Many investors have been making a lot of money from the new companies and technologies, but this is not without its risks as recent falls in the sector show.
Several fund managers have recently told FE Trustnet they’re playing ‘online-resistant’ stocks as a way to profit from growing consumer demand as the UK recovery gains momentum.
These are stocks that capture this growing demand but whose core businesses have products that cannot be consumed online.
Roland Arnold, who co-manages the £2.1bn Blackrock Special Situations with Richard Plackett, recently told FE Trustnet this is one theme he is playing for his fund’s portfolio.
“Retailers that don’t have a decent internet offering are likely to suffer in the future but there are definitely consumer stocks where there is a good story, regardless of the rise of online,” he said. “Some businesses can capture the growth in an improving domestic economy without having to sell online.
By playing the ‘internet-resistant’ theme doesn’t mean companies cannot have an internet presence, or that the online-related stocks are not attractive as well, says Arnold.
“Companies such as Restaurant Group, theme park operator Merlin and pub company Young’s, all of these can of course use the internet as an advertising tool or to facilitate bookings,” he said.
“There are two themes to play; one is stocks that are resistant to on-line because it is very difficult to consume their goods through the internet.”
“The other angle is consumer stocks that are actively embracing the internet as an additional sales channel, in particular we like ones which also have a roll out story for the bricks and mortar business such as Dunelm and Ted Baker.”
The Restaurant Group own several well-known restaurant chains including Frankie and Bennie’s, Garfunkel’s and Chiquito. Young’s is a UK pub chain with several breweries and over 220 pubs. “We think that these companies will be putting some pressure on the consumer sector, in a world where the internet is taking space from the high street.”
“The Restaurant Group for example can’t sell a meal out over the internet.”
Both the Restaurant Group and Young’s have performed well over three years, considerably outperforming the FTSE All Share.
The Restaurant group rose 151.84 per cent and Young’s rose 72.27 per cent whereas the FTSE All Share gained 28.86 per cent.
Performance of stocks vs index over 3yrs
Source: FE Analytics
Merlin Entertainments, who own visitor attractions such as Legoland and the London Eye, floated in November 2013.
Its share price has risen 7.97 per cent in the five months since flotation, compared to 0.73 per cent in the FTSE All Share.
Other funds with high holdings of these stocks include Liontrust Global Income, Old Mutual UK Mid Cap and Rathbone Income, who all have the Restaurant Group in their top 10 holdings.
The £242m Liontrust Global Income fund, co-managed by James Inglis-Jones and Samantha Gleave, has it as its top holding with 6.26 per cent of the fund invested in the stock.
The five Crown-Rated Invesco Perpetual Income & Growth, managed by Ciaran Mallon, is one of the largest holders of Young’s, with a 2.51 per cent of its £557m invested in the stock.
Both Liontrust Global Income fund and Invesco Perpetual Income& Growth have outperformed their respective sectors over three years.
Liontrust Global Income has returned 35.79 per cent to investors over three years compared to a sector average of 29.41 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Invesco Perpetual Income& Growth has returned 48.15 per cent to investors over three years compared to a sector average of 39.01 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Tech stocks have been one of the best performing sectors since the financial crisis.
However, some companies, particularly those closely aligned to online retailing, have rolled over in the past few weeks suggesting the stocks are looking expensive to investors and may be due a correction.
Ocado, ASOS all have seen their share prices hit in recent weeks with several fund managers telling FE Trustnet they are concerned over valuations and earnings potential.
FE Alpha Manager Julian Lewis is particularly sceptical internet stocks that have recently suffered such as ASOS.
“The danger with a stock like ASOS is it cannot keep growing stratospherically for ever – no stock can do 20 per cent earnings growth a year for ever. The market isn’t big enough,” he said.
Since the start of the year both ASOS and Ocado have underperformed compared to the FTSE All Share.
Performance of stocks vs index in 2014
Source: FE Analytics
ASOS fell 16.26 per cent and Ocado lost 2.93 per cent compared to a minor fall in the FTSE All Share of 0.72 per cent.
