The 7 stocks Paul Moore is eyeing closely

This series of 'The $10,000 Idea' has featured one of the biggest ETF product issuers in the country (VanEck) and has taken a closer look at the small end of the market thanks to Elston Asset Management's Gary Merkel. For our next edition, we are profiling the ideas of PM Capital CIO and Founder Paul Moore. 

The last time I spoke to Moore, we found out that the one stock he would buy and hold for 25 more years was Heineken (AMS: HEIA). The beer manufacturer was highlighted for its ability to take a long-term approach - something Moore is always keen to emphasise as a fundamental part of the PM Capital investment process. If you missed that piece, you can check it out here:

Equities

Paul Moore's stock to buy and hold for the next 25 years

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It's worth noting that Moore is not a fan of constructing hypothetical portfolios (like the ones we have been constructing in this series), admitting that the team will sometimes look at a stock for 12 to 18 months before deciding to initiate a position. Having said that, our discussion did bring up some key issues that investors are talking about and where he finds tangible opportunities as a result. 

He also normally likes to have "some cash" in the portfolio, to pounce on opportunities in case markets do move drastically - but he did not allocate any hypothetical money in our experiment.

So, with those disclaimers in mind, here are Moore's thoughts on where markets are today and, most importantly, the biggest opportunities he is finding in global equity markets.

The following is an edited transcript of a phone interview I conducted with Moore.

What is your opinion on global equity market valuations?

It's a barbell situation because we all know the Top 10 [stocks]' story. It has dominated market moves, it became the Magnificent Seven, and into the Fab Four. I'm predicting it'll become the one and only, eventually, with just one stock driving things up (Moore thinks NVIDIA (NASDAQ: NVDA) is the company most likely to do that).

At a high level, it has become very concentrated. Part of that is passive flows - we had a record for weekly passive flows last month. It is still very strong. Part of that is earnings momentum. Part of that is also uncertainty about the economy. 

But what it all means is that these valuations are pretty stretched. The good part of that is when you look at the rest of the market, I keep getting surprised about how reasonable absolute valuations are. 

There are enough areas to fill your portfolio of valuations that I would expect more in a market that is depressed as opposed to one that is high. So, valuation is both good and expensive depending on where you look. 

The one thing that stands out to me is the opportunity to diversify away from the concentration risk in those top 10 stocks. It's funny how the industry is always rabbiting on about the concentration of risk, not getting away from the benchmark, and all this rubbish. Yet here we are with one of the greatest concentrations of risk you have ever seen. 

That should be ringing alarm bells. 

Concentration risk doesn't worry me because it gives us opportunities. 

What is your biggest hope or concern for markets?

What you hope for is that the economy is OK. 

It's slowing down and it will allow the Federal Reserve to lower short rates without lowering long rates. In other words, we get back to a positive yield curve. What you don't want is the Fed getting behind the curve, crashing short rates and long rates falling because the economy is in a mess. We always thought the economy would surprise people and it has. Now, the market is not only at that view, but they're worried about the economy being too strong. 

The biggest risk is that the Fed holds too long in their mistaken belief that they can get inflation down to that magical 2% level. The inflation environment has inflected and it's here to stay. One of the reasons is that governments continue to spend. They're not addressing their fiscal spending and they're hoping that their debt will be dealt with by inflation. 

To me, that says you've got higher lows and higher highs for inflation. The Fed blew it up so badly before and they don't want to get it wrong again. But the risk is they will get it wrong again because I think short rates above 5% are probably too high.

Moore's important disclaimer

I'm not a fan of these because they're done in a moment of time, and obviously, the very next second, things can change. The other issue is that our process is very much longer term in nature. Our ideas play out initially over three to five years, but typically over seven to ten years-plus. 

We could be looking at a stock for 12 to 18 months before we even buy it, making sure that we've addressed all the issues we are required to address before we have a high-conviction view of the stock. Trying to pick out your best two or three or one at any particular point is hard.

Moore's $10,000 Ideas

The case for European banks

Even though they've done very well, these banks are still only selling on a 6-7x P/E ratio and they're giving me 10% dividend yields. I think we're on a long journey of re-rating. This is what I would have as my number one pick - and it's our largest position in the fund. We have five Commonwealth Bank (ASX: CBA)-equivalents in Europe. 

The reason we have five is because they are pretty generic in terms of what drives them. They are also all selling on the same valuation. But any individual bank can have a problem. So in that situation, it's better to have a portfolio than one single stock. 

Author's Note: Moore is a long-time bull on the global banking sector. CaixaBank is a Spanish-listed firm, AIB (Ireland-based) and Lloyd's are both listed in London, ING is a Dutch firm, and Intesa San Paolo is one of the largest banks in Italy.

The case for Newmont Mining (NYSE: NEM)

We're not buying right now but I'm thinking medium to longer term. A share price in the low-30s is where I would argue you want to be taking a big position. So we've now got a position and short term, the share price is probably ahead of itself. 

Now, a lot of that was justified because of poor capital allocation by management over a 20+ year time horizon. If you looked at the financials of a gold company, you would say that you should never own a gold company. The funny thing is that throughout my entire investment career, gold companies used to sell at big P/Es because of the magical lustre of gold. Meanwhile, copper companies used to sell at low P/Es because it is an industrial metal. That has flipped!

We originally played the copper stocks, but they've run ahead, are well-recognised, and are now selling at decent valuations. I wouldn't put new money into them, even though I think they're a must-have for this decade. Whereas Newmont has gone from $70/share down to $30/share, even though the gold price is at a record high. There are still issues related to these gold companies but as it stands today, I'd probably put that as my number two idea.

Author's Note: You can read more about their Newmont case in this wire.

The case for Sands China (HKG: 1928)

Sands is the biggest operator in Macau. The long-term thesis is that the Chinese want all gambling to go through Macau. They want Macau to be the Las Vegas of Asia but the reality is they want it all going through Macau, so they can keep an eye on everyone. Gambling in China is illegal and it's also illegal for Chinese citizens to gamble overseas as well but it just hasn't been enforced. However, they're starting to knock on people's doors, so they don't do this. 

I think the long-term dynamics at Macau are very strong. It's supported by the infrastructure they are putting in place. Obviously, China's post-COVID economy has its issues. It's been very slow to recover, unlike Vegas, which has boomed.

The profits of Vegas casinos are twice what they were pre-COVID whereas the profits in Macau are still below where they were pre-COVID. It's just a question of time and the markets are very impatient - they are shorter term than ever. We're arbitraging patience here and Sands China has now come down to a point where it's selling on probably a 12-14x P/E on very conservative earnings recovery. So in the short term, who knows? But in the medium to longer term, I think in terms of nominal price appreciation potential, I definitely would have that as my number three pick.