Category: Sectors

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Fixed Income Fixed Income

Fidelity® Emerging Markets Z FZEMX

He joined Fidelity in 2006 as an analyst, and then built strong track records at Fidelity Pacific Basin FPBFX from 2013 and Fidelity Emerging Asia FSEAX from 2017 until he became the successor to this fund’s previous manager in February 2019. Since taking over the following October, Dance has leaned on Fidelity’s deep emerging- markets analyst team for support, a strong group that continues to play a role here as Dance learns more about the emerging markets he didn’t invest in at his previous charges.

Dance, a successful regional strategy manager, still must show he can consistently apply his process to a broader universe. He’s a growth-oriented investor who buys four kinds of stocks–sustainable growers, niche companies, firms with macroeconomic tailwinds, and special situations–and holds them for three to five years.

Dance considers regional economics and macro views more than many of his peers, looking to accumulate exposure in regions or sectors in which he sees high growth potential. He turned defensive in February 2020 after learning of the coronavirus outbreak in China, selling expensive stocks like Brazilian investment manager XP while buying consumer staples stocks like Angel Yeast and healthcare stocks like Shenzhen Mindray.

The portfolio reflects Dance’s preferences. Its average holding has better profitability metrics and competitive advantages than those of its MSCI Emerging Markets Index benchmark and diversified emerging markets Morningstar Category. Such stocks often come at a cost: The portfolio’s average valuation measures like price/earnings, price/book value, price/sales, and price/cash flow are higher than those of its benchmark and typical peer. Despite some price risk, Dance has succeeded at his previous charges with this approach, so there’s reason for optimism.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Invesco Main Street Mid Cap Y OPMYX

Anello had been a lead manager of this fund since 2012 and had worked with Main Street team founder Mani Govil since 2006, but the fund had been a mediocre performer under his watch, so his departure was not really a shock. Now the fund’s sole lead manager is Belinda Cavazos, who was hired in February 2020 to manage this fund and Invesco Rising Dividends OARDX. She previously spent three years at Boston Trust managing small and mid-cap funds with some success. But this fund is much larger than any of her previous charges, and turning it around will be no easy task.

This fund is a mid-cap counterpart to Invesco Main Street MSIGX, which tries to identify profitable, well-run companies trading at reasonable valuations. Cavazos has not made any major changes to the process, but she has tried to put her own stamp on the fund, especially since Anello left. She reduced the portfolio’s exposure to some interest-rate-sensitive sectors, notably real estate and utilities, and added to some cyclical names such as Vulcan Materials VMC and homebuilder

D.R. Horton DHI. She also reduced the overweighting in energy that the fund typically had under Anello and sold some large-cap names that didn’t really fit with the fund’s mid-cap mandate. The effect has been to make the fund less reliant on sector bets and more driven by stock-picking. So far, the results haven’t been great. In 2020, the fund trailed about two thirds of its midcap blend Morningstar Category peers, similar to its performance over the past three, five, and 10 years. Results were similarly disappointing in the first five months of 2021. It is hard to come to any firm conclusions based on such a short time period, but Cavazos will definitely need to achieve better results than this before concluding that the fund is on the right track.

This fund’s strategy is straightforward in most respects. It is similar to the approach used by Invesco Main Street MSIGX, but less tested. It earns an Average Process rating. Lead manager Belinda Cavazos and her six co-managers employ a version of the strategy developed over the years by Main Street team leader Mani Govil. They seek companies with strong management teams and a fundamental catalyst for future value creation over the next two to five years, such as pricing power, market share gains, or improving profitability.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

L Brands Post Strong Margins

Bath & Body Works continued to impress with a 26% operating margin, a figure in line with luxury retailers. While some expense leverage probably came from sales that rose to $3 billion (up 83%, lapping roughly six weeks of COVID-related closures last year), we think some gross margin gains could stay, given their attribution to better merchandising. However, we also expect some gains to recede, as the promotional cadence is likely to pick up over time. For reference, sales in the first quarter of 2020 were just $1.65 billion, since locations were closed for half of the fiscal quarter due to COVID-related restrictions.

L Brands’ second-quarter outlook also provides a lift to our fair value estimate, with 10%-15% sales growth and $0.80- $1.00 in EPS anticipated; these marks are ahead of the $2.9 billion in sales and $0.53 in EPS we projected for the period. As such, we plan to lift our full-year sales and EPS estimates to more closely reflect probable first-half performance, though the firm did not provide full-year guidance. We plan to stand firm on our long-term projections, which include 2% sales and mid-single-digit EPS growth along with midteens operating margins. As the division of the VS and BBW segments approaches, we expect to have more clarity on the capital structures of the separate businesses, which will allow us to value the stand-alone brands properly. Until then, we will continue to model the two businesses under the same umbrella, rendering an outcome based on current capabilities.

L Brands is still targeting August as the official separation date for its two brands, though it provided few additional details. For VS, the company will aim for midteens operating margins, an objective that feels increasingly attainable, given the brand’s latest success. VS will maintain its recent focus on inclusivity in both the VS and Pink labels, with the hope of regaining consumer confidence and demand. For BBW, the firm intends to stay the course, considering the success it has achieved with its current strategy, though it has expressed interest in expanding into whitespace categories such as sustainable hair and skincare, a move we commend given the recent focus on “green” consumption. Both brands will be expanding buy online/pick up in store capabilities, especially as they transition to more off-mall locations, which should improve throughput and profitability.

In anticipation of the spin-off, the firm named new CFOs for the two independent companies. Bath & Body Works’ CFO will be Wendy Arlin, current senior vice president and controller for L Brands, who previously was an audit partner at KPMG. Victoria’s Secret’s CFO will be Tim Johnson, former CFO of Big Lots. We believe both individuals will bring important knowledge and expertise to the two new standalone entities. In particular, Johnson’s retail industry experience will be useful as VS attempts to maintain its current trajectory.

 (Source: Morningstar)

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General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Palo Alto Networks : Platform Approach Resonating With Clients Across Network, Cloud, and Automation

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The complexity of an entity’s threat management increases as the quantity of data and traffic being generated off-premises grows. Network security can be attacked from various angles, and we posit that security will remain a top concern for all enterprises and governments, which bodes well for Palo Alto and its peers. Security point solutions were traditionally purchased to combat the latest threats, and IT teams had to manage various vendors’ products simultaneously, which leads us to believe that IT teams are clamoring for security consolidation to manage disparate solutions. Core to Palo Alto’s technology is its security operating platform, which provides centralized security management. We believe the ability to add technologies via subscriptions in the Palo Alto framework can alleviate complications by providing more holistic security, which can generate sustainable demand.

We expect that Palo Alto will continue to outpace its security peers by focusing on providing solutions in areas like cloud security and automation. Palo Alto’s concerted efforts into machine learning, analytics, and automated responses could make its products indispensable within customer networks. Although we expect Palo Alto to remain acquisitive and dedicated to organic innovation, we believe significant operating leverage will be gained throughout the coming decade as recurring subscription and support revenue streams flow from its expansive customer base.

Adding on modules to Palo Alto’s security platform could win greenfield opportunities and increase spending from existing customers.

Palo Alto could showcase great operating margin leverage as it moves from brand creation into a perennial cybersecurity leader. Winning bids should be less costly as the incumbent, and we think Palo Alto is typically on the short list of potential vendors.

The company is segueing into high-growth areas to supplement its firewall leadership. Analytics and machine learning capabilities could separate Palo Alto’s offerings.

The large public cloud vendors are developing security suites that may be preferred over those of a pure-play security supplier. If these companies offer products outside their data centers, Palo Alto may be stuck with niche applications and on-premises products.

Palo Alto competitors are also offering consolidated platforms, which could make displacing competitors more challenging.

