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Black Friday and Cyber Monday are retailers’ favourite ways to get us spending fast for the Christmas period, with eagle eyed shoppers keen to take advantage of early bird discounts to bag themselves a bargain.
The plan typically works. Who doesn’t love a cheap and cheerful deal?
Brits plan to spend an estimated £3 billion in the 2023 Black Friday and Cyber Monday sales, with 8 in 10 Gen Z’s (that’s those born between 1997 and 2012) planning to spend in the Black Friday sales, with an estimated average spend of £176 — 56% higher than the national average*.
Yet bargain hunters are more fickle when it comes to stocks. Low share prices can put some investors off, or make them sell out, amid fears they are on a losing streak, or the stock is ‘cheap for a (bad) reason’.
Sometimes pessimism is fair, when the outlook for a business is far from rosy, or dividends look unlikely to continue at the current rate. But smart investors know periods of market uncertainty can offer up rare opportunities to buy a bargain, while valuations are only temporarily depressed.
Working out the difference between the two is the art and science of investing. But what did our Elite Rated managers have to say about their best bargains of 2023?
PDD Holding is the third largest e-commerce platform in China, and the best buy this year of Dale Nicholls, manager of the Fidelity China Special Situations Trust.
“It shows outstanding efficiency in supply chain management and cost control, a competitive edge that not only allows it to offer very competitive pricing, driving continuous gains in market share, but also is supporting PDD to expand internationally via Temu brand, leveraging China’s supply chain to meet offshore demand,” says Dale.
Currently Temu is still loss-making due to heavy investment in the user acquisition phase, so in the near term the expansion is a drag on PDD’s profits. However, taking the long-term view, Dale thinks there is good potential for significant value to be generated in this business.
Sanwa is a small-cap Japanese-listed global leader in manufacturing and supply of shutters, garage and industrial doors. Kirsty Desson, manager of abrdn Global Smaller Companies, bought it in February 2023. Since then the stock has risen 50%**.
“The company boasts a strong product portfolio and distribution network and healthy cash generation and return metrics,” says Kirsty, as well as growth drivers the market was underappreciating. These included robust demand for non-residential construction in Japan and the US, expansion in Asia, and a post-Covid normalisation of service revenue, which accounts for around 20% of sales**.
The best bargain for Neil Goddin, co-manager of the Artemis Positive Future fund, so far in 2023 is another Japanese stock called Disco, which supplies grinding and polishing machines used in semiconductor fabrication plants. Its biggest customer is TSMC, and its shares have risen 131% this year***. According to Neil, “the products Disco supplies into this area are complex. It has little competition and so enjoys higher profit margins.”
Constellation produces electricity using nuclear power. Its share price is up 35% this year***, making it one of Artemis US Smaller Companies fund manager Cormac Weldon’s top bargains.
“Electricity prices can be volatile. Biden’s Inflation Reduction Act subsidises producers like Constellation whenever the electricity prices fall below a certain level. It’s meant to encourage them to build and keep open nuclear power plants, which the government sees as key in delivering reliable, always-on electricity, enabling greater adoption of less reliable renewables, like wind and solar. It’s lowered the volatility of Constellation’s earnings.”
Another boost comes from businesses like Microsoft that have made a carbon reduction commitment and are keen to sign deals with Constellation to guarantee the supply of carbon free power.
Vincent McEntegart, co-manager of the Aegon Diversified Monthly Income fund, also highlighted Microsoft. US technology stocks have been leading equity markets in 2023 on the back of strong earnings growth and the artificial intelligence theme.
“Investors had to pay 25x earnings for Microsoft at the start of 2023, now 32x, posting a total return of 51% year-to-date (local currency),” says Vincent. Microsoft’s 49% ownership of OpenAI, the company behind ChatGPT, has helped boost the return, which “turned out to be a bargain at the start of 2023.”
Burford Capital basically created the litigation finance industry, and it remains the industry leader. It’s also the only law firm to be listed on both the New York Stock Exchange and the London Stock Exchange****. Essentially, Burford invests in commercial legal claims, and it has done so successfully for over 13 years, generating high returns on capital. Alec Cutler, manager of the Orbis Global Balanced fund, bought the shares because he believes the company is fundamentally misunderstood.
“Its largest claim relates to the Argentine government’s expropriation of the oil company YPF. While the market is bearish about Burford’s chances, they have notched a series of wins so far, and recovering even half the claim would mean we are getting the rest of Burford’s business for free at today’s share price,” Alec says.
Falling house prices, soaring mortgage rates, shrinking transaction numbers, crumbling profits and slashed dividends. 2023 has been a year to forget for UK housebuilders. Yet Taylor Wimpey has seen its stock rally 15% so far this year^.
“The future matters more than the past when it comes to stock prices and the glimmers of hope on the horizon have outweighed the miserable past baked into housebuilder valuations,” says Alan Dobbie, manager, Rathbone Income fund, which holds the company.
Looking forward, while challenges remain, peaking inflation offers the tantalising prospect of falling mortgage rates and rising confidence. “Throw in the potential for political support ahead of a general election, and the fact that we desperately need to build more houses, the future promises even further stock price gains,” says Alan.
UniCredit is a well geographically diversified commercial bank which offers its services in Italy, Germany, and Central and Eastern Europe. It also “offered the highest total yield in the euro area while trading at a depressed valuation relative to the market”, says Guy de Blonay, manager of the Jupiter Financial Opportunities fund, making it his best bargain buy of the year.
The combination of a robust capital position and sustainably higher net interest income “should enable the bank to distribute more than €20bn of capital back to shareholders over the next three years, which would equate to more than 50% of the market cap at the beginning of the year,” he adds.
We couldn’t talk about bargains without mentioning the incredible “once in a generation” discount on investment trusts. Dr. Niall O’Connor, manager of Brooks Macdonald Defensive Capital, believes we may have reached the point of being ‘maximally unloved’ for trusts. He highlights Riverstone Energy, a UK-listed investment company that has traditionally invested in North American oil and gas assets, currently trading on 47% discount to NAV^^. Niall tells us more in a recent podcast interview.
As James Budden, director of Marketing and Distribution at Baillie Gifford, highlights “there may also be good transitory reasons for large discounts. They reflect the dynamic of supply and demand and negative or positive sentiment towards a trust. Yet it could be time to be brave and pay up some 85p for 100p of assets and that’s before any potential improvement in performance – something of a bargain perhaps.”
Vincent Ropers, co-manager of WS Wise Multi-Asset Growth, agrees this is a fantastic opportunity and continues to tilt the portfolio towards investment trusts (currently 67% exposure^^^) “using the margin of safety of abnormally wide discounts as well as the diversification of sectors and styles to be well-placed when better days inevitably come.”
*Source: Black Friday in the UK: Statistics for 2023, 17 November 2023
**Source: abrdn, November 2023
***Source: Artemis, November 2023
****Source: Burford, November 2023
^Source: Rathbones Group, November 2023
^^Source: Brooks Macdonald, November 2023
^^^Source: Wise Funds, November 2023