Earlier today, I had the opportunity to sit in on Bell Asset Management's investment webinar.
A little over a year ago, the forum may well have been a seminar. Perhaps it will be again by this time next year. But with social distancing still the norm, almost every conference on my agenda remains virtual.
Which ties in well with Bell Asset's theme for the investment webinar. Namely, Positioning for the post-COVID consumer recovery in global equities.
The webinar featured Bell Asset's chief investment officer Ned Bell and senior global equities analyst Nicole Mardell.
Together they examined some of the biggest risks and opportunities facing global share investors in an environment where many valuations are getting stretched, and inflation is showing signs of resurfacing.
Image source: Getty Images
Very strong earnings recovery still ahead
Looking at the year ahead, Ned said that markets are already effectively pricing in the post-COVID world. With a focus on the small to mid-cap space, which in this instance are shares in the US$1–5 billion range, he said:
The thing that excites us the most is the earnings trajectory and the earnings leverage we expect to see in the next 2 years… If you look back to post the dotcom bust and post the GFC, if you bought small to mid-cap stocks after that period, during those earnings troughs, the returns have been phenomenal.
We feel like we're now in the third of these earnings troughs and recoveries. The earnings recovery in the post-COVID world, we think is going to be very, very strong. That's going to drive exceptionally strong performance.
As far as valuations are concerned, we still find good value here. The asset class itself is trading on about 22 times earnings. But that's against the backdrop that earnings expectations have probably still got a fair way to move up.
So from an investor's perspective, they haven't missed out yet.
Nicole said there were some particularly appealing opportunities in consumer discretionary shares in the year ahead:
Within the discretionary space, there's a lot of pent-up demand that's still to be realised across a number of subsectors. The consumer represents about 75% of the US economy, and that consumer has just been flooded with a whole bunch of cash. And they're still in lockdown.
Bell Asset portfolio picks
Noting that people are spending a lot more time at home for both work and leisure, Nicole pointed to Yeti Holdings Inc as one of the fastest growers in the Bell Asset portfolio. Meanwhile, Home Depot Inc got a nod for the highest return of capital (ROC).
Bell Asset also recommends investors seek out some strong global brand names. Nike Inc (NYSE: NKE) counts amongst the strongest brands in its portfolio.
According to Nicole:
That's not so much looking at Nike and saying we know the brand is strong. It's more about understanding why that brand is strong and what they're doing behind the scenes to continue to keep sales strong and turn it into profitable growth.
As far as underappreciated shares in the Bell Asset portfolio go, Nicole tipped Tractor Supply Company.
Seek out high-quality small to mid-cap shares
Most investors have been schooled to look for quality shares.
However, as Nicole highlighted, that's more important now than ever.
COVID has really expanded the divide between high-quality names and low-quality names. That's true across the sector, but specifically when you look at retail and luxury.
Ned added that Bell Asset expects small to mid-cap shares to outpace large-caps going forward:
The large-cap stocks over the last 18 months have had an incredible rally led by a handful of stocks. It's difficult to see how that can continue. The companies are terrific, but they are so over-owned. Not only by growth managers but by value managers, probably in fear of their life.
Ned pointed to Amazon.com, Inc (NASDAQ: AMZN) as an example of the large-cap shares that have been beneficiaries of COVID. Many of these companies have actually had a lot of future earnings pulled forward into 2020.
According to Ned, this means that going into 2021, "growth rate starts to pancake and multiples will compress. And you get inflation ticking up, which is terrible for high [price-to-earnings ratio] P/E stocks."
He said the same story has not yet played out for the majority of the small to mid-cap consumer discretionary shares. "It's like the Christmas present hasn't been opened yet." He says they remain exposed to the huge pent up consumer demand, with consumers cashed up from stimulus measures.
In short, "The earnings recovery still has a long way to play out over the next 2 years."
And inflation?
As for the long muted inflation, Ned noted that there were signs it's beginning to kick in with interest rates picking up. "There is a pretty strong argument for when it kicks, it's going to kick hard," he said.
If that happens, "the most expensive stocks get beaten up". Company's that have strong gross margins and pricing powers should fare best.
Nicole added that overall discretionary shares were more defensible and aided by the tailwinds of massive government stimulus that's going right into consumer pockets.