Cloud and software-based startups could disrupt Palo Alto’s high-growth plans. The market for acquiring bolt-on firms could be hotly contested, and Palo Alto could miss out on the next big technology.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

S&P Global and IHS Markit Are a Collection of Moaty Franchises

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 Key Takeaways

  • S&P Global and IHS Markit are high-margin, largely recurring-revenue businesses that serve a diverse set of customers. IHS Markit has modestly more recurring revenue, which should lead to smoother earnings for the combined business.
  • S&P Global and IHS Markit have seen meaningful operating margin expansion over the past five years. S&P Ratings, the firm’s largest segment, has seen strong revenue growth and has expanded adjusted operating margins to 62% in 2020 from 50% in 2016 driven by robust issuance and pricing.
  • Following the merger, S&P Global and IHS Markit’s transportation and consolidated markets and solutions segments will continue to be stand-alone segments. Financial information and services will be created from S&P Market Intelligence and IHS Markit Financial Services (excluding indices), commodities and energy will be created from S&P Platts and IHS Markit Resources, and Indices will be created from S&P Dow Jones Indices and Markit Indices.
  • We expect S&P Global to achieve its $480 million expense synergy target. While we acknowledge some potential upside to this target, at a certain point the margin expansion implied by additional cost synergies would become unrealistic. Furthermore, S&P Global’s expense synergy targets are on top of existing expense efficiency programs.
  • S&P Global expects $350 million in revenue synergies within five years, though thus far it has given only limited detail on this. In Exhibit 1, we provide a list of where we think those revenue synergies may lie.
  • Rather than use the cross-sell versus new product framework, we instead categorize potential revenue synergies based on the segment and then identify vectors of where revenue synergies may be achieved. We expect the majority of revenue synergies to be in the financial information and services segment; to achieve its targeted synergies, we estimate the segment would need to grow 1.3% faster than it would have on its own. We view this as reasonable and could envision upside to this scenario.
  • While synergies are important, we believe investors should not overly concentrate on them. Other factors may have a greater impact in determining earnings, such as bond issuance volume. In addition, it can be difficult to precisely measure revenue synergies, given product bundling and other factors.

(Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Expert Insights Shares Small Cap

Canopy Offers Attractive Investment Exposure to the U.S

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Although we expect the medical market to shrink as consumers turn to the recreational market, we forecast more than 10% average annual growth for the entire Canadian market through 2030, driven by the conversion of black-market consumers into the legal market and new cannabis consumers.

Canopy also exports medical cannabis globally. The global market looks lucrative, given higher prices and growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Canopy. Partially offsetting the global markets’ potential for Canadian producers are threats of future production from countries with cheaper labor— the single largest cost. However, many Canadian companies have pulled back expansion plans given ongoing cash burn. We forecast around 15% average annual growth through 2030.

Besides hemp, Canadian companies typically have no U.S. operations, given legal limitations. However, Canopy has a standing deal to acquire Acreage Holdings, a U.S. multistate operator, immediately upon federal legalization. We thought Canopy paid a good price and acquired an attractive option for an accelerated entry into the U.S. Canopy also owns 27% of U.S. multistate operator Terrascend on a fully diluted basis. The U.S. market is murky, with some states legalizing recreational or medical cannabis while it remains illegal federally. We expect that federal law will be changed to recognize states’ choices on legality within their borders. Based on our state-by-state analysis, we forecast nearly 20% average annual growth for the U.S. recreational market and nearly 10% for the medical market through 2030.

Constellation Brands owns 38.6% of Canopy with additional securities that could push ownership to 55.8%. We see the investment as supportive of developing branded cannabis consumer products while also providing a funding backstop and foothold into the U.S. non-THC market.

