At the recent Livewire Live event, Mary Manning from Alphinity Investment Management outlined the bull case for Ferrari (NYSE: RACE) and summed it up nicely by saying that regardless of the economic conditions, people are going to want to buy Ferraris. Such is the power of the Ferrari brand.
Indeed, there are some businesses that are much better at weathering the economic cycle. This could be due to a combination of the segment that they operate in, the power they possess, universal brand appeal, and the demand for their products.
On this edition of Buy Hold Sell, host David Thornton is joined by Nikki Thomas from Magellan and Adam Chandler from Claremont Global, as they run the ruler over a handful of all-weather businesses to see how they stack up.
Make sure to watch the episode to find out which tech titan they both rate as a BUY, as well as the one stock they each highlight that no longer makes the grade.
Note: This episode was filmed on September 20, 2023 and first published for Livewire Markets. You can watch the video, listen to the podcast, or read our edited transcript.
David Thornton: Hello and welcome to this episode of Buy, Hold, Sell. I'm your host, David Thornton. We're on the hunt for companies that are all weather and can generate return all through the cycle. Today we're also going to talk about some names that just don't stack up anymore. For that, we're joined by Nikki Thomas from Magellan, and Adam Chandler from Claremont Global. Welcome guys.
Let's dive right in at the luxury end of town, we're talking LVMH, owner of brands such as Louis Vuitton, Bulgari, Fendi. Adam, we'll start with you, is it a buy, hold or sell?
Adam Chandler (HOLD): It's a hold for us. We did have it in the portfolio earlier in the year and we used some of the price strength as an opportunity to let that one go. Still big admirers of the company, just the brands that they have there and that brand heritage is very hard to replicate. It's just irreplaceable. Some of those brands date back to the 18th century. So we do like the company, but from a valuation perspective, it was more stretched. I do know that the share price has come off since then.
David Thornton: Nikki, the stocks only up about 7% this year, but a lot of analysts do like it. Is it a buy, hold or sell?
Nikki Thomas (BUY) : Taking that longer-term view, I'm a buy on the stock around these levels. The market right now, and as you mentioned, the share price hasn't done as well very recently. Markets are concerned about slowing consumer discretionary spend. We're seeing some signs of that. Recessionary risks are around definitely in China and Europe and places like that. We've had this big revenge travel thing, which is maybe slowing back from really ridiculous levels. LVMH also has exposure to the wealthy Chinese, so people are nervous about that exposure as well. I actually think if you think about what this business can generate over the next three years and the positioning that it has, the opportunity it has in Dior and Tiffany, which are brands it is revitalising, and the incredible strength this business has through its really diverse group of Maisons, that this is a wonderful stock to own for the long term. And these sort of cyclical slowdowns, these concerns about consumer spending, is when you get those opportunities to buy a business like this.
David Thornton: We'll switch gears now from luxury to fast food, Chipotle Mexican Grill, it's growing quickly. Nikki, is it a buy holder, a sell?
Nikki Thomas (HOLD): In the near term it's a hold, just because the stock's rerated a lot in the last six months or so, and I'm really bullish about this stock over the next three years, but probably a lot of it's reflected in the price, just very short term. This is a business that is supposedly running really healthy Mexican food restaurants in the US. It has about 3,000 stores and potentially has at least 7,000 - and that's still half the number of McDonald's in the US. So we're not talking excessive build. It's going to roll out space at 8-10% per annum. We think that number will accelerate towards 10 as we go into next year, and some of the difficulties of opening stores will go away as we get further away from COVID. So we think this is actually an accelerating story, but right now it's had a good run in the short term.
David Thornton: Adam, it's done about 40% this year. Is it a buy, hold or sell?
Adam Chandler (HOLD): It's a hold for us as well, just based on price at this point in time. I mean, we really like Chipotle. You take a step back and think about some of those quick serve restaurants and restaurant chains, a lot of them have that franchiser-franchisee relationship and that can create quite a lot of friction. One of the things we really like about Chipotle is that they own their own stores and so they have more control, that's clearly worked for them, best in class, in terms of restaurant margins and growth, same store sales, as well as the rollout that Nikki was talking about. So like it for all those reasons. And when you speak with management - Brian Niccol and Jack Hartung, they're very operationally focused and they're talking about throughput. They're not talking about financial engineering, they're not talking about basically selling off company restaurants and buying back shares. So for all those reasons, we really like it, it's a great story, but just too pricey for us at the moment.
