By James Thomson

 

Want to start your new investing year with a real bang? How about shorting the biggest company in the world.

After delivering impressive returns at L1 Capital’s flagship long/short fund in the past few years, joint managing director and chief investment officer, Mark Landau, has set his sights on a stunning target: shorting the $US2.1 trillion ($3.1 trillion) tech giant Apple.

Landau argues the pandemic pulled forward huge demand for Apple, roughly doubling profits and the group’s share price. But with markets now moving past COVID-19, he feels several big challenges facing Apple are not priced into the stock.

First, Landau doesn’t believe the new iPhone 14 and M2 MacBook represent much of an upgrade on previous models. And at any rate, consumers are choosing to delay upgrading because of tougher economic conditions. Further, Apple is likely to see some pressure on margins, given it kept iPhone 14 prices steady despite rising input and marketing costs.

“The iPhone is Apple’s biggest selling and highest margin product, with any softening in volumes or margins having a disproportionate impact on earnings,” Landau says. “Despite these challenges and early signs of volume declines, market expectations are for Apple to continue to grow earnings in FY23, which, we believe, is optimistic and unlikely.”

Landau was one of 11 fund managers who provided a long-term stock pick to Chanticleer’s New Year survey. These fundies are also part of a roster of top-flight managers that provide their expertise for free to Future Generation, the not-for-profit investment company that donates 1 per cent of the assets of both its ASX-focused listed investment company and its global stocks LIC to charity each year.

The Future Generation managers gave Chanticleer a sneak peek at some of their best ideas for the year ahead.

Tribeca Investment Partners – Ramsay Health Care

Ramsay Health might be sitting 20 per cent below its pre-COVID-19 levels and 32 per cent below the recent takeover bid from KKR, but Tribeca’s lead portfolio manager, Jun Bei Liu, sees a recovery on the horizon, as workforce shortages ease. The group’s relatively high debt load should also look more reasonable as hospital admissions normalise after the pandemic.

“Ramsay is now very well positioned for a rapid recovery in earnings given the backlog of patients waiting for surgery in Australia, the Nordics and especially the UK. We are confident this will support elevated surgical volumes for an extended period,” she says.

Lanyon Asset Management – Shiseido

If you’ve ever wondered how Lanyon portfolio manager Nick Markiewicz keeps a youthful glow, his long-term pick for 2023 may reveal part of his secret: Japanese cosmetics giant Shiseido.

Markiewicz sees the reopening of the Japanese and Chinese economies as key to growth. “The consumer experience in the US suggests that cosmetics are likely to be a key beneficiary of post-COVID-19 revenge spending,′ ” he says.

But the company has also undergone recent internal improvements, getting out of lower-margin, mass-market businesses and pumping the savings into better Chinese distribution and more marketing. Management’s plan? To become the No. 1 cosmetics group in the world by 2030.

Wilson Asset Management – Nexted

Lead portfolio manager at WAM, Oscar Oberg, likes a post-COVID-19 play in English language school operator Nexted. While closed borders weighed on international student numbers, Oberg says Nexted is set to have 4000 students by the end of 2022, double pre-COVID-19 levels. Operating leverage should improve as migrant and student numbers increase across 2023.

“With listed peer IDP Education trading on a price to earnings multiple of 48 times, we expect Nexted to command a premium valuation and believe the share price can double over the next one to two years,” Oberg says.

Ellerston Capital – Cellnex Telecom

Bill Pridham, portfolio manager at Ellerston Capital, has been an investor in European wireless tower owner Cellnex for several years, but he’s never seen the stock this well positioned.

With rising rates pushing up funding costs, Cellnex, which controls more than 20 per cent of the continent’s towers, has pivoted away from empire building to maximising organic cash flow; this is tipped to hit €2.5 billion ($3.9 billion) a year, or about 10 per cent of the company’s market capitalisation.

“It is a real ‘skate to where the puck is going’ opportunity,” Pridham says. “With over €110 billion of contracted revenue in place and secular demand drivers associated with 5G network rollouts, there are very few companies with the long-term earnings and growth visibility of Cellnex.”

Regal Funds Management – RPMGlobal

Management guidance for strong revenue and earnings growth hasn’t prevented cloud-based mining software provider RPMGlobal from dodging the drubbing handed out to tech stocks in the last year. But James Sioud, portfolio manager at Regal, believes the company’s time has come.

“Whilst the mining industry has adopted cloud-based software much slower than other industries, we believe this transition is inevitable. RPMGlobal has spent the last decade preparing for this structural shift, spending almost $200 million building or acquiring software products, all of which are now cloud-enabled.”

Strength in commodity prices should also help boost mining companies’ tech budgets, while Sioud says RPM’s position is further enhanced by solid pricing power and switching costs.

Firetrail Investments – Seek

For Kyle Macintyre, investment director at Firetrail Investments, the weakness in the share price of online classifieds giant Seek is a buying opportunity.

While the potential for a weaker labour market to hit ad volumes and revenue is weighing on the stock, Macintyre argues Seek’s position as a market leader gives it “underappreciated pricing power which can offset any potential slowdown in job ad volumes, allowing Seek to grow earnings despite the tougher macroeconomic environment”.

The potential to grow across its Asian businesses is another attraction for Firetrail.

Plato Investment Management – Moderna

David Allen, head of long/short strategies and co-head of research at Plato Investment Management, likes one of the biggest names of the pandemic: Moderna.

Currently valued at just six times earnings, with $US18 billion of cash on its balance sheet (20 per cent of its market capitalisation) and plans to buy back 5 per cent of its stock, Allen sees the potential for 50 per cent upside on the stock on conservative valuations.

“The cash balance and technology give flexibility for M&A, R&D, partnership or added investment.”

Sage Capital – James Hardie Industries

Building materials giant James Hardie might have halved from its highs as rising interest rates have hit the housing market, but Sage Capital’s chief investment officer, Sean Fenton, sees a medium- to long-term buying opportunity.

He says James Hardie’s skew towards renovations and remodelling means it should be able to weather any housing downturn. “Whilst there’s undoubtedly a high amount of short-term earnings risk, James Hardie has a proven capability to grow its earnings across cycles and the current price represents an attractive entry point for the patient investor focused on long-term returns.”

Nikko Asset Management – Compass Group

The food sector has always been a safe haven for investors in tough times and Iain Fulton, investment director of global equities at Nikko Asset Management, has a new spin on this idea. His pick is London-listed Compass Group, which provides contract catering services to hospitals, universities, offices, factories, sports stadiums and a wide range of other venues.

“The inflationary environment and tightness in labour markets has accelerated the trend of outsourcing in food service operations and, as the leading player with the strongest balance sheet, Compass stands to deliver solid growth with improving returns on capital as the business continues its recovery post-COVID,” Fulton says.

Antipodes Partners – TSMC

The battle to control computer chip production may turn out to be one of the defining stories of the next decade and Antipodes portfolio manager Graham Hay is looking to ride the trend with TSMC (Taiwan Semiconductor Manufacturing Co), a company that has become known as the “silicon shield” between China and the US.

Hay says demand for the leading-edge chips that TSMC makes is growing faster than at any time in history, while the size of TSMC’s existing chip foundry business is such that both China and the US depend on it (and the company is getting big incentives to set up production capacity in the West).

Finally, its valuation is conservative, at 13 times and 10.5 times Antipodes’ 2023 and 2024 earnings forecasts.

Back to blog