Company Profile

Canopy Growth, headquartered in Smiths Falls, Canada, cultivates and sells medicinal and recreational cannabis, and hemp, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow. Although it primarily operates in Canada, Canopy has distribution and production licenses in more than a dozen countries to drive expansion in global medical cannabis and also holds an option to acquire Acreage Holdings upon U.S. federal cannabis legalization.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

Categories
Global stocks

CCRE Expansion Key for Future Growth

While the spin-off reshapes CCRE into more defined focus in property development, the asset-light business—which enjoys higher price-to-earnings multiples–is carved out of CCRE, which may dampen investor optimism on the post spin- off CCRE. We resume coverage of CCRE post spin-off and revise our fair value estimate to HKD 2.92 per share from HKD 4.40 per share. The shares are undervalued, trading at a depressed price/earnings ratio of about 2.2 times 2021 earnings. In our view, this is attributed to the spin-off mode not improving the balance sheet and the slower-than-peers contracted sales recovery. Moving forward much will depend on how the company’s recently articulated Greater Central China Strategy will pan out to improve growth prospects.

Contracted sales shrank 4.8% year on year to CNY 68.3 billion in 2020, which fell short of the company’s CNY 80 billion target and performance is largely below that of peers. We note that the company attributed the underperformance to a slower pace of saleable resources launched and reiterated its confidence in the Henan market. Nonetheless, CCRE recently articulated its Greater Central China Strategy to cover a large market radius around its Zhengzhou home base to bolster growth. However, we think the geographical expansion strategy may take time to bear fruit as the company enters new markets. For the first four months of 2021, the run rate looks off the pace with contracted sales at 17% of full year target. Hence, we think for this year the CNY 80 billion contracted sales target the company retained from last year looks aggressive, which may dampen share price performance.

Company Profile

Central China Real Estate is a China property developer founded by Chairman Wu Po Sum in 1992 and listed on the Hong Kong Stock Exchange in 2008. Differentiated from most other listed Chinese developers with a nationwide presence, CCRE is focused primarily in Henan province. The company’s coverage is spread across Henan’s prefecture and county-level cities, as well as a small presence in Hainan. Zhengzhou is a key market for the company, contributing the highest contracted sales and salable inventory among cities in Henan. The company has spun off its asset-light project management business and seeks geographical expansion via its Greater Central China Strategy for growth. Wu owns the controlling stake of about 74.9% in CCRE.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

Categories
Funds Funds

Devon Alpha Fund

This is the fourth portfolio manager change on this strategy in four years. In early

2019, Devon announced it was changing the portfolio manager to Mark Brown from Nick Dravitzki. Prior to taking the portfolio manager role, Brown had been the chief investment officer at Devon. Dravitzki had been the portfolio manager on this strategy since 2017 following previous portfolio manager Robertson’s ascension to the key business management role. This level of portfolio manager change on a strategy that allows significant flexibility for the key decision-maker rarely leads to good outcomes in the short to medium term, even with an experienced team.

The investment process seeks to identify companies in the NZX 50 and S&P/ASX 200 indexes that have the ability to generate strong returns on invested capital and achieve good cash flow expansion or have unappreciated catalysts for revaluation. The strategy allows for a portfolio of just 10-15 stocks, so the fund carries significant stock- and sector-specific risk, which may result in greater volatility than more-traditional strategies. In addition, the portfolio manager has a high level of discretion and can allocate 0-100% to New Zealand stocks, 0-100% to Australian stocks, or 0-100% to cash. Historically, cash levels have often been in the 20%-30% range but have been lower since mid-2020. The portfolio manager also has the flexibility to short-sell stocks (though we’ve rarely seen it used) and invests outside Australasia.

Since inception, the strategy’s returns have been largely lacklustre, which is not entirely unexpected given the difficulty in getting cash levels right and the portfolio manager changes.

Devon Alpha has some interesting characteristics, but the numerous portfolio manager changes constrain our enthusiasm.

Devon seeks to identify Australasian companies with the ability to produce strong returns on invested capital. Devon generates investment ideas through its fundamental research process and draws on its members’ extensive experience. On-the-ground research is an important part of the process; the team will not only visit management of companies in the portfolio and potential holdings, but also competitors, suppliers, and customers. Discounted cash flow is the most important factor in the valuation decision, ensuring the team avoids overpaying for companies. The investment decision also considers the strength of the business model, the relative attractiveness of the industry, quality of management, and the company’s financial health. These factors are assigned weightings that the portfolio manager uses in his portfolio construction process.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Devon Dividend Yield Fund

However, Nick Dravitzki, who had been portfolio manager on this strategy since it was launched in 2012, resigned in early June 2020. Devon’s experienced chief investment officer, Mark Brown is now portfolio manager here. He is assisted by the investment team, which includes managing director Slade Robertson, three portfolio managers, and two senior equities analysts.

