Which stocks are you looking at adding to, or snatching up, since valuations have fallen?
We are seeing a huge opportunity in memory chips, specifically what’s known as DRAM.
Micron Technology is one of the three companies that control over 90 per cent of this market. It’s a healthy oligopoly. Micron’s enterprise value is just over $US50 billion, but to replace its assets would cost over $US100 billion. It’s trading on 1 times book value, is free-cashflow positive, and is undertaking a share buyback.
Demand for DRAM has fallen in 2022 and all the main players have been quick to adjust their capital expenditure plans, and thus supply plans, for next year. Memory pricing is likely going to be tough for a couple of quarters, but the market being balanced is visible on the horizon. We expect the market to then begin to tighten up quickly, as the memory chip cycle is typically very fast, and supply takes 12-18 months to respond.
Which stocks/sectors could come under significant pressure?
We are steering clear of companies with poor balance sheets. For most, COVID-19 was a wake-up call to get their liquidity and debt under control when times are good. When conditions get tougher, as they are now, a strong balance sheet is vital. Highly geared companies are today facing higher costs of capital, and this raises the possibility of dilutive raisings at depressed share prices.
We are also wary of anything that is too exposed to the consumer. The rising cost of living in many developed markets is already beginning to have an impact on household balance sheets and there is a good chance that some companies find themselves trying to shift elevated levels of inventories in the coming year.
Why do you see European equities as an opportunity?
There are lots of hidden gems in European equities right now. Schneider Electric offers pragmatic solutions to energy efficiency. In Europe, as well as globally, you can see how difficult it is to increase the supply of energy in its various forms. Schneider operates on the demand side, ensuring that buildings and factories are minimising their use of electricity. Its switches, controls and systems aren’t always the fanciest, but they are trusted. We expect to see higher earnings to drive share price gains over the medium term.
What’s the most frustrating position in the portfolio?
HelloFresh’s share price performance has been frustrating in the short term, impacted by the tech and “COVID-19 winners” sell-off and concerns over the European macro backdrop, despite most of its revenue coming from the US. This has created the opportunity for us to increase our position.
From a fundamental view, the company is continuing to perform very well. Active customers are still growing, meals per customer are growing and the revenue per meal is growing. The gross margin has been expanding, it has €500 million cash on the balance sheet, and you only need to look two years forward to see a 10 per cent free cash flow yield.
The fund has underperformed its benchmark amid a volatile market for global equities. Why launch as an active ETF?
We’ve had experience launching funds in periods of heightened volatility. Firetrail launched our Australian small companies fund on 20th February 2020, which was the peak of the market before the sharp COVID-19 crash.
It was volatile – but also gave us some outstanding opportunities that we look for as a medium-term investor. Fast-forward to today, and that fund has outperformed the ASX Small Ordinaries benchmark.
We are seeing similar opportunities today in global equities. Whilst volatility has resulted in some short-term underperformance, we believe now is a great time for investors with a medium-term horizon to find global equity ideas that can outperform.
Favourite local bar or restaurant? What’s your go-to order?
North Sandwiches on Bridge Street in Sydney. The Hot & Blue is a must-try. Get there early to beat the crowd.
Any podcasts you’d recommend?
If you want to learn the details of how businesses evolve, then I can highly recommend How I Built This with Guy Raz. For those interested in technology companies, Acquired by Ben Gilbert and David Rosenthal is excellent. One warning though – some of these podcasts can be over four hours long, so settle in.
Disclaimer: This material has been prepared by AFR, published on 29 September 2022. HM1 is not responsible for the content of linked websites or content prepared by third party. The inclusion of these links and third-party content does not in any way imply any form of endorsement by HM1 of the products or services provided by persons or organisations who are responsible for the linked websites and third-party content. This information is for general information only and does not consider the objectives, financial situation or needs of any person. Before making an investment decision, you should read the relevant disclosure document (if appropriate) and seek professional advice to determine whether the investment and information is suitable for you.
