Much of today’s investment landscape is populated by stocks offering seemingly “unique” growth opportunities, tapping into themes such as disruption, asset-light models, renewable-energy sources and post-pandemic consumer behaviour. Yet, as is so often the case, a good number of such stocks will quickly fizzle out, inflicting painful losses on investors.
Such is the nature of the investment world that many practitioners fall into the trap of perceiving binary outcomes: sure-fire winners versus total duds. Today’s version of this sees terrific benefit of the doubt – and capital deployment to match – afforded to sectors such as food delivery, sustainable energy and digital retail. The rush into such “opportunities” has accelerated as the phenomenon of environmental and social governance (ESG) investing has emerged.
While the stampede might not reverse any time soon, it presents a fabulous opportunity for the investor who believes that valuation does, in the end, matter and that outputs such as cashflow and return on capital are far from quaint relics. These basic investment tenets are forgotten in a frenzy. It is therefore the “old economy” stocks that we expect to provide upside surprises.
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One is LafargeHolcim (Zurich: LHN). For many years an underperforming giant in the unfashionable cement industry, LafargeHolcim is being transformed by a world-class management team.
It is right that we ask ourselves which industries and products stand at the mercy of disruption: cement is not one of them. All those roads, bridges, prisons, schools and hospitals are unlikely to be fashioned by 3D-printers anytime soon.
The challenge is to produce this much needed commodity and deliver it to market in a sustainable fashion. A global powerhouse in a range of sustainable building materials, LafargeHolcim leads the field in the decarbonisation of cement.
Carving out a win in wood
Another promising company is UPM-Kymmene (Helsinki: UPM). Based in Finland, the company is a leading producer of wood-based products. At the core of our investment philosophy is backing management teams with a proven focus on value-creating capital allocation. UPM is a case in point.
Funded by a robust balance sheet and strong cash generation, the group is in a phase of transformational organic growth in the areas of pulp and wood-sourced biofuel, and in replacing oil-based PET plastic with wood-based material. These investments should underpin an earnings trajectory likely to eclipse many of today’s more storied “disruptor” stocks.
A European stock conquering the world
The third name is one that stands to benefit from reopening. Having enjoyed a V-shaped recovery in the industrial sphere, we believe that the same will occur in the consumer sector. Households are itching to get out and shop.
Inditex (Madrid: ITX) is a classic example of a stock listed in Europe but winning on the global stage. Owner of fashion brands including Zara, Massimo Dutti and Stradivarius, the company straddles the world of physical and digital retail and it is an emphasis on the latter that should drive a rise in return on capital for investors.
John Bennett is manager of the Henderson European Focus Trust
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