When the investing landscape turns to custard, invariably one term gets bandied around - "quality".
Quality is the investment style that is designed to see you through all the peaks and troughs of the economic cycle.
Quality targets companies with consistent track records, strong management, dependable earnings, and healthy balance sheets. The style has been around for decades and its popularity is backed by evidence.
With the global economic and investing landscape becoming increasingly challenged, particularly as economies grapple with soft landings versus full-blown recessions, quality is rising once again.
Note: This episode was filmed on September 20, 2023 and originally published on 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. With the global economic landscape becoming increasingly complex, investors are on the hunt for quality. Joining us today on that hunt is Nikki Thomas from Magellan and Adam Chandler from Claremont Global. Welcome, guys.All right, let's get straight into it. We're going to talk Nike. Adam, I'll start with you. Is it a buy, hold, or sell?
Adam Chandler (BUY): It's a buy for us. It's an incredibly resilient business across time. And if you look at that top line for Nike, going right the way back to the turn of the century, they've only had two down years. The down years have been very marginal, low single digit decline. So, very resilient top line. Where they've had more issues recently has been with their margin. So, we've seen that in terms of their freight costs and some of the inventory costs which they've had to face. So, short-term, a dampener on margins. But longer term, what we can see is a real path for them taking margins up to the high teens, and that's with their move to direct distribution. So, for those reasons, at the moment we think earnings are depressed, and on top of that it's trading at a multiple, which compared with history is relatively low.
David Thornton: Nikki, the stock's down about 20% year-to-date. Is it a buy, hold, or sell?
Nikki Thomas (SELL): I'm a sell. I think Nike is an incredible franchise. I've owned it in the past. It's a really clever business. But right now... And they've made a big pitch around moving direct-to-consumer. So, what that means is for every pair of shoes they sell, it used to be they'd split the money between themselves and the retailer. And increasingly, they're cutting the retailer out and they're getting the full value of the shoes, and that means lots of margin expansion as you go through that. So, it sounds like a great strategy, but it hasn't been working that well in the short-term and issues around that, COVID hasn't helped.
But the bigger issue for me is this is a big business in China. The Chinese consumer is increasingly under pressure and also under pressure to buy local, and are moving away from Western brands. And when such a big part of that business is dependent on that China franchise, I'm nervous that there's more earnings downgrades ahead before we see the bottom on this, what is typically a pretty good quality business. So, look, I'm just a sell for now, and I'd keep watching it.
David Thornton: Nikki, I'll stay with you. We'll move on to the retail behemoth, Amazon. Is it a buy, hold, or a sell?
Nikki Thomas (BUY): It's a buy. It's run a lot in the short-term from lows, but we tend to take a longer-term view, and I think the market's just starting to recognise the enormous value creation that's coming in its two major pieces, actually three. The AWS cloud business. So, we talked about Microsoft's cloud business the other day. This is similar. They're going to dominate in that Hyperscale place and generative AI is additive to that whole story. Then, they overbuilt their distribution network, and now they're actually starting to get leverage across that. And so, there's a huge story.
They're taking more than 25% of every extra dollar of market share and retail sales in the US at the moment, so dominating in retail sales growth, and that gives them operating leverage in that business. And then, you've got the advertising piece on top of that. So, I think it's probably not going to do much in the very short term, but you just put this stock in your bottom drawer and you're going to make a lot of money over the next three years.David Thornton: Adam, it has returned about 6% this year. Is there still some juice left in the tank? Adam Chandler (HOLD): It's a hold for us. Look, it's an amazing company in terms of the innovation, and you can just list off the products. Think of Prime, or AWS, or what they've done with third-party sales. But that's a double-edged sword because it does mean that they're reinvesting a lot into the business. That means that the margins are thinner, and also, in terms of the capital that they're spending. And so, they've had negative cashflow on and off over the last couple of years. So, great business, but for us, just a little bit harder in terms of that predictable earning stream that we're looking for, and doesn't quite fit within our wheelhouse of companies.
David Thornton: Staying with you Adam. We'll move on to Visa. Is it a buy, hold, or sell? Adam Chandler (BUY): Visa's a buy for us. We love the business. Obviously, a fantastic network business, so very hard to recreate the network that they had. Visa came out of banks owning it, and as a result of that, over time, what they've built up is over 4 billion cards. You've got over 15,000 banks, and then you've got 100 million merchants who all use Visa. So, an incredible network effect, which gives us a lot of confidence in that sustainable competitive advantage that we've been talking about. Then, on top of that, you've got the tailwinds of moving to digital payments and away from cash. I mean, anyone who's tried to find an ATM to pay a tradie recently has probably had the same issue. They're just dwindling. And obviously, we're all using our cards more and tap-and-go. So, when we get to the financials of it, that recurring revenue that we see is just amazing and incredibly high margins. So, almost 70% operating margin, the typical S&P company averaging around 15. So, very profitable. We love it for all those reasons. David Thornton: Nikki, are you similarly bullish? Nikki Thomas (HOLD): Visa and MasterCard have been in the Magellan strategies, both High Conviction and Global, pretty much through the last 15 years for the global strategy. So, we're clearly big fans of the payments space. Maybe I'm a hold right now just because I don't think there's anything that's going to see it dramatically do better than what the market expects right now. But are you going to get double-digit compound returns through time out of this business? I think so. So, great company to own. Put it in your bottom drawer and keep holding it.
David Thornton: All right. So, we've given you a couple of stocks there, but we also asked our guests to bring along a couple of their own high-quality names. Nikki, what have you got for us today?
Nikki Thomas: I brought ASML. ASML is a Dutch-listed company, but it is essentially the enabler of Moore's law. So, this is the company that makes the lithography equipment that sits inside the foundries that manufacture semiconductors. And if you think about where our world is headed over the next decade, semiconductors are going to be in everything. They're pretty much in everything today. And the use cases for this just continue to expand. ASML are the only people who make EUV equipment, and so they're just superbly positioned for the growth in that industry. It's interesting right now because there's a cycle that always happens in semiconductors. And it means the stock right now is being priced as if there's a bad cycle coming, and it's too cheap for what you're getting. So, I think it's a really extraordinary opportunity to buy this incredible business because the market's discounting a short-term concern and forgetting about the long-term opportunity. David Thornton: Chip manufacturers have been on fire this year. Adam, what have you got for us?
Adam Chandler: Agilent Technologies is one that we really like. We've been adding to it in our portfolio. So. Agilent Technologies are a leader in precision instruments, so they provide instrumentation to around 250,000 labs around the world. And that's a really sticky product because once you're in the workflow for a lab, it's very hard to move it on. There's obviously regulation around that, and you're deeply integrated and embedded. So, we really like it for those reasons. And then it's the razor and razor blade model. So, you have the instrumentation which sits in the lab, and then they're selling the consumables or they're selling the services on top. And as they've been increasing their attach rates, or selling more of those two things, we've seen margins go up as well.
More recently, the end market has been a little bit bumpy, and China is part of the reason for that, but we see that as being an opportunity. Once again, we're thinking long-term and its multiple is quite depressed relative to historical levels. So, we like Agilent.
David Thornton: That's all we have time for this week. If you enjoyed that episode, please give it a like. And don't forget to subscribe to our YouTube channel. We're uploading content like that every week. We'll see you next time.
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