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Behind the mega-themes shaping top stockpickers

Eric Johnston
The Australian
Nov 18, 2022

Fund managers presenting to Sohn Hearts & Minds 2022 conference are picking stocks that business models are built around enabling the success of other companies as well as those capitalising on major demographic shifts.

Fundamentally the stock pickers remind us to always keep the investment proposition reasonably simple.

That is, to back businesses that have a path to earnings and cashflow growth and buy these stocks at an attractive entry point – in other words businesses that are seriously unloved and their valuations have been knocked down by the market.

The concept behind Sohn Hearts & Minds – dubbed a Woodstock for investors – is relatively simple. Leading fund managers find their best stock idea and pitch it like a speed-dating exercise to hundreds of big fund managers, super fund and investors. The returns on offer for the pitches can’t be ordinary; they need to be extraordinary and the investment case behind the pitch needs to be compelling.

All proceeds from Sohn go to medical research with more than $40m raised since the event started in Australia in 2015.

Joyce Meng of FACT Capital at Sohn Hearts & Minds 2023
Joyce Meng of FACT Capital at Sohn Hearts & Minds 2023

But the conference also offers important clues about where the top investors believe real opportunities can be found. And here the market is rapidly changing.

One thing, glamour technology stocks are long gone. So too are those playing on pandemic disruption, while capital intensive industrial players are also out.

A recurring theme among fund managers is defensive technology.

Even with a technology crash, demand for technology and services are ever growing. Joyce Meng, the New York-based founder of hedge fund FACT Capital says Anglo-Irish tech company Keywords Studios serves as “the picks and shovels” to the $US250bn ($370bn) video game industry.

Keywords do all the outsourced art, engineering, functional testing and so on that goes into high-end complex games. And global video game publishers are only just beginning to tap into outsourcing opportunities as they face an arms-race in spending on development and innovation.

Playing into this theme is Nick Griffin the founding partner of Munro Partners points to Dutch-listed company ASML which owns the tools that squeezes transistors on microchips. It has an essential monopoly on the cutting-edge technology which sits in a box that sells to chip manufacturers for as much as 300 million euros – the cost of a commercial aeroplane. Elsewhere California-based New Relic provides deep monitoring services to ensure a company’s app or website is running smoothly.

Governments can make or break business, so the role of regulatory tailwinds can’t be underestimated.

Cooper Investors founder Peter Cooper points out ever increasing regulation is playing into the hands of French lab player Eurofins which does 450m tests a year. Regulation around food to air quality is increasing 10-fold and driving up Eurofins’ testing and certification demand. Otherwise Jun Bei Liu of Tribeca says Hong Kong-listed China Tourism Group dominates the Chinese duty free market.

A regulatory shift means more Chinese are travelling internationally and including to the duty free haven of the “Hawaii of China” the Hainan province. For both this leads to a situation where there is regulated demand but unregulated profits.

Tim Carleton of Auscap Asset Management at Sohn Hearts & Minds 2023
Tim Carleton of Auscap Asset Management at Sohn Hearts & Minds 2023

It’s also worth taking another look at what is right in front of you. This is known as the JB Hi-Fi trade (The retailer was nominated by Tim Carleton of Auscap Asset Management in 2018). Since then JB Hi-Fi has piled on 84 per cent. Here household names that have been looked over by the market deserve another look. A reinvention of their business model is often a good reason to take a fresh look.

Carleton this year points out car listing company given its high margin and international push. Claremont Global’s Bob Desmond says sportswear giant Nike Inc is improving its margins by selling direct to consumers, taking back the profits that once went to external retailers. Even under pressure wealth manager AMP is trading well below its potential with all the businesses under its brand offering billions of dollars of returns under a potential break up.

Finally, market opportunities exist outside Australia. The ASX represents just 2 per cent of the world’s equity market by capital which shows the scale of opportunity. Fund managers are looking at thousands of stocks on NYSE and Europe and even more opportunities through Asia.

This article was originally posted by The Australian here.

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