David Thornton: Okay, we're going to move on to the mother of all tech names, that is Alphabet, of course the parent company of Google. Adam, is it a buy, hold or a sell?
Adam Chandler (BUY): Buy for us, that's an easy one. It's interesting when we go back six months, a little bit longer and all the clouds that were around Alphabet and in particular Google Search, and concerns about what Microsoft might do to them. And as we've moved through time, we've seen that Alphabet has still got the tech, they've got all the AI sitting there, they've just been more conservative rolling it out. They've still got the data and the consumer habits are still the same. So that core search business really, really strong, remains so. Incredible moat, 90% market share. For all the noise Microsoft have made about search, they haven't made much progress in chipping away at this stage.
I think one of the other things that we find really encouraging about Alphabet at the moment is the margin story. And so last year it was a little bit disappointing with the margins. More recently they seem to have got religion on cost and so we're seeing cost actions being taken and some of their real estate footprint being rationalised and obviously there's been some layoffs as well, which we never like to see. But just a different tone coming out of Google, which has been really positive from a shareholder perspective in terms of what's happening with margins and then also from a mix perspective, that cloud business is now profitable. And so as that continues to grow, we expect to see margins expand, that'll be a nice tailwind for the business as well. For all those reasons, buy.
David Thornton: Nikki, it's certainly ridden investor sentiment around AI. Is it a buy hold or a sell for you?
Nikki Thomas (BUY): It's a buy, similar reasons. They had a tough year in 2022. They went out after costs. It's not been as aggressive as Meta, but I would say still there's a cost out story led by Ruth (Porat), who's not just CFO now, is taking on an additional role and I really think she's a fantastic executive in that business, so I'm really excited by the fact that she's expanding her role. But those costs out will really drive very strong numbers through 2024 and so it makes the stock look pretty interesting. I do think the longer term story around how search may evolve with generative AI is one we're going to all have to watch carefully. There's a real dependence in that business on its search franchise, it's really where it makes all its money and we don't know where that's going to go long-term as gen AI really comes home to roost. So one to watch, it looks well positioned, but I think we just need to keep an eye on that as we get a little bit further down the track.
David Thornton: This week we asked our guests to bring along a stock that no longer makes the cut. Nikki, what have you got for us?
Nikki Thomas: For me, it feels a bit controversial, but I've brought Eli Lilly. So Eli Lilly is one of the two companies who have brought these big weight loss obesity drugs to market and they're now going through clinical trials around the utilisation of these, how they could expand use cases to solve other chronic diseases. And to be honest, when you think about the level of obesity and morbid obesity - horrible term but it's a technical term - and overweight people in the US, the patient population for these drugs is, just in the US alone, about 150 million people.
So the market's really excited about the size of this TAM and the possibility of these drugs. And Eli Lilly and Novo Nordisk are the two that are kind of out in front on this. And I kind of agree with that, I think there's an amazing opportunity here, but at the same time, I just think the market has got a little bit overheated on the stock. There's lots they've got to prove, there's lots of clinical trials to get through, it's science risks, so other drugs could come. You could get an adverse event suddenly appearing, that people are like, "Oh, these people actually get really sick." So I don't think we're far enough through this to be paying what the market is paying for it at the moment. So I'm a sell on Eli Lilly, just risk rather than that I'm missing that there's a big story here.
David Thornton: Do you have a similar thesis on Novo Nordisk, the main competitor?
Nikki Thomas: It's probably not as aggressively priced, but we probably don't like Novo more because it's a little bit narrower in its science risk. So you're really leaning on one drug. Eli Lilly is a broader opportunity set, plays a bit broader, but it's not one we're looking closely at, at the moment.
David Thornton: Adam, what stock does not make the cut for you guys?
Adam Chandler: Well, we're big admirers of it, Hermes, which is really in very rarefied air when we think about luxury goods companies. And one of the questions that we always have, and we have it with Louis Vuitton as well, is when we're thinking about supply and maximising revenue, which is finance people, we all like to hear, it's getting that balance with exclusivity and scarcity. I think what Hermes have been able to do very well over time is strike an amazing balance. When you think about someone buying a handbag for $20,000 and having to wait a year to be able to do that, you're doing something incredibly well with a brand to achieve that and their ability to just manage supply, but it is very expensive and so that's where we take a step back. Once again, still big admirers of the company, but just a little bit pricey, the bags and the stock at the moment.
David Thornton: Well, that's all we have time for today. If you enjoyed the episode, please give it a like and don't forget to subscribe to our YouTube channel. We're adding more content like that every week. We'll see you next time.
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