By Chris Elliott, portfolio manager, TB Evenlode Global Equity fund
The new year began with the “big-tech” companies taking centre stage. First, Apple passed a market valuation of $3 trillion, with Microsoft not far behind. Then, the Nasdaq entered correction territory, as a mix of fears over monetary tightening and inflated valuations weighed on global market sentiment.
As long-term investors, we are focused primarily on company fundamentals rather than the quicksilver moves of the market. However, we do trade to take advantage of valuation opportunities and manage valuation risk. After a year of broadly rising equity prices, such as 2021, our trades are focused on the latter. And while the valuation debate will continue to rage over the tech titans, we are finding plenty of hidden gems further down the cap scale across the globe.
From, vision care to software solutions, we took advantage of recent levels of elevated volatility, over the last six months, to take positions on companies with relatively low valuations that have high long-term return potential. All three have strong growth drivers that we believe are undervalued by the market.
US-listed Cooper Companies is the world leader in myopia (short-sightedness) treatment lenses and has recently gained medical approvals in China and the US for pediatric corrective lenses. It is estimated that 50% of people in China currently suffer from myopia and the number of global myopia sufferers is also increasing rapidly, driven by aging demographics and increased screen time.
This provides significant upside to a business that has been growing steadily as consumers switch from monthly lenses to dailies.
This reduces systemic costs while structurally increasing profits for Broadridge as it is managing an increasingly fixed-cost business. As the transition progresses, Broadridge will likely shift to a subscription model, creating a recurring revenue stream.
Powering the energy transition
As we transition to cleaner sources of energy, industrial suppliers will need to adapt their operations and dramatically improve efficiency. This will require increased consumption of the technology that Aveva supplies.
Cash is king
While our comparator benchmark, the MSCI World Index, has risen by 23% over the past year, there remain a number of valuation opportunities. However, we do argue that the importance of understanding a company’s underlying growth opportunities and competitive advantage has also increased. This is where we will continue to spend our time and effort.
That will provide plenty of firepower for future investment and shareholder returns. We will continue to seek out investments where the market undervalues a company’s lifetime cashflows, as we believe this is the best opportunity to drive performance over the long haul.