Buy Hold Sell

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

Mon 05 Jun 23, 9:02am (AEST)
BUY HOLD SELL PrimaryYoutube (68)
Source: Livewire Markets

Key Points

  • Since the beginning of 2023, growth darlings like Nvidia are up 177% year-to-date
  • Is this a sign that it's time for growth to shine once again?
  • Antipodes' Jacob Mitchell and PM Capital's Paul Moore share their secret to finding value in today's volatile market and the headwinds facing earnings over the next 12 months

After a decade of Growth taking the market by storm, Value came back in a real way in 2022. 

Both locally and abroad, cyclical and economically sensitive stocks such as financials, materials, infrastructure and energy companies all saw their share prices soar. It was all thanks to rising interest rates, skyrocketing inflation, Russia's war in Ukraine, and a supposed "return to fundamentals". 

But since the beginning of 2023, things have changed once again. Growth darlings like Nvidia (NASDAQ: NVDA) are up 177% since the beginning of the year. 

So is this a sign that it's Growth's time to shine once again in 2023? And what is the biggest risk investors should have on their radars over the year ahead? 

To find out, Livewire's Ally Selby was joined by Antipodes' Jacob Mitchell and PM Capital's Paul Moore for their secret to finding Value in today's volatile market and the headwinds facing earnings over the next 12 months. 

Plus, for a bit of fun, we asked them to select one stock they would bet their own house on right now. And their answers are sure to surprise you.  

Note: This episode was filmed on Wednesday, May 31 2023 and first published for Livewire Markets on Monday 5 June. You can watch the video, listen to the podcast, or read an edited transcript below.

Edited Transcript

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.

Value came back in a real way in 2022, but since the beginning of 2023, we've seen Growth really take the spotlight again. I mean, Nvidia is up around 170% since the beginning of the year. I'll start with you, Jacob. Do you feel like Growth will outperform in 2023, or do you think Value will come back?

Value versus Growth

Jacob Mitchell: I think our base case is that there's a recession that's coming down the pipeline. We haven't really seen it in the spot data yet, but I think, given the amount of tightening that's gone into the market via most of the central banks, it's inevitable. 

In that environment, actually, you have risk in both Growth stocks and Value stocks. But we would argue that most of the Growth stocks still have the highest expectations, and there's always that risk that a Growth stock becomes a Growth trap, i.e. it's maturing, and as it matures it becomes more cyclical. 

I think that describes quite a lot of the consumer-facing mega-cap tech. The outperformance will reverse, and then within Value you want to be fairly defensive.

Ally Selby: Over to you, Paul, do you feel like Value could rebound again in 2023?

Paul Moore: Short-term, until we get this recession that everyone's expecting behind us, I think Growth could continue on, but I think you really need to go back and look at the medium to longer term. And we think that post-COVID was a once-in-a-lifetime opportunity in Value type stocks. What we said at the time is that typically when you get these great opportunities, there's a 10-year cycle, and the trick is to play it out for the full cycle.

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

Ally Selby: We have seen mega-cap Growth stocks in the US outperform since the beginning of the year. The US has also led the world over the past decade. Do you see that continuing, or is there a different region where you're finding opportunities right now?

Paul Moore: We don't focus too much on geography because it's about the stock that you buy. For example, Visa (NYSE: Vis 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.

Ally Selby: Okay. Over to you, Jacob. Are you finding more opportunity in the US or in other regions of the world right now?

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 

Ally Selby: We've just seen earnings out of the US. They were better than expected. Do you think the bar was too low?

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. 

Ally Selby: Do you feel like we could actually see the earnings recession that many predicted? 

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

Ally Selby: What's the biggest risk to Value investing over the next 12 months?

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. 

Ally Selby: Okay. Over to you, Jacob. We've got patience here. What do you think is the biggest risk to Value investing over the next 12 months?

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? 

Ally Selby: No doubt it's tough out there at the moment, so this question is a little bit of fun. It's a bit of a thought experiment. We want to ask our fund managers if there's one stock that they could bet the house on, 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.And then finally, it also does the high voltage transmission equipment. Even before we actually have to double the amount of power output to decarbonize transport and heating, we already have this very old infrastructure that needs to be upgraded and then expanded. So we just see a multi-decade investment cycle that's emerging, and you're in the early stages. And that's when these types of businesses, I would argue, are most inefficiently priced, because people don't really believe, right? They can't see it yet. But when you look at it from a margin of safety, the backlog is already building and the multiple's attractive. So I think it's a really interesting one to put in the top drawer and forget about.

Ally Selby: And bet the house on. Over to you, Paul, what stock are you betting on for the year ahead?

Paul Moore: Well, just to start off, I don't make recommendations to others in terms of what they should be investing in, but in terms of what I'm betting the house on myself, it's actually interesting at the moment. There are probably three or four stocks that I've either bet the house on or I'm thinking of betting the house on. They're all financials. I've got ING (AMS: INGA) in Europe, I've got Bank America (NYSE: BAC) in the US, Apollo Global Management (NYSE: APO) in the US, and Charles Schwab (NYSE: SCHW). 

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


Paul Moore: Well, I'll probably go the safe route for the moment in ING because you're getting a 7% or 8% dividend yield upfront. They're selling on about five to six times earnings because everyone's worried about recession and potential bank taxes and other issues, but they're actually paying the money in your pocket today. And if you look at the long-term return on equity markets, I don't know what it is off the top of my head, but I'm guessing around 9-11%. Going forward, it's going to be less. So if you're already getting a dividend of 7% upfront, that's pretty good. 

They're also paying back a third of their market cap in excess capital. And at some point, I suspect they'll rerate from five to six times to nine or 10 times, which is still not excessive and you get pretty good capital growth. So I think that's the safest bet. But to be honest, each one of those I have or will be betting the house on.

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.

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Buy Hold Sell

Buy Hold Sell is a regular video series where Australia's leading professional investors share their views on Australian and Global Shares. This content is produced by Livewire Markets and has been syndicated to the Market Index website.

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