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FINDING OPPORTUNITY IN
TORRID GLOBAL MARKETS
Portfolio Manager, Sanlam Investments UK
Aug 26, 2022
During the first half of this year, global markets recorded their worst performance in more than half a century. More than US$13 trillion was wiped off the MSCI World Equity Index during the period, and the S&P 500 plunged by a whopping 20%. Some observers have labelled the first six months of 2022 a ‘horror story’ for investors. Sell-offs of this magnitude are indeed gut-wrenching and scary.
However, such extreme market volatility can also offer great buying opportunities for investors with a long-term outlook. In keeping with our investment philosophy of purchasing quality companies at reasonable prices, we’ve taken advantage of the opportunities presented by the sell-off to acquire several businesses with excellent long-term growth prospects for the Sanlam Global High Quality Fund.
One business we bought into is the financial software firm Intuit, the owner of the QuickBooks accounting software. This is a company with excellent fundamentals (in terms of cash flow, assets, liabilities, revenue, profitability and growth potential), and we believe it can comfortably grow its earnings at double-digit rates over the medium term. In our view, the share was excessively priced for much of the past two years, but the sell-off meant that the price corrected from US$690 to US$360 per share. According to our assessment of the intrinsic value of the business, this was a justifiable price to pay, and we had the volatility of the markets to thank for this opportunity.
We also added capital to Samsung during the market weakness. The share price of this business has corrected meaningfully over the course of the year as concerns emerge around oversupply in the semiconductor sector. Samsung is either the leader or has a strong position in all its end markets, including consumer and industrial electronic equipment and products such as semiconductors, personal computers, televisions and home appliances. We believe the current share price offers the patient investor an excellent entry point into this market leader – concerns over the global economy meant we could purchase the share on a multiple of eight times next year’s earnings.
Another company we increased our exposure to during the downturn is SAP. SAP is a global leader in enterprise resource planning (ERP), the backbone of many businesses around the world – it assists firms with a multitude of tasks such as inventory management, payroll and procurement. Management has set a target of €8 billion free cash flow in 2025. If they can achieve this, we believe the share is trading at very undemanding levels for investors with a long-term horizon. Concerns over the upgrade cycle the company is currently going through are weighing on the stock – the market appears to be concerned about its ability to transfer its customer base to its cloud-based subscription model.
Yum China has been another exciting use of our capital this year. The owner of the KFC franchise business in China is set for good growth – over 1 000 new stores per year are currently being rolled out across the country. The company is aiming to grow its footprint significantly to tap into a growing middle class and increased urbanisation in China. Yum China provides investors with a great way to capitalise on the improving consumer disposable income trends in the region. The share has performed better as news improves over lockdowns in China, but it still offers appealing upside over the long term.
In our view, by investing in new names such as Intuit, Samsung, SAP and Yum China – as well as Fiserv and the LSE Group – when these fast-growing businesses offered value during the downturn, we have improved the overall long-term growth prospects of the Sanlam Global High Quality Fund.
Other opportunities we’ve capitalised on over the past year include selling Sage Group and Oracle at elevated valuations when technology stocks rallied hard last year, Danone after reassessing inflationary pressures on the business, and Bookings Holdings after a strong recovery in the second half of 2021. All four of these names have subsequently underperformed.
We also sold AbbVie – a pharmaceutical business that was trading at very attractive levels when we first invested – after strong gains over our holding period. On a net basis, the companies we sold had a debt balance of US$153 billion, mainly because of large debt levels for Oracle and AbbVie.
At the time of writing, the new businesses we invested in during the sell-off have a net cash balance of US$88 billion, mainly due to significant cash balances for Samsung and Yum China and very low net debt levels for Intuit.
We’re excited by the prospects of investing in these companies that are leaders in their industries and that suffered significant corrections along with the market in the first half of the year. Since then, the market bounce has taken us by surprise, and we’ve seen relatively new positions like Fiserv, Intuit and the LSE Group performing strongly in the new quarter.
Names we’re now sharpening our pencils for include Danaher, Equifax, Taiwan Semiconductor and Thermo Fisher – these companies have grown their earnings far faster than the market as a result of their industry leadership positions.
However, we want to ensure that we invest only when a good business is trading below our assessment of fair value, so the fact that many US large and mega-cap names have pulled back significantly doesn’t mean they automatically offer value to us. Our investment process leads us to invest in good businesses at a sufficient margin of safety and not based on price momentum or their weight in the index.
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