Halloween stock picks: Companies that gave investors a scare

It’s October and Halloween is fast approaching. Carved pumpkins are starting to flicker on windowsills and cupboards are stuffed with trick-or-treat goodies.

Donning scary costumes and bobbing for apples is a bit of harmless fun. But of course, there are always times when things really do go bump in the night. We asked four Elite Rated managers about some of the holdings in their portfolio which could have spooked more cautious investors, but have proven to be good investment choices over the long term.

Baillie Gifford Strategic Bond: Subsea 7

Torcail Stewart, who runs the Baillie Gifford Strategic Bond fund, said market fear can present some of the greatest opportunities for investors who are willing to hold their nerve. He pointed out that, when entire sectors fall out of favour, strong company bonds often fall in value alongside the weak.

“When sectors in the bond world sell-off en-masse, this often will be accompanied by defaults (when companies can’t pay their debt). So it’s important to tread carefully, but there will be select opportunities,” the manager explained.

“When the oil price fell materially through 2015 and 2016, there was a wholesale sell-off in oil company bonds and, in particular, oil services. It therefore became a fruitful sector to carefully seek quality companies that were more than just a pure play on the oil price: one such company was Subsea 7.

“Subsea 7 was one of the leading players in terms of installing subsea pipelines and associated infrastructure. Sales were forecast to fall materially, and so the bond price fell 10 percentage points. However, the market had overlooked the fact that the business had very high costs which could easily be cut, low levels of debt, cash on its balance sheet and a high-quality fleet of vessels.”

He added: “The bonds were offered with a yield of more than 5%. so we took a meaningful position for our fund and the bonds were successfully repaid last year.”

Fidelity Special Values: Pearson

Alex Wright, who heads up the Fidelity Special Values trust, gave British publishing and education company Pearson as an example.

“Pearson has struggled to deliver for several years with multiple profit warnings. Earnings have almost halved since the company was a major beneficiary of increased spending on education programmes for the unemployed in the years following the 2008/9 recession. The cyclical downturn in spending on education (which has occurred as unemployment has fallen) has been a major headwind over the past five years or so. With US unemployment now at all-time lows, it is possible that we are in a cyclical demand trough,” the manager explained.

“Alongside this cyclical issue, the company has faced a structural challenge as Amazon has facilitated the development of a market in second hand academic textbooks. However, this should become less problematic in time, as the second hand market finds its appropriate level, and academic institutions transition towards digital content.”

Threadneedle UK Equity Income: AstraZeneca

Richard Colwell, manager of the Threadneedle UK Equity Income fund, said long-term holding AstraZeneca has given investors a fright over recent years.

“We’ve been adding to the position when it was seen by the market as a pharmaceutical company with a declining core business, and an unproven pipeline of potential drugs being trialled,” he said. “Over the course of our holding it has had further challenges, such as a sharp share price fall when its MYSTIC lung cancer trial did not meet its target endpoint last year.

“However, we used this as an opportunity to top up the position. With a track record of executing new drug launches, AstraZeneca has also assembled a robust oncology portfolio and its new drug launches have driven a pick-up in revenue growth.”

Baillie Gifford High Yield Bond: Sprint

Lucy Isles, co-manager of Baillie Gifford High Yield Bond fund, considered US mobile operator Sprint for investment back in 2016.

“At the time, it was the fourth-largest mobile operator in the US, which had been bought by Softbank with the intention of merging Sprint with T-Mobile. The merger initially faced political opposition. The operational performance of Sprint was poor and the business was heavily indebted,” she explained.

“As it became clear that the merger wouldn’t happen quickly, Sprint put in place an ambitious strategy to turn itself around. The market was sceptical, but our analysis found that Softbank would likely support Sprint were it to get into any further difficulty. We took a small position and, over the next few quarters, the strategy began to bear fruit as the market’s concern subsided.”