How L1 is resetting its portfolio after a bumper 12 months
To say that the past year has been a good one for investors in L1 Capital’s Long Short Fund (ASX:LSF) would be an understatement. Investment returns and the share price performance are 112% and 153% respectively*. The question facing joint CIOs Mark Landau and Raphael Lamm and shareholders, is what will drive performance in the year ahead and beyond?
Landau says the firm has rotated the portfolio "very significantly" over the last six months to make way for the new ideas. He adds that the stocks they’re excited about today fall into four broad categories: the reflation trade, "new" energy, "old" energy and restructuring stories.
In this video, he explains the thesis behind each of these categories, a selection of stocks L1 is backing and an industry in the early stages of a decade-long structural boom.
It's always hard, after a long period of outperformance, to make sure that you're not holding onto yesterday's winners. Fortunately, we've rotated the portfolio very significantly over the last six months. In particular, we've rotated out of a lot of those names that gave us a huge boost over the last reporting season. The share prices might've more than doubled over that period.
A lot of the stocks that we think are exciting today fall into four categories. The first one is the reflationary trade, like copper stocks Hudbay Minerals and Teck Resources, which are listed in Canada. And also some of the financials like Wells Fargo, which is listed in the US, or QBE.
The second area is in the energy space - both in new and old energy, which we think are attractive. In new energy, we think lithium has really attractive fundamentals. Everyone would know about this structural shift towards electric vehicles, which is now starting to accelerate. And we think that the lithium market is finally tight for the first time in many years because you're starting to see the demand increase and the supply is taking a bit of time to respond.
We think that companies like Mineral Resources (ASX: MIN) and Orocobre (ASX: ORE), which recently announced a merger with Galaxy Resources (ASX: GXY), are really well-placed to benefit from that shift.
And then in the old energy space, which you might think is yesterday's story in terms of oil, we actually think the outlook for oil is really positive. This is because essentially during the crisis, a lot of the oil majors like BP, Shell and Chevron cut their CapEx budgets by at least 30% and also their OpEx budgets by 30%. That means they're going to struggle to just maintain production going forward. And at the same time, oil demand through driving and also flying is going to start to accelerate over the next 12 months. And you're already seeing inventory declines globally for oil. So, we think the supply-demand balance is actually going to look really positive as we move out of COVID and the vaccine rollout occurs globally.
The last area is the restructuring story. We think that companies like Tabcorp (ASX: TAH), Link Administration (ASX: LNK) and News Corp (ASX: NWS) are three great examples of companies that are looking inwardly at, "What can we do to highlight the value of our business?" They've typically got non-core assets they could sell, or they might be spinning out part of their business through a demerger.
So, in the case of Link, they've got PEXA, which is an incredibly high quality, exciting business for property conveyancing. Then you’ve got Tabcorp with its lotteries business, which I think is dramatically undervalued in some parts. And lastly, in the case of News Corp, everyone knows and loves REA Group (ASX: REA) and realtor.com, which is the number two player in the US in that property portal space. We think those restructures are going to come to the fore over the next 12 months
I guess the last area is online sports betting in the US. It's a part of the market that I think is just at the start of a massive structural boom that we think will last at least a decade. For anyone who's been following it, you'd see companies like PointsBet (ASX: PBH) or Entain or Flutter that are really starting to get a lot of momentum.
You're seeing state by state in the US that they’re opening up for sports betting and in a weird way, Australia is a leader in understanding the sports betting market, because we've been doing it in Australia for years. And interestingly, there's a lot of in-play betting in the US. It's allowed in the US. It's basically illegal in Australia, and the addressable market when you have in-play betting, triples or quadruples the size of the market. And we think that people are underappreciating how big that's going to be over the coming five to 10 years. And two of the stocks that we really like, one of them is listed in Australia, that's PointsBet. And one of them is listed in the UK, which is Entain. They're both doing some really exciting stuff operationally. And we think that's another big structural winner that we'll hopefully benefit from over the coming years.
I think there are two key reasons: One is that in-play is just going to keep growing exponentially going forward. So you've got more and more states opening up. And then within that, you've got more and more people taking up the opportunity to bet on a game, and it's becoming part of the entertainment to watch a game and bet on each set in the tennis, or who's going to win the next quarter in the basketball. And if you're an NFL fan or an NBA fan, it's really become part of watching the game.
The second one is that the guys who are operating best, who are executing well, who have the best technology, who have the best management teams, are the ones that are clearly winning market share. So whether it's Entain, which have gone from basically nowhere, to now having almost 18% market share on average across the US, or whether it's the PointsBet guys that recently did a five-year exclusive deal with NBC, which is the number one sports telecaster in the US, and they're starting to see the benefits of that come through. We think those two companies are really well-positioned, but the market leader Flutter we think is also well-placed, it's not a stock we own today, even though we really like the company and the management. We're hoping the valuation gets into the zone and we'd happily buy that. But we think that those are three of the companies that are best placed to win the market.
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*Performance figures as of March 31 2021 (Source: Company Presentation)
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