Global equities had a strong 2023. Performance for most of the year was driven by the seven largest tech stocks. However, the back end of the year saw an increase in breadth as the 2023 laggards began to rally.
The question is whether or not we see that broadening out continue in 2024.
As we look forward, we’re focused on finding tomorrow’s winners rather than wedding to yesterday’s success stories. We’re also focused on paying the right price for a company’s business resilience and growth profile – not any price.
In this Good Value Briefing we want to illustrate this approach by outlining five investment opportunities across various sectors and regions that are mispriced. These businesses include beneficiaries of AI/Cloud monetisation and the energy transition, a medical device business that will benefit from aging demographics, and a grocery retailer that has both cyclical and structural opportunities.
Taiwan Semiconductor Manufacturing Co
AI is an exciting long-term trend, but at this very early stage of monetisation there will be as many losers as there are winners.
Taiwan Semiconductor Manufacturing – or TSMC – is the picks-and-shovel play of the AI age. TSMC manufactures chips for semiconductor companies globally (for example, chips for Apple’s iPhone 15 and Nvidia’s GPUs) and it has a near monopoly at the leading edge.
However, while the chips required for generative AI workloads and applications come out of TSMC’s fabs, the company hasn’t participated in the AI excitement because of concerns around geopolitics. Geopolitics can’t be ignored – it has to be factored into valuations – but TSMC’s critical role in the AI supply chain can’t be ignored either.
The company has made the investment to participate in this cycle of innovation – including investments in fabs in the US and Japan – and is now positioned to harvest those investments for growth and profitability.
We see the company growing 15 – 20% p.a. and priced at 16x forward earnings, an attractive multiple for the world’s largest foundry.
Oracle Corp
Sticking with mispriced tech, Oracle may be the last underappreciated cloud migration story.
The company is one of the leading Enterprise Resource Planning (ERP) software providers, the core function being general ledger applications as well as HR, financial planning and supply chain management. A cloud, or subscription-based, customer is worth twice that of an on-premise customer over the life of the contract, and the transition to the cloud still has headroom which is positive for Oracle’s revenue growth. On top of this Oracle is taking market share.
Investors must also recognise Oracle Cloud Infrastructure (OCI) is emerging as the fourth largest public cloud player. We see OCI growing 50%+ for the next few years thanks to its fundamentally different architecture that has lower latency and higher bandwidth – essential for AI applications.
Finally, the transition of Oracle Database to the cloud has only just begun and transitioning to a cloud/subscription-based service can drive a meaningful uplift in database revenue. We see Oracle growing 10-15% p.a. and priced at 18x forward earnings.
American Electric Power Company
The energy transition is another investment cycle which will define the next decade, and beyond.
We are at the foothills of an investment super cycle which will require the developed world to make incremental investment of 3% of GDP p.a. to meet climate goals, and even more from emerging economies.
While the adoption curve for EVs and the investment required in renewables is well discussed, the investment in the grid – which needs to be rebuilt and extended to distribute renewables – is, by comparison, relatively overlooked.
Regulated utility American Electric Power provides access to this capex cycle as it has one of the highest exposures to high voltage transmission at almost half its asset base. High voltage transmission lines distribute power over long distances and investment is essential for connecting renewables to the grid as generation of electricity is typically far from where it’s consumed. AEP will also benefit from the US’ Inflation Reduction Act which delivers a boost to renewables and transmission investment in AEP territory.
The company is priced at 14.5x forward earnings, with a steady mid-single digit earnings growth profile.
Alcon AG
The hype around obesity (GLP1) drugs dominated the healthcare sector in 2023. This debate isn’t going away and uncertainty remains. For example, the degree of weight loss, permanence of weight loss if not accompanied by behavioural changes, and insurance coverage.
While the market is preoccupied with GLP1 drugs, we’re finding mispriced opportunities in medical device companies which will benefit from another long-term trend – aging demographics.
Swiss headquartered pharmaceutical and medical device company Alcon is a great example. It’s a global leader in surgical eyecare devices (e.g. those used in cataract surgery) and vision care (e.g. contact lenses and drops). An aging population will see an increase in the rate of cataract surgeries particularly in developing markets, and spending on vision care/preservation is arguably less discretionary than other medical spending.
Alcon has a mid-teens earnings growth profile driven by an increase in R&D, and M&A can provide additional upside. The stock is priced at 25x forward earnings.
Sendas Distribuidora
Finally, over the last year we’ve been building confidence in Brazil as the economy shows signs of recovery. Inflation is under control, policy rates are falling and consumption is improving.
Sendas Distribuidora is the second largest grocery retailer in Brazil via the Assai brand, a cash and carry format which stocks a limited range of goods at a reasonable discount to supermarkets and hypermarkets. This format has been taking market share.
From a cyclical perspective the company will benefit from falling interest rates following the recent debt-funded expansion to their network of stores and is poised to de-lever as sales and profits of the acquired stores have meaningfully grown.
From a structural perspective at just 20% of total food sales we expect the cash and carry format to continue to take share and the company has identified a significant number of new cities to expand into.
We see operating profits growing 20% p.a., and earnings even faster thanks to lower rates and lower debt, with the stock falling to a high single digit PE on our 2025 earnings forecasts.
*This is illustrative only and not a recommendation to buy or sell any particular security
For some further commentary on these positions, we invite you to listen to our most recent podcast episode in which five of our Portfolio Managers discussed stocks and themes to watch in the year ahead.
Listen on Spotify, Apple or on our website.
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