The balance sheets of the companies we are invested in are relatively strong and we have sold a couple of holdings where we weren’t sure this was the case. Across the board we have net debt to EBITDA of 0.9% versus the index of 2.4
At the moment, analysts are favouring companies with strong cash flow and balance sheets but we think that, if not now, in the post-Covid 19 world that there is an argument to take some companies on that may have some leverage. The reason is that because, from a National perspective, there is an attitude of “we’re all in this together” and, post the crisis, the banks are going to be extremely wary of “pulling the plug” on businesses who have struggled as a result of Coronavirus.
I’m not going to leave “value”, although it is fair to say that the defensive companies have tended to outperform during the recent sell off. The PMI data has collapsed to a level we have not seen since the financial crisis and European small cap is correlated to PMI numbers. We would expect European small cap and, indeed value, to outperform when normality returns.
Our economist is a strong believer in narrow money supply driving the economy and an early pick up in money supply driving forward the economy. Broad money supply, which includes money on deposit, is what the Fed and the Central Banks take note of. If banks are forced to lend we are likely to see a pick-up in inflation as we will have more money in the system and chasing goods. We are already seeing inflation in some goods such as food. That would benefit value stocks.
Looking back at the recovery in 2009 it wasn’t the high multiple companies on 40x earnings that rebounded strongly, so we are likely to stick with cyclicals, but only those that are robust and have strong balance sheets.
There are some voices saying that we will retest new lows in the market. I don’t agree. The market may again show some volatility later in the year as we emerge from the virus lockdown but confidence in an economic recovery is tested.
We think the recovery will be driven by mid-caps (1Bn to 3Bn) which are linked to ETFs and the recovery from micro-caps which have been particularly badly beaten up in the sell-off will be slower.
With regards to our recent activity, we have added three names to the portfolio; ASM International, a Dutch semi-conductor company which is structurally in the right place in terms of the equipment they sell which is all about technology transition to 5G. That transition may be delayed but they have 75% global market share and we bought when it had corrected 50% and was on 15x earnings.
Another thing we have bought is Interroll, a company that makes the conveyer belts that go in all the on-line warehouses and airports. For the last three or four years the stock has been far too expensive for us but has now come back to a valuation with which we are comfortable.
Lastly, we bought Getinge; a global market leader in high-end ventilators and oxygenation machines. That might seem as though we’re jumping on a theme but we are looking to the long term.
We’ve also topped up in some areas where we think stocks have been overly badly hit, such as the Italian bank Fineco. These banks are benefitting substantially from on-line trading volumes and have been hit during the indiscriminate sell-off. S.O.I.T.E.C, a semi-conductor manufacturer and Banca Farmafactoring, who provide factoring services to employees of the Italian State and Embracer, a Swedish gaming company, are all examples of companies where the structural trends are in the right direction and we have simply added to our holding on share price weakness.
Additionally, we have been trimming some holdings. We have already sold out of Air France and also Varta, who manufacture batteries for headphones..
We currently stand at 11% gearing and we will make sure we stay under 15%. We are not ready to be aggressive and take the gearing higher than that as we would need to see some stabilisation of the Covid-19 virus situation before we make such a call.
There has been no massive change in management policy. Rory and I are continuing to operate normally and conduct company meetings over the telephone, but we are well used to doing that already. This is an imperfect market and we are confident that the hard work we put into our understanding of the companies in our universe will enable us to spot and take advantage of further opportunities and mispricing.
EBITDA: earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s overall financial performance and is used as an alternative to simple earnings or net income in some circumstances.
Purchasing Managers’ Index (PMI): is an index of the prevailing direction of economic trends in the manufacturing and service sectors.
Mid-cap: the term given to companies with a market capitalization (value) between 1Bn to 3Bn
Narrow money supply: is a category of money supply that includes all physical money such as coins and currency, demand deposits and other liquid assets held by the central bank.
Micro-caps: stock of public companies in the United States which have a market capitalization of roughly $50 million to $300 million.
Gearing: A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes