Bob Desmond is still seeing opportunities - and 2 stocks he has been buying

In recent months it seems that investor concern has abated somewhat, as the impact of higher interest rates has taken effect and inflation has come down.

And whilst we might still have to deal with an earnings reckoning at some point, that hasn’t stopped investors from pouring back into stocks.

We need look no further than the fact that the Dow Jones is around 4.5% from its all-time high and the ASX 200 closer to 4% from the same mark.

And whilst the Nasdaq still sits 13% off its record high, it has rallied 35% year-to-date.

These price levels are supported by the macroeconomic narrative, particularly in the US where the base case is now a soft landing and even the Fed is backing away from the dreaded “R” word, where it now forecasts a “noticeable slowdown”.

The changing market dynamics have prompted us at Livewire to ask the question “What should you be investing in if markets keep rallying?”

It’s a question we asked in a recent episode of Buy Hold Sell and we’re now putting it to a handful of fundies who have been more bullish than bearish over the past 12 months and who still have a positive outlook.

First up, we’re talking to Bob Desmond from Claremont Global. The flagship Claremont Global Fund was the most viewed fund on Livewire in 2022.

More bullish than bearish

While Desmond is more bullish than bearish over the next 12-24 months, context here is important.

When my colleague David Thornton hosted Desmond on The Rules of Investing podcast in October last year, he was very bullish. But markets have rallied strongly since that time and Desmond is now “neutral to slightly bullish” – which is simply a function of how valuations have changed.

‘We target a return of eight to 12% per annum and we're sitting in the middle of that range… maybe slightly to the right of that, just because valuations have moved quite a bit”, says Desmond.

Having recently returned from a trip to Europe, during which the Claremont Global team spoke to around 40 companies and observed the conditions on the ground, Desmond notes that consumers are still strong, with good savings from COVID, and full employment.

It’s a similar story in the US, where Desmond notes that mortgage holders generally have fixed rate mortgages, and again, the consumer remains quite strong – albeit cautious.

How are you positioning?

In terms of portfolio positioning, about one-third of the Claremont Global Fund is invested in big tech, although that is an area in which Desmond has been taking some profits.

“We've had really strong performance from Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Adobe (NASDAQ: ADBE). Obviously, earnings haven't moved as fast as the share prices, so the valuations are not as attractive now”.

Desmond adds that “the general theme has been trimming tech because it's done so well - really just on a valuation basis”.

So, where has that capital been put to work?

Before answering that question, it is important to understand how the Fund operates. Rather than holding large amounts of cash, capital is typically rotated away from stocks in the portfolio that have become fully valued, and into stocks with more compelling valuations.

“I would say that the market is quite full. I'd say our portfolio is ‘fair’. So, what we do in a market like this, and we did the same thing towards the end of 2021, is make sure we stay disciplined”, says Desmond.

"Where stocks have run quite a bit, we will trim, and recycle that back into existing positions that are better value, or into new names."

Desmond adds that he and the team are always trying to make sure that the positions in the portfolio don’t morph from quality growth into momentum.

“When things get more expensive, we trim, and if they get very expensive, we'll cut them out of the portfolio and recycle”.

As noted above, big tech positions that have performed well have been trimmed and Desmond cites the consumer discretionary and healthcare sectors as areas into which capital has been allocated.

More specifically, Desmond names Nike (NYSE: NKE) and Agilent Technologies (NYSE: A).

On Nike, he notes it is down around 7% year-to-date and that it has lagged the market, but “the valuation is quite attractive”.

Agilent, which provides instruments, software, services, and consumables for laboratories, was established in 1999 as a spin-off from Hewlett-Packard (NYSE: HPQ).

Desmond notes that whilst many healthcare companies – Agilent included – have suffered a little from a covid hangover and the replacement cycle has been a bit softer, longer-term he thinks it is “a terrific business”.

“It caters to 250,000 labs around the world. It's a razor blade model, so they get the instruments into the labs and then they have high margin, fast-growing consumables and services behind that”, says Desmond.

He adds that it’s a “mid-twenties margin business” that has done a terrific job of allocating capital over a long period of time.

Looking ahead, Desmond expects to see low double-digit growth over time, which is a major reason why the team has been topping up.

In terms of new positions, there is one stock that Claremont Global has been buying recently but Desmond was not at liberty to name it, given the position is still being built. He did mention that it was in the consumer space but did not provide any further detail.

A high bar

Perhaps more important than the name, is the fact that the position being built fits the Claremont Global process.

When asked what is unique about the Fund, Desmond is unequivocal. It’s the concentration coupled with the focus on quality.

It is these attributes, Desmond believes, that allow investors some peace of mind during the tough market periods, and to deliver strong performance in the better periods.

“We want investors, when times are tough like they were last year, to sleep easy at night and say to themselves ‘you know what, I'm in some really good businesses. Maybe the share prices are down, but the earnings aren't down, the value is not down, and I'll ride out the trough”.

The Fund typically holds 10-15 stocks and when asked about the difference between the fifteenth idea that makes it, and the sixteenth idea that doesn’t, Desmond says that “anything coming into the portfolio must be at a discount to value that's at least as good as the average stock in the portfolio”.

In other words, like in a sports team, if a business is trying to get into the first 15, it needs to play its way into contention, and force out the weakest link. 

Own the world's best businesses

Claremont Global is a high conviction portfolio of value-creating businesses at reasonable prices. For further information on the fund, please visit their website or fund profile below. 

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