Pharma company Sartorius, luxury car manufacturer Ferrari and digital marketplaces operator Scout24 are three European stocks that not only have long-term value-creation potential but investors can’t get elsewhere either through a passive strategy or a mainstream fund, according to Miton’s Carlos Moreno and Thomas Brown.
While markets are efficient at short-term valuations, Moreno and Brown believe these are not as effective in valuing what the business will look like in the long term.
Not only that, but the co-managers of the £300m LF Miton European Opportunities fund think the best opportunities aren’t in either the commonly held big European stocks or in the riskier smaller ones.
“£5bn or £10bn funds, due to that asset size, are forced to buy the bigger companies in Europe,” said Brown. “We pick the stocks investors can’t get elsewhere either through a passive fund or through a mainstream one.”
“Small companies tend to be risky: the best risk-reward tends to happen for medium-sized companies, as they can grow but they are very proven,” Moreno noted.
“Also, when people look at having exposure to Europe they like something different. For that reason a lot of our holdings are different from the holdings in many European funds,” he added.
Performance of fund vs sector since launch
Source: FE Analytics
The managers focus on companies that can exploit the high return on capital, invest in themselves and deliver superior long-term earnings growth, a strategy they said has helped LF Miton European Opportunities “being the best-performing fund in its sector since launch in December 2015”.
Ferrari
Italian luxury sports car manufacturer-based in Maranello, Italy, is one underappreciated stock the team favours.
“We think the market underestimates both the volume and pricing opportunity. Therefore, we see further substantial share price upside,” the pair noted.
Unlike other car companies and most luxury good firms, Moreno and Brown said Ferrari has a very high return on capital, one of the reasons why the stock was the largest position in the fund last year.
“Ferrari is a lovely story. With two factories is unusually profitable. They hardly produce any cars so there is tremendous opportunity for Ferrari to make a lot more cars than they do today,” Moreno said.
“Fiat used to control Ferrari’s ability to rise price. However, free from Fiat, they are probably through some chunky price increases,” he added.
“We met the team recently and they said they want to move Ferrari to the next level in terms of pricing: that type of confidence in the management is very positive.”
With waiting lists kept at around 18 months and a low production of Ferraris and Porsches, Moreno and Brown believe the luxury car manufacturer is still “early on the story”.
“We are pretty bullish on volumes. At the moment Ferrari only produces 8,500 cars but they could double that. No one is talking about that, but it is entirely doable,” Moreno noted.
Sartorius
German pharmaceutical company Sartorius, which covers the production processes of the biopharmaceutical industry and the production and servicing of laboratory instruments and consumables, is another under-appreciated stock the pair is bullish on.
“Our biggest overweight is in the healthcare sector but we are not in the large drug companies as we think those have structural challenges and they don’t get through our screen,” the pair explained.
“We are not in bio-tech because we think they are very binary and difficult to analyse but we have a big position in medical technology. Sartorius is a fantastic investment in that area and we think the market has been very pessimistic on the implied long-term returns of the company.”
Performance of Sartorius over 1yr
Source: Google Finance
Sartorius was included in the portfolio when the fund was launched in 2015 and is one of the team’s largest positions due to the company’s high market share in an industry that is growing very quickly.
“Drugs are getting more and more complicated, we’ve gone from small molecules to large molecules where these drugs are brewed,” Brown noted.
“This is something very complicated to be made by an standard chemical engineering process. When a drug like this is developed, the manufacturing process is approved as part of the drug approval.
“Sartorius makes part of the equipment that goes into manufacturing those drugs: they make a disposable bag in which the brewing takes place.”
Despite this is a very small part of the overall cost of the drug manufacturing process, the manager noted it is “un-substitutable”, which means the drug company (the manufacturer) has to buy the equipment from Sartorius “no matter what”.
Scout24
Finally, the pair highlighted the fund’s biggest position, the operator of digital marketplaces specialising in the real estate and automotive sectors Scout 24.
“Scout24 is the UK equivalent to right move and auto trader combined: it does property, cars…” Moreno explained.
“What fascinates us is the idea of preferred log in. What is very important going forward is that every type of purchase starts off with going online so you have to dominate the preferred log in. This is something Scout24 is well positioned to do.
“Scout24 not only premium-fy what they offer but they also sell a lot of additional products to those customers.
“When you are in the mindset of buying a house there is a whole range of things that you can get through Scout24.”
Performance of Scout24 over 1yr
Source: Google Finance
The pair also noted Scout24 is a very strong business with very high margins: “If your business is naturally asset-lite, like Scout24, it’s a business that wont see a lot of M&A but it has very, very high margins."
“Companies with very high margins tend to have very good cashflow, so, when we always talk earnings we are really thinking about cash quality,” they pointed out.
“Our businesses are not going to have that amazing cashflow because there’s lots of assets to maintain so you can kind of kick around and If you’ve got lots of stuff your cashflow it’s always going to be a bit more of a challenge.
“They are asset-lite high-margin businesses where earnings quality tends to be fantastic and, although they are a bit under-appreciated, when you think of the types of revenues they can have going forward they are much, much higher,” Moreno and Brown noted.
Since launch, LF Miton European Opportunities has delivered a 77.96 per cent total return compared with a gain of 43.50 per cent for the average fund in the IA Europe Excluding UK sector. The fund has an ongoing charges figure (OCF) of 0.95 per cent.