Each week, a professional investor tells us where he'd put his money. This week: Stephen Yiu of Blue Whale Capital highlights three undervalued winners.
Our investment strategy involves finding attractively-priced companies capable of expanding and becoming more profitable.We take a bottom-up, fundamental approach and are happy to take a different view to the market. Indeed, we prefer to do so, as this provides greater potential upside and outperformance of the benchmark index.
We run a relatively small portfolio of about 25-35 stocks. With this level of concentration, the performance of each stock is material and the fund manager must believe very strongly in each investment.
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We do not understand how managers relying on widely consumed, external sell-side research can possibly achieve such conviction. We take an active approach to the management of the portfolio, with a constant review of the constituent stocks helping to create the scope for beating the market.
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Turnaround at Adidas
Adidas (Frankfurt: ADS) has enjoyed a renaissance under its impressive CEO Kasper Rorsted, who joined in 2016. Rorsted focused the business on becoming prominent in key "trend-setting" cities, increasing digital presence and direct-to-consumer sales.
Under his leadership, the sportswear giant increased the speed of the supply chain and improved market share and profitability in North America. Adidas has successfully implemented the key initiatives set out by Rorsted, ensuring the turnaround has gathered pace. This year, Adidas is set to post €22bn of sales, up 30% from 2016, while operating profit margins have almost doubled. What's more, the potential for Adidas to continue delivering such strong performance is underestimated by the market.
Plenty of growth ahead
Amazon (Nasdaq: AMZN) has built dominant e-commerce infrastructure, supporting unprecedented improvements in delivery times. With the switch from physical to online retail still in its initial stages, Amazon is poised to take a significant share of a growing market.
Amazon is similarly dominant in cloud services through AWS, while its Prime membership programme is supporting a loyal, high margin customer base; it has now reached 100 million members. The acquisition of Whole Foods, the creation and refinement of Amazon Alexa and the group's investment in digital media all point to future sources of growth not yet fully appreciated by investors.
Adobe (Nasdaq: ADBE) has more than 50% of the digital content creation software market. Whenever you view an image, video, website, magazine, or even an app, there is a good chance it was created using its software. We believe Adobe will be a major beneficiary of continued explosive growth in this market, as ever-richer digital content is consumed across devices.
Meanwhile, Adobe's pioneering move to a subscription model is unlocking international opportunities and helping to combat software piracy, which has eaten into the company's revenues in the past. The upshot is that we think the market is underestimating Adobe's ability to grow sales at 20% per year, and profits faster still, for the foreseeable future.
