Anchor Capital is betting on established companies that are trading at cheap valuations due to an overreaction by investors to bad news or temporary poor performance, such as Citigroup, Estee Lauder, Starbucks, Scottish Mortgage Investment Trust, and Rentokil.
Anchor Capital CEO and co-chief investment officer (CIO) Peter Armitage told CNBC Africa that the next two years should be good for investors in global stock markets.
He said 2023 has been a year of recovery following a difficult 2022 for companies as government stimulus wore off and central banks aggressively hiked interest rates.
In 2024 and 2025, Armitage expects interest rates to come down globally, which will boost the performance of equities.
“There is room to be fairly positive, although valuations are high. You have to look at it with a bottom-up perspective,” Armitage said. “It is about company stories as opposed to market stories.”
“We like to find companies with good stories and good returns,” he said. Despite the so-called ‘Magnificent 7’ being relatively very expensive on a price-to-earnings basis, one has to maintain exposure to them.
“You’ve got some brilliant businesses generating massive cash flows and are reinvesting them to build the future.”
Armitage expects cloud computing and artificial intelligence (AI) to be the dominant themes for investors over the next few years. American big tech companies are an excellent way to be exposed to them.
However, if you want outsized returns, you have to make contrarian investments, which has led Armitage and Anchor Capital to invest in well-known, established companies with momentary missteps that have made them cheap to buy.
Below is a detailed breakdown of Anchor Capital’s five stocks to bet on in 2024.
Citigroup is one of the largest banks in the world and is currently undergoing a class “self-help story”, according to Armitage.
Recently, management has gotten the company into a bit of trouble with several bad investments and expansions into unprofitable markets.
This has led to a decline in Citi’s share price, with it trading at around half of its book value. This means investors are paying around $50 for $100 worth of assets.
The management team has begun to sell off underperforming business segments and pull back from unprofitable markets, effectively going back to the basics of what Citi does well.
Armitage says the bank is ahead of the timeline given for its turnaround, and if it achieves its three-year plan, then the potential upside would be incredible, with the share price possibly doubling.
Estée Lauder is an American multinational cosmetics company that manufactures makeup, skincare, perfume, and hair care products. It is the second-largest cosmetics company in the world.
Armitage said this company has historically produced excellent returns and has top-class brand management.
However, its performance has slipped over the past two years as 27% of its sales came from China, which has experienced an economic slowdown, impacting Estée Lauder’s earnings.
The share price has overreacted to this, Armitage said. It has a proven track record, high-quality brands, and an exemplary management team that can turn its fortunes around.
This is an opportunity to buy into a proven, high-quality company at a relatively cheap price.
Armitage cautioned that recovery stories are always a bit risky as they do not guarantee that a company will return to its former highs. Still, Estée Lauder has a lot going for it in this regard.
The world’s largest coffee chain has also suffered from China’s economic slowdown, but Armitage thinks it still has room to grow.
Starbucks’ share price was also impacted by the rapid growth in appetite-suppressing medications, such as Ozempic, which led investors to fear that consumption of food and drink would decline.
Armitage said this was an overreaction, and despite the success of the medications, it is unlikely that coffee consumption would be significantly impacted.
Again, the company has a proven track record, good management, and an aggressive expansion plan across emerging markets to reduce its reliance on China.
The decline in Starbucks’ share price has presented an opportunity to own a high-quality business at a cheap price, where the value of the company is not accurately reflected by its market price.
Scottish Mortgage Investment Trust
The Scottish Mortgage Investment Trust is an investment vehicle listed in the United Kingdom which has exposure to over 90 relatively small tech companies.
Armitage likes this investment because it exposes the investor to a wide range of tech companies involved in the themes of cloud computing and AI.
This is an excellent way to have exposure to the sector without trying to pick the winners and the losers at such an early stage.
Moreover, the trust trades at a 20% discount to its net asset value.
“We will look back on 2023 with the unveiling of what is happening in the AI space as another pivotal time in history,” Armitage said.
Aside from investing in the Magnificent 7, this trust is a way to be exposed to revolutionary technology.
Rentokil Initial is a British business services group based in Crawley, England. It is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.
It was founded in 1925 as a pest-control business but subsequently expanded and diversified, partly through organic growth under the leadership of Sir Clive Thompson in the 1980s and 1990s and through the acquisition of BET in 1996.
It is now a business delivering a wide range of facilities management services.
This company follows Anchor Capital’s investment thesis of owning businesses with proven track records and good management teams that have had a temporary dip in performance or negative news.
In 2023, Rentokil’s share price declined by over 15% due to a declining profit margin, partly due to rising input costs and interest rates.
Rentokil is well-poised to bounce back as inflation and interest rates come down in 2024 and 2025.