Buying the hottest stock in the hottest industry can be a dangerous game in investing. Valuations and expectations are typically very high, and many an investor has been burnt by purchasing a fashionable stock too late in the cycle. For example, tech darling Tesla is now 30% off its high following a stellar run through to 2017.
Often the best opportunities come from boring industries, which don’t generate much ‘buzz’ but quietly build something special. Sir James Dyson became rich in vacuum cleaners, becoming a household name in a low-growth industry where competition and innovation was previously low.
Overlooked not overcooked
If you can find the right company in an overlooked industry, returns can be exponential. Earnings exceed expectations and the valuation multiple applied to those earnings increases as investors appreciate the better than expected outlook. It’s a double kicker to investment returns.
The table below shows some recent examples of winners operating in boring, low-growth industries that have performed exceptionally well over the last 12 months.
|Company||Code||12 month return||Industry|
|Spicers||SRS||110%||Paper products distribution|
|Infomedia||IFM||90%||Auto dealership software|
|Vista Group||VGL||70%||Cinema software|
|Breville Group||BRG||60%||Kitchen appliances|
Spicers distributes paper-based products and has been negatively impacted by the move to paperless communication. Along with capital structure issues the stock did little for seven years. However, the industry has consolidated, Spicers had net tangible assets well above the share price, undertook a successful turnaround and then received a takeover offer.
Infomedia is a global provider of software to the parts and service sector of the automotive industry. The automotive sector is mature, making costs an increasing focus. Yet Infomedia has grown by improving its customer efficiency and adding significant value.
Vista is the leading provider of software to cinema operators globally, which is currently being challenged by streaming providers like Netflix. However, cinema attendances globally are moderately growing, and Vista has delivered five consecutive years of revenue growth above 20%. An exciting new marketing opportunity is also beginning to scale.
Breville has developed an innovative and appealing range of kitchen appliances like toasters and kettles. Hardly exciting. Yet it is expanding globally, broadening the product range and recently reported earnings per share growth of 20%.
What are some new ideas on this theme?
What are some other ‘boring’ industries which offer investment opportunities? The table below shows some new ideas that we like among stocks in industries which may be considered unfashionable.
|EQT Holdings||EQT||$26.80||Trustee services|
EQT provides trustee services for individuals and corporates. It’s considered a relatively stable industry. Existing customers are unlikely to leave but it’s also hard to win new customers. New management has reinvigorated the business and earnings growth is accelerating. The recent Financial Services Royal Commission is likely to be significantly beneficial as greater importance is placed on external, independent trustees like EQT.
GTN has a near monopoly providing real-time traffic information to radio stations and sells attached advertising. It was sold down heavily after a downgrade in December 2018, but we understand those issues have now been resolved. It is about to benefit from accelerating earnings growth in Canada and Brazil and trades on an FY20 PE of 9x and yields 9%. Only a little needs to go right for investment returns to be large.
Ive Group is a printing and marketing company. The industry is challenged, but recently consolidated, and is increasingly rational. IGL just completed a capex programme and is about to reap the returns. Trading on a free cashflow yield of c. 20%, shareholders should benefit from higher dividends and value-accretive acquisitions.
Sometimes, frogs do turn into princes.
Richard Ivers is Portfolio Manager of the Prime Value Emerging Opportunities Fund, a concentrated fund which invests in companies outside the S&P/ASX100. This article is general information and does not consider the circumstances of any investor.