“Make new friends,
But keep the old.
The new are silver,
And the old, gold.”
You may know these words as the opening lines from a well-known rhyme – but have you ever thought about these words in relation to investing in the stock market?
Many investors (and investment managers) often seek out the latest and supposedly ‘greatest’ stocks – something they think they can get their fangs into (pardon the pun!).
However, as dedicated value investors and bargain-hunters may know, going against the grain of current investment trends and investing in undervalued companies for the long-term to allow time for value to be recognised can often be a better strategy.
Taking a long-term perspective and sticking with ‘old friends’ can also lead to solid investment outcomes.
Three stocks that have been in our portfolio for a long time and that demonstrate the effectiveness of this philosophy are British Petroleum (BP), Siemens and Oracle.
Chart 1: BP PLC Price Chart 7/15 – 5/19*
We have owned BP, a British multinational oil and gas company, since October 2003 and have increased holdings from time to time when there have been opportunities to capture further value.
BP’s growth projects are coming online and adding value for shareholders today after a decade of investment. Production has grown by 2.4% year on year as at the first quarter of 2019. BP has also stabilised its capital expenditure and operating costs.
BP’s management teams are focused on shareholder returns and have successfully steered the company through significant cultural change. Management is very aware of the market’s concern with maintaining capital discipline, and they intend to keep capital expenditure pegged to the oil price.
Our view is that dividends are well covered in most oil price scenarios and that BP shares remain attractive in today’s market.
Chart 2: Siemens Price Chart 7/15 – 5/19*
Siemens is a German multinational industrial conglomerate and the largest industrial manufacturing company in Europe, with a diverse portfolio of operations across several sectors. The company’s operations span factory design and automation, electrical equipment and power generation turbines, the installation and servicing of energy efficient buildings, constructing onshore and offshore wind farms, building rail transportation systems, and health care imaging and diagnostics equipment.
Siemens has been in our portfolio since July 2005 and we significantly increased our position in July 2015.
Siemens has been able to develop strong businesses, but, in our view, the value is obscured within the conglomerate structure.
A recently announced realignment of businesses, including allocating more centralised costs to the operating units, should improve cost transparency and eventually lead to lower total overhead costs. Siemens has also just announced in May a spin-off of Siemens’ Gas and Power, which will also help to unlock further value.
Recent setbacks to a proposed merger of the rail division and continuing difficulties within gas turbines have contributed to the stock trading at a meaningful discount to peers and its underlying asset value. Importantly though, the stock is not currently pricing in the potential for change or developments that could flow from improved clarity around the operational divisions.
Chart 3: Oracle Corporation Price Chart 7/15 – 5/19*
Oracle is the world’s leading supplier of database software with a strong position in enterprise applications. We have owned the stock since June 2006. In November 2015, the business was undergoing some changes, which allowed us to purchase more shares at cheap valuations.
The company is transitioning from the traditional license business to a subscription-based business model. In the short-to-medium term, this has negatively impacted Oracle’s financials. However, we believe in Oracle’s long-term strategy and are positive about its revenue and profit opportunity.
Oracle’s total addressable market will increase. The stable and persistent subscription based-income stream generates strong free cash flow, which will support returns to shareholders in the form of dividends and share buybacks. Oracle is currently returning 400% of free cash flow in dividends and buybacks but will bring this number down closer to 100%. The core database business currently has a stable 43% market share, and the company should be resilient to competitive threats given its ecosystem of comprehensive and integrated cloud applications and platform services.
As everyone knows, strong and lasting friendships are one of life’s greatest treasures. But deep friendship usually arises with time, patience and commitment. Just as we need to invest in our friendships, at TGG we have found that it pays to stand by your investments. Perhaps, then, friendship is one of the best metaphors for a successful investment strategy.