Investors should stop hunting for perceived value, recovery and growth opportunities and instead focus on other credentials when buying stocks, according to Kames Capital’s Pauline McPherson (pictured). 
The co-manager of the Kames Global Equity fund believes that investors should go against the grain and turn to opportunities that others may find unappealing.
She says that, while this may be a difficult perspective to take on, it is important for investors to challenge their own views as opposed to blindly investing in the same areas as everyone else.
“Throughout history, the world’s greatest thinkers have warned us against becoming too comfortable with our ideas,” she said.
“Sticking with the consensus approach and seeking ‘reasonable’ investments is actually very limiting, leading to compromise, low conviction and a comfortable middle ground that rarely leads to outperformance.”
McPherson adds that there are plenty of unloved or expensive stocks that remain sturdy businesses and that investors could be overlooking.
What’s more, she believes that a lot of these ‘expensive’ stocks aren’t expensive at all, and are being punished for achieving extended periods of excessive gains.
“With intimate knowledge of companies and their business models, it is possible to identify opportunities that appear cheap and unpalatable to most investors, or to identify expensive stocks that will generate supernormal growth, perhaps because a new industry is being created, a new technology is being developed, or a new business model appears that is capturing something new,” she explained.
In light of this, McPherson lists three typically undesirable types of stock that the Kames team holds in its global equity portfolio.
Unreasonable value
The manager says investors typically dislike Japanese insurance companies because Japanese bond yields are so low that the returns they make on their investments are lower than the promises they give to their policyholders.
She adds that the market will generally price these companies as though they will make 15 to 20 years of losses as well, as policies can easily be this length.
An example of this is Dai-ichi Life, which is one of the world’s largest insurance companies in terms of revenue. It is primarily engaged in the underwriting of insurance policies including group pension insurance, individual annuity insurance and group insurance, among others.
However, it was announced last Wednesday that rival company Nippon Life is planning to buy Mitsui Life, which could provide fiercer competition for Dai-Ichi Life and knock it from the top spot from its position as Japan’s largest earner of insurance premium income.
“Our view is that the company is taking mitigating action, has overseas earnings that are becoming more valuable as the yen weakens, and has a core non-life business that will generate attractive returns,” McPherson argued.
“Since purchase the stock is up a considerable amount, and we think it can rise even more substantially. In this instance, we were willing to look at something that other investors wouldn’t touch, and year-to-date this is our most successful holding in our global equity strategy.”
Unreasonable recovery
German airline giant Lufthansa caused a stir among investors last month when it announced a new ‘direct connect’ booking system.
While this could prove positive for the company, many have voiced concerns that Amadeus, the Spanish IT services provider that primarily processes airline bookings, may take a hit as a result.
Despite the IT services stock taking a tumble of almost 25 per cent in two weeks, McPherson believes the company is a good investment.
“We know the company’s business model well, and believe that Lufthansa is making a bold bet while holding a weak hand. The stock has already recovered since the time of purchase. It was not a cheap stock, but we were comfortable being bold when others were fearful.”
Amadeus IT Holdings’ shares have been listed on the stock exchanges of Madrid, Barcelona, Bilbao and Valencia for the last five years.
Not only does the company offer IT solutions, it also has a global distribution system and offers pricing, search, booking and ticketing services to travel providers in real time.
Its headquarters are in Madrid but Amadeus also has sites in 10 other countries across the globe, including Sydney, Istanbul and Bangkok, and employs more than 10, 000 people worldwide.
Unreasonable growth
International tech company Mobileye, which develops technology for semi-autonomous and autonomous driving, also makes up part of Kames’ global equity portfolio.
“When we purchased this stock, it was trading on 140 times earnings,” McPherson said.
“However, the rate of growth of the company’s revenues (50 per cent based on recent results) and significant operational leverage within the business meant that continued sales growth would feed straight through to profits.”
Despite this, the manager points out that Mobileye has been adopted by almost every automotive manufacturer across the globe, and as such she believes the penetration rate will be similar to previous automotive equipment such as disc brakes and airbags.
The Israel-based company, which went public last August, has been popular among some investors for its rapid earnings growth and the fact that it is the leader of a major new trend – its product is being used by 22 out of 25 of the world’s top five automakers including BMW, Nissan and General Motors.
“Mobileye is a clear example of a type of discomfort very different from buying an exceptionally cheap or unloved stock. Instead, it is the discomfort of mustering the courage to buy an unreasonably expensive stock, and the conviction, backed by analysis, that it will get even more expensive,” McPherson added.
