CHRIS BURRELL ’ S BLOG
Inflection from Growth to Value
Paul Moore from PM Capital Global Equities gave a presentation on Wednesday the 26 th of May in the TR Burrell Room .
What distinguishes PM Capital is that valuation is the critical factor – buy bottom quartile valuation , sell top quartile . These investments sometimes are quite long-term , while at the same time PM Capital look for anomalies in pricing such as occurred in March 2021 with COVID , the 2009 global financial credit crisis ( a once in a lifetime opportunity ) and the 2000 ‘ tech-bubble ’, sometimes referred to as TMT ( i . e . technology , media and telecommunications ).
The 2020 COVID correction saw record valuation dispersion between value stocks and growth stocks .
This movie has played out before- post the 87 crash , post TMT , post GFC . Paul Moore cautions not to make the same mistakes . In his view , the rotation has just begun from growth to value and is a long-term trend over the next 10 years , i . e . we have seen a significant inflection point in the past 12 months . It is the valuation dispersion where the difference will be made in portfolio returns .
Macro-issues are presenting quite a deal of noise in the markets . The yield on Greece ’ s 3 year bonds turned negative , reaching an intraday low of minus 0.037 %. This shows how distorted rates have become when the world is paying Greece to give them money . It was not long ago that nobody wanted to give Greece funds . Another example is that in 1989 the price of property in Japan was so high that you could sell the Emperor ’ s palace and buy all of California ! In 2020 , one could sell Apple and buy both the German and Italian stock markets , both of which are reasonably sized markets .
These red flags include some mentioned in previous blogs :
‐ The swift collapse of a company built on debt viz Greensill Capital .
‐ He had $ 20B then lost it all in 2 days being the sudden implosion of Bill Hwang ’ s Archegos Management in late March being one of the most spectacular failures in modern financial history . No individual has lost so much money so quickly .
‐ US stock commentators using the term Total Addressable Market ( TAM ) and so valuing stocks at 50-10 times revenue ! Profits apparently not being required . All the above is very reminiscent of the 2000 tech-bubble .
Other valuation anomalies include central banks around the world including both Australia and the US have given up on any fiscal responsibility . At JP Morgan in the US , term deposit growth is up 36 % year on year due to stimulus cheques and other Government income support measures . This represents pent up demand , which will be spent on record boat / car and other discretionary sales . There are record house prices . Cryptocurrency , a computer game that mimics gold mining , is front and centre . Fact is that it undermines legitimate currency and facilitates crime . There are record forward economic indicators for consumer confidence and the purchasing manager ’ s index . All of this is in stark contrast to central banks saying that interest rates will be low for the next three years and a 1.6 % 10 year US Government bond . If the economy is so strong , then the 10-year interest rates around the world will move and central banks will be caught flat footed , as they have been in the past .
So where are the opportunities ? Paul Moore notes the following :
‐ Post COVID 2020 , the best cyclical businesses were at all-time low valuations . ‐ Valuation , not macro , is the issue . There are many distractions , the most common being macro-economic . ‐ The strong economic cycle is boosting copper prices and other commodities prices . ‐ Some European businesses such as Siemens have a 10-year runway on earnings growth from here . ‐ The casino sector was oversold and had a good recovery . ‐ European banks such as ING are on a price to book ratio of 0.5 compared to the Commonwealth Bank with a
P / B ratio of 2.0 and trading on a PE of 19 .
‐ The oil sector pre-COVID was paying dividends that were too high and then were cut to the other extreme during COVID . Shareholders exited , but the dividends will be reinstated over the next 12 months . Yet the sector is trading at half of what it was pre-COVID .
There was several other stocks both internationally and domestically mentioned in the presentation which accord with Burrell portfolios and Burrell independent research .
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