Euro small caps among Bell’s top picks
Global small- and mid-cap stocks still hold appeal for this manager, including Spanish airline booking and luxury goods companies Amadeus and Moncler.
Lex Hall: Hi, I'm Lex Hall and welcome to another edition of Morningstar's "3 Top Picks." With me today is Ned Bell from Bell Asset Management. He has just come back from a whirlwind trip to both the U.S. and Europe where he visited about 60 odd companies. He's going to give us his take on the macro outlook and see where – we're going to go over, I should say, where he sees a few opportunities.
Good day, Ned.
Ned Bell: Good day. Thanks for having me, Lex.
Hall: My pleasure. Now, when you were last here in April of this year, and we were sort of still a bit – were reeling a bit from the big falls in December of 2018.
Bell: Yeah.
Hall: And now, several months later, the U.S. markets are setting records, the Dow, the S&P, the NASDAQ are all up by 20 odd percent. Australia's interest rates go to zero in front of it. Is it all looking rosy or are there any areas where we should be concerned about?
Bell: Yeah, yeah, it's interesting times now because I think, you're right, the markets have just sailed higher irrespective of all the risks that are out in front of us. So, I think what we've done is we've probably in terms of global equities and Aussie equities to some degree, the markets are now pricing almost no risk. So, global equities are almost pricing this idea that the trade deal just get settled without much fuss and economic growth flattens and even picks up a little bit next year.
Hall: Okay. Where are you taking profits?
Bell: So, profit taking has been driving a lot of our activity more recently. So, it's been more so probably in like some of the tech type names. So, stocks like Apple have obviously had a massive run. That's been a holding for more than 15 years. And so, things like Visa and Mastercard, so all those tech type names have had huge rallies, but also some of the small mid cap healthcare names that we've owned. So, stocks like HOYA, Masimo we'll take a profit in. A little company, WD-40, which we've owned on and off for a number of years…
Hall: Yeah, I remember you mentioning that.
Bell: Yeah, that's had a big rally. So, we've actually sold that position because it's just now got too expensive. But the good news is, there's still good opportunities in the small and mid cap space. That's still where we're finding good value. So, we're able to rotate that cash out of those types of names into some other names that have lagged a little bit more recently.
Hall: Let's get straight into it. What's your first name that you wanted to…
Bell: Yeah. So, one of the first names is a company I met with more recently, which is Amadeus IT. So, they are one of the leaders in terms of its booking systems and IT systems for the airline industry globally, which is a – it's a really interesting industry in that there's effectively three players, but two of them are particularly weak. So, the second two being, Travelport and Sabre. And those guys are consistently losing market share to Amadeus. It's a European – it's a Spanish company. They're getting a lot more market share out of, especially some of the airlines in Asia Pacific and that market share will continue to lead towards Amadeus. And you look at that company now, there are a 30% return on equity business, growing at an earnings of 12% plus, and it's not that expensive. It's about 24 times earnings and that growth will probably pick up more and more because what they are doing also is cross selling more of their IT services business into the airline customers.
Hall: Okay. Second name on your list?
Bell: Second name, Moncler, which is an Italian luxury company, which is more – again, another one of small and mid cap names. Now, we've been following Moncler for about four years and it's been very well run. They've been very consistent in terms of how they've grown. So, they haven't grown their stores too quickly as a lot of the other luxury names have. So, it's quite lowly penetrated, very high price points. But it's a name that's not as well owned as a lot of other luxury names like LVMH. And again, trades on pretty good valuations on sort of around 22 times.
Hall: Let's just pause on Europe for a second…
Bell: Sure.
Hall: …because they're in a bit of trouble, aren't they? I mean, Christine