LVMH?
In the case of McDonald's, it depends on the market you're in. In some places, it's more of an affordable luxury. In a developed market, less so. It's more consumed by lower-income consumers to a larger extent. It is a place where if the consumer environment were to soften, there's often a trade down into fast food, and that sort of environment from a more expensive, sit-down dining experience. It can perform well through the cycle, which is something that we like about it.
It's a company where they make the vast majority of their profits from just a few markets, with a lot of potential to improve profitability in the other hundred and some countries that they operate in, which is what we've been seeing, and a reason for us to have recently bought it.
Invest with intent
For more information on the Intermede Global Equities Fund, please visit here. If you are a financial adviser, please contact your MLC representative here. If you are a direct investor, please speak to your financial adviser or invest directly through the Product Disclosure Statement (PDS) here.
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Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew McCaffery, JPMorgan Asset Management Global CEO George Gatch, and Lazard Chief Market Strategist Ron Temple just to name a few. He has a double degree in economics and journalism and is a first-generation Filipino-Chinese Australian.
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Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew...
Expertise
Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew...
Expertise
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