At Antipodes Partners, we seek in our long investments both attractively priced businesses offering a margin of safety, as well as investment resilience characterised by multiple ways of winning. The opposite logic applies to our shorts.
While the investment case will always be predicated on idiosyncratic stock factors such as competitive dynamics, product cycles, management and regulatory outcomes, we seek to amplify the investment case by taking advantage of style biases and macroeconomic risks and opportunities.
The Antipodes Partners Valuation Heatmap, as shown, provides a more granular illustration of valuation clustering across sectors and regions. Cell colouring indicates the degree to which a sector’s enterprise value to sales multiple, relative to the world, is above or below its 22-year trend – expressed as a Z-Score, the number of standard deviations from the mean. The warmer the colour, the greater the relative multiple versus history; vice versa for the cooler blues, with extremes highlighted by the boldest of colours. Within these blue areas, we highlight a number of attractive investment opportunities – both long and short – we believe are being currently mispriced by the market.
‘Natural gas market is poised to fire’
Unlike other global commodities, natural gas has still yet to fire. Headlines suggest a liquefied natural gas (LNG) glut, but when put into context, LNG only supplies approximately 10% of total global gas demand. The much hyped US shale gas potential has stalled and commissioning of giant LNG projects launched globally in the last decade is coming to an end. Supply growth is slowing just as Chinese demand is awakening from a policy shift away from coal towards cleaner burning natural gas.
Our natural gas exposure is in stocks such as Japanese giant Inpex and independent US oil and gas exploration and production company CNX Resources. We also like energy/infrastructure service providers, such as UK-based group TechnipFMC and Japanese global engineering company JGC.
‘Reforming Korea simply too cheap to ignore’
For a long time, minority shareholders in Korea have been negatively impacted by an unhealthy closeness between chaebol-controlled conglomerates and the government. This has allowed the controlling shareholders of many operationally sound companies to mismanage balance sheets and expand into areas that are not in the best interests of minority shareholders.
However, newly elected government officials are beginning to position themselves independently of the country’s most powerful families and are implementing reform to eliminate many of the shareholder unfriendly actions that have been prevalent in the country. For example, the government is looking at removing the ownership circularity evident in many powerful conglomerates, which has allowed families to maintain a tight grip on these businesses. The authorities are also seeking more progressive capital management policies, which would certainly attract more international investors to the country. We are bullish on a number of Korean opportunities – including KT, KB Financial, Hyundai Motor and Samsung Electronics.
‘Sentiment temporarily trumped reality in tech’
Disruption has perhaps become one of the most used words in modern investing. The bifurcation of sentiment and valuations amongst those deemed as victims and those as initiators, has at times become extreme. This has created opportunities to acquire high quality businesses trading cheaply relative to any reasonable assessment of medium term prospects. This is clearly evidenced in the technology sector, where we have stakes in incumbent stocks such as Netapp, Microsoft and Cisco Systems.
NetApp, one of the two dominant providers of enterprise storage systems over the past two decades, is a good example of sentiment temporarily trumping reality. The rise of Amazon’s public cloud services, part of which comprised cheap commodity storage, began to eat into the market for dedicated storage vendors such as NetApp. While this market shift was indeed real, the market by early 2016 had become so convinced traditional storage was dead and NetApp’s shares traded at just 4x free cash flow. Fast forward two years and NetApp’s business has evolved substantially. With the accelerated introduction of a new operating system, the company has leveraged this to become the fastest growing company in the ‘all flash’ storage segment, with hard disks giving way to solid state flash memory for many high end corporate and web-scale environments.
‘Short bond proxies as cycle enters shakeout phase’
The extreme thirst for yield has pushed the US high yield corporate debt cycle into uncharted territory, with the stock of debt outstanding and the average leverage ratio high relative to the current ‘goldilocks’ combination of low base rates, tight credit spreads and high profit margins. The cycle is approaching the shakeout phase.
Our specific shorts include equities to have benefited from the high yield debt boom, including bond proxies favoured by passive strategies that confuse momentum with value and low volatility with quality. This is particularly true in mobile telecom tower companies priced for the illusion of duration at circa 20x EV/EBITDA.
Jacob Mitchell, CIO of Antipodes Partners and manager of the Antipodes Global Fund – Ucits