The investment team is tight-knit and possesses valuable experience, but in recent years the good quality research and portfolio construction we had come to expect from Devon has marginally declined relative to peers. In addition, a change of portfolio manager, in the short term, can be unsettling for an investment team and strategy. However, Robertson has restructured and reinvigorated the team by hiring two additional analysts and increasing his mentoring of the investment committee. The investment process is straightforward, with an emphasis on fundamental bottom up research. The team invests in companies based on their gross yield to a New Zealand investor and the sustainability of that yield. The 20-25 stock portfolios is high-conviction and therefore carries significant stock- and sector-specific risk, which may result in greater volatility than peers.

Utilities, listed property, and financial services companies typically take up 45%-50% of FUM.

However, there are no restrictions on the amount invested in Australian and New Zealand companies, providing the portfolio manager with significant flexibility to allocate capital where he sees opportunities. Since inception, the strategy has experienced mixed performance. The process worked well up until late 2016, but since early 2017 the strategy has struggled against the index and equity region Australasia Morningstar Category peers. The process behind Devon Equity Income is reasonable, but our conviction is stronger with peers at this time.

Devon Dividend Yield aims to provide investors with a stream of income by constructing a concentrated portfolio of New Zealand and Australian companies, with a 2% blended yield improvement compared with the market. Devon screens the S&P/NZX 50 and S&P/ASX 200 indexes and ranks stocks by their gross dividend yields to a New Zealand investor. Valuation of top-ranked stocks is determined using a discounted cash flow methodology. Devon will go the extra mile to obtain an understanding of the intrinsic value of a business. Fortunately, a healthy travel budget accommodates this, whether for company visitation or investment conferences.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

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Funds Funds

Devon Trans-Tasman Fund

Willis and Robertson are supported by the Devon investment team of Chris Glaskin (portfolio manager), Mark Brown (portfolio manager/ chief investment officer), Victoria Harris (sustainability portfolio manager), and two investment analysts. The investment team is tight-knit and possesses valuable experience and knowledge. In addition, Willis undertakes considerable company visits and management meetings in New Zealand and Australia. However, during the past few years, there have been some missteps in stock selection and portfolio construction that have prevented the fund from outperforming its index and peers. Issues have included limited exposure to some of the largest and best-performing New Zealand stocks. We believe the good quality research and portfolio construction we had come to expect from Devon had declined relative to peers. However, during 2020, the highly experienced Slade Robertson restructured and reinvigorated the team by hiring a sustainability portfolio manager and two additional analysts; he also became co-portfolio manager of this strategy. Robertson had been portfolio manager of the fund up until 2015.

The process is straightforward and repeatable, with an emphasis on fundamental bottom-up research. The team searches for companies with sustainable earnings, high return on capital, good cash conversion, and low capital expenditure. A benchmark-agnostic high-conviction approach is adopted when constructing the growth-orientated portfolio of 25-35 stocks, which often contains mid- to small-cap companies. Despite recent solid performance, on a trailing returns basis, the strategy has fallen behind equity region Australasia Morningstar Category peers the category index (50% S&P/NZX 50 Index and 50% S&P/ASX 200 Index) over the trailing three and five years to 30 April 2021.

Devon seeks to identify Australasian companies with the ability to produce strong returns on invested capital. Devon generates investment ideas through its fundamental research process and draws on its team members’ extensive experience. The team travels extensively to obtain an understanding of businesses and to determine the intrinsic value of companies. A healthy travel budget accommodates this, whether it is for company visitation, investment conferences, or idea generation.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.