“May you live in interesting times.” This apocryphal Chinese curse springs to mind when looking at today’s equity markets. The initial wave of the Covid-19 virus may have peaked in Europe and the US, but the longer-term trajectory of the disease and its economic impact remain highly uncertain. Throw in geopolitical tension between China and the US and a Brexit deal still to be agreed, and “interesting” seems an understatement.
Investing against such a backdrop can be a challenge, but it also offers opportunities. At Odyssean we aim to exploit these by retaining a focus on our core philosophy – backing high-quality businesses where engagement can improve returns – and identifying companies that benefit from the current market situation.
Finding oversold first-rate cyclicals
When cyclicals sell off, investors need to judge the timing of a rebound and appropriate entry valuations. These are not easy questions to answer. We take comfort in backing market leaders at valuations supported by significant real assets. Elementis (LSE: ELM) fits this bill.
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The company is a leading producer of speciality chemicals sold into a broad range of industrial and personal-care end markets. The group enjoys strong market positions with access to unique mineral assets underpinning differentiated, premium products.
The group should benefit from a cyclical recovery in demand after the virus, while synergies from recent mergers and acquisitions and targeted cost savings of $15m will help too. The shares trade on a price/book ratio of just 0.5 compared with a five-year average of 1.8, suggesting significant value.
Profiting from uncertainty
We also seek out companies that should emerge as winners from the current market disruption. Looking beyond the obvious, direct winners (such as online retail) we like are firms we think capable of gaining market share in uncertain times. Volution (LSE: FAN) falls into this category.
Volution is a leader in domestic and commercial ventilation equipment. The company has leading positions across the UK, Europe and Australasia in a growing market. Energy-efficiency standards are driving increased ventilation spend per property.
As a well-capitalised, larger player in a fragmented market, Volution should benefit from turbulence in the sector. Its ability to maintain supply and inventory should allow it to gain market share and its access to capital means it could buy up distressed smaller players.
Growth stocks that can move up a gear
Finally, high-quality businesses in growth markets led by capable managers that could improve overall performance are highly appealing, but rare, investment opportunities. SDL (LSE: SDL) is an example.
It is a leading global provider of translations services and related software tools. The company serves blue-chip corporate clients in a market growing at a mid-single digit rate as content volumes grow exponentially.
SDL boasts a high level of recurring sales, plenty of scope for improving margins, a record of accretive bolt-on acquisitions, a strong management team and a healthy balance sheet. It’s a long-term story we would like whatever the market conditions.
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