Three resilient companies to buy on the dip
Professional investor Mark Page picks three resilient companies that should be able to grow their earnings and cashflows in (almost) any economic environment.
Each week, a professional investor tells us where he'd put his money. This week:Mark Page, Artemis European Opportunities Fund
Investors love trends and fads. The latest is the "reflation trade". In anticipation of stronger economic growth, inflation and rising interest rates, structurally challenged banks and unprofitable cyclical companies have been the market's best performers since the summer. At the same time, profitable, resilient companies that are able to grow their earnings and cashflows in (almost) any economic environment have seen their share prices suffer. As a result, the real value for investors in today's market lies in "buying the dip" in the best of this second group of stocks.
The first is Norway's Orkla (Oslo: ORKO). It used to be a conglomerate, but its new management is taking the company back to its roots in selling fast-moving consumer goods: Jokk (a berry drink), Ejderns (marketed as "a fish roe spread for the brave") or Frdinge (cakes) may not be household names in the UK but they are in the Nordic countries. Thanks to the new management's focus on marketing and innovation, organic growth has already rebounded. Now, Orkla can complement its portfolio and benefit from economies of scale by acquiring attractive brands. Further, the management is improving efficiency by selling factories, which could lead to a meaningful improvement in margins. Finally, some non-core investments could also be sold and the proceeds returned to shareholders.
A second company whose share price has been a collateral victim of the increase of bond yields in the US is the Spanish utility Enagas (Madrid: ENG). At the time of writing, its share price has fallen by 15% since the US election. Yet it yields 5.7% and is valued at less than 14 times earnings. As a regulated utility, its earnings are predictable. The management has committed to returning roughly a third of its cashflows to shareholders through the dividend; its dividend per share should grow by 5% per annum over the next five years. Whatever fashions prevail, this combination of a high and growing dividend supported by predictable earnings is an attractive proposition.
My third suggestion may appeal to investors who are willing to benefit from (potentially) higher bond yields but who don't subscribe to (potentially) inflated expectations about the wider economy. Look no further than the French asset manager Amundi (Paris: AMUN). Its underlying business in France is very solid but its shares trade on less than 13 times earnings and yield more than 4%. As bond prices come under pressure, its clients may be encouraged to switch out of bond funds (where fees are low) and into its equity funds (where they are higher). Its recent acquisition of Pioneer, the Italian asset manager, will improve its position in Europe. A superb franchise, Pioneer has been growing its assets under management by 10% per annum. Amundi was fundamentally attractive before the deal; now it looks even more so.