Two recent additions to the portfolios

In the midst of a sell-off, it takes a serious amount of intestinal fortitude to bite the bullet and open a new position. But for those who do, the rewards can be handsome. Those smart or lucky enough to pick up Afterpay at the bottom of the market have seen returns of more than 5x in very short time.

So what were the fundies buying during the recent sell-off? Ned Bell from Bell Asset Management found one company with a high degree of earnings certainty that’s set to grow earnings per share by 10% this year. Meanwhile, Kirsty Desson from Aberdeen Asset Management reckons the sell-off provided an opportunity to pick up a high quality company with a promising future. Find out which two companies caught their eye here.

A strong result in a weak market

Ned Bell, Bell Asset Management

One of the more interesting newer positions in our portfolio is Booz Allen Hamilton, which is a U.S. based speciality IT services business. It almost exclusively services the U.S. government (e.g. Defence department, intelligence agencies etc.) which means they have far less earnings risk than the market as a whole.

The company’s recent results were very strong, and it actually upgraded guidance when many companies are withdrawing guidance altogether. Management expects to grow revenue by 6-10% and earnings per share (EPS) by 10% this year. Historically it has grown sales and EPS by 7.2% and 17.5% p.a. respectively which is a very impressive effort.

As we look ahead, we feel the ability to deliver positive earnings growth in the current grim earnings environment really sets the company apart. Furthermore, the earnings environment seems to be improving as evidenced by a recent $800m, 5-year contract win.

We don’t feel that the company is overly expensive on a 2021 P/E of 21x and Free Cash Flow yield of 5.0%. If we look out two years, we can see 35% upside from current levels.

An opportunity to ‘buy the dip’

Kirsty Desson, Aberdeen Asset Management

We added Dolby Labs to our portfolio in April. This US technology company is a pioneer and market leader in sound and picture quality. Dolby was in the early stages of a new product cycle in line to accelerate growth in revenues and margins. With a valuation below its historical average, we saw an opportunity for an earnings surprise and multiple expansions.

Dolby has built a strong brand name synonymous with market-leading sound and picture quality. Manufacturers and content creators demand Dolby not just because of its high-quality technology, but also because consumers want it. The company receives a licence fee whenever a consumer buys a TV, sound bar, receiver, smartphone, tablet, PC, set-top box, gaming console, smart speaker or ticket to a movie/concert that is Dolby-enabled. Competing technologies include DTS and Auro in sound, HDR10+ in vision and IMAX in cinema. But Dolby has the number one position in sound, appears to have the edge in vision and is expanding in the cinema segment.

In recent years, new formats such as mobile and streaming have forced the business to reorient itself and reinvest. It has resulted in Dolby Vision, which delivers cutting-edge picture quality, and Dolby Atmos, an immersive audio experience which gives the sensation of 360-degree sound. Now we are starting to see evidence of success for these new products, with their inclusion in high-end Apple and Samsung smartphones, Amazon’s Echo smart speaker and Netflix original content.

The company’s share price fell sharply in March amid the fallout of COVID-19, and sales will remain depressed until consumer electronics shops reopen. But as long-term investors, this dip in price allowed us to buy into a high-quality company with a promising future.

Opportunity remains

While broad indexes have already been pushed close to or beyond previous highs, recent gains have been concentrated in a small group of names. For shrewd investors, plenty of opportunities remain, now with the added tailwind of a rising market.

In part one of this series, Ned and Kirsty told us about the most important trends to watch as communities emerge from lockdown.