7 takeaways from our US road trip

Ned Bell

We recently met with 170 companies as part of a research road trip that crossed the US and Europe, to test existing investment theses, and look for new opportunities and trends. One key takeaway was that we have found far more attractive opportunities in global small to midcap (SMID) companies. While we may need to be patient from a valuation perspective, we generally found the quality and longevity of the corporate franchises to be better. Given that growth in sales and earnings are a scarce commodity, it is increasingly important to be able to assess investment opportunities here. In this wire, I report on the other key takeaways, including fresh examples of disruption hitting the biggest incumbents, and corporate leaders talking to a growing disconnect between business conditions and the market’s expectations.

What was the purpose of the trip?

Throughout the course of May and June, three members of the BAM Investment team embarked on an extensive research trip through the US & UK. Between them - Ned Bell, Joel Connell & Nicole Mardell - met with over 170 companies across a range of different industries. They consisted of 1x1 meetings with company management and attending a handful of conferences. We met with companies in London, New York, Chicago, San Francisco, San Diego, Minneapolis, Chicago, Boston, Philadelphia & Los Angeles. As fundamental global equity investors, we had several key objectives behind the trip.

  1. Discovery research, i.e. looking for new names
  2. Testing investment theses on names in some of our portfolios and on our watchlist
  3. Looking for trends from a corporate perspective - secular & economic

In totality, we were looking to build up our watchlist of investment ideas that we can deploy now and in the future when valuations become more interesting.

Who did we visit?

Between the three of us, we met with over 170 companies across a range of different industries. The bulk of the companies we met were in the Consumer Discretionary, Health Care, Industrials and IT sector. While we met with 40 companies that we currently own or have owned in the past, the bulk of our meetings were with companies that we had identified as being potential investment targets in the future.

What were the main takeaways from the trip?

Coming from the perspective of being bottom-up stock pickers, there were several key takeaways that directly relate to our current positioning in many of our portfolios:

  • Opportunities in Small & Mid Cap companies : with the benefit of having reflected on our collective meetings - it has become clear that we have found far more attractive opportunities in SMID cap companies. While we may need to be patient from a valuation perspective, we generally found the quality and longevity of the corporate franchises to be better in the SMID universe. Further where growth in sales and earnings are a scarce commodity, it is becoming increasingly important to have the ability to assess investment opportunities within the SMID cap space.

  • Stretched valuations : unfortunately, many of the companies which we have identified as being top priorities on the basis of fundamental strength - are also trading on relatively punchy valuations. Given our investment style as being Quality at a Reasonable Price, we are prepared to be patient and wait for attractive buying opportunities.

  • Crowding in U.S. Large Cap IT Stocks : We are seeing a huge number of active and passive investors buying large cap IT stocks. While we already knew crowding was an issue with some of the larger US tech names, it became all the more apparent from being on the ground talking with companies, brokers and other investors. The reality is that too many investors are simply afraid of not having exposure to stocks that are ‘working’, as opposed to companies that represent good value.

  • Franchise damage : while corporate disruption in the U.S. has had no shortage of airplay in the last 12 months, what has become more apparent is that disruption is spreading and is affecting companies whose franchises have until now been considered to be rock solid. Our meeting with Procter & Gamble was an interesting case in point. They made the point that they recently had to take a 12% price cut across their range of Gillette products - mainly due to a heightened competition from the likes of Dollar Shave Club (founded 6 years ago and acquired by Unilever in 2016 for $1billion). The speed and magnitude of the pricing damage caused by a relatively new business model should cause a number of corporates to sit up and take notice.

  • Technology Disruption : has become a really important issue for all businesses to consider. It’s hard to think of too many businesses we met with that weren’t being in some way affected by technology disruption. The main takeaway for us on this point is that you cannot simply assume that companies will be able maintain their competitive advantages.

  • Corporate read on business conditions : while we are fundamental investors, we are always interested to hear what corporate leaders have to say about broader economic conditions. In an overall sense, we remain optimistic about the economic outlook in the U.S. & Europe; however, throughout the trip, there were a couple of very pertinent observations made by the companies that we met with:

1: U.S. Economy & Paychex : as a leader in payroll services, Paychex have their fingers on the pulse of the U.S. economy and particularly small business. They made the point that while the economic backdrop remains sound in the U.S., they have recently seen a diversion between small business confidence (strong) and new business formations (weakening). We felt this observation was particularly interesting as it highlights the fact that their is a degree of uncertainty appearing amongst small business in America. While it’s difficult to attribute these trends with precision, we would argue that the toxic political environment is negatively impacting business confidence.

2: U.K. Economy, Brexit & Real Estate : several UK real estate companies painted a fairly sombre economic picture for the coming 12 months. While the overall property market has held-up quite well post-brexit, it seems that the weak sterling has had the effect of attracting a number of foreign real estate buyers. This has had the effect of temporarily holding up the property market - until now. By all accounts, the foreign buying is now drying up and a demand imbalance is becoming clear. We feel the UK property market is an important proxy for the economy as a whole. After also considering the ramifications of the recent election and the ongoing uncertainty surrounding Brexit, we find it difficult to get overly excited about the UK equity market. The only exceptions being the larger exporters such as BAE Systems that will benefit from a weaker currency.

  • Disconnect between Conditions & Expectations : one clear message that came through loud and clear was that U.S. corporate leaders have become increasingly cautious about the likelihood of the Trump agenda becoming legislation any time soon. The recent performance of the U.S. equity market is seemingly pricing in a more robust economic environment than what may realistically unfold in the coming months.

What are the implications of these takeaways for our portfolios?

We feel as though all of our portfolios are already very well positioned in regard to the major findings:

  • As the market has pushed higher we have prudently reduced exposure to stocks that have become expensive, and we maintain an underweight to the most expensive parts of the market as a whole.
  • We maintain a big underweight to what we would call the ‘mega-cap’ US names, many of which appear crowded to us.
  • We have continued to rotate more of the portfolios into high quality SMID cap stocks
  • We have resisted the temptation to chase stocks that have run up on the back of the ‘Trump Trade’.

On a going forward basis, we will continue to make adjustments within these broader parameters as opportunities present themselves.

General commentary on market activity, sector trends or other broad-based economic or political condition should not be taken as investment advice. References to specific securities should not be taken as recommendations. This article is intended for use by adviser s and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. In Australia, this document is issued by Bell Asset Management Limited (BAM) ABN 84 092 278 647, AFSL 231091. Details of Bell Asset Management’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website.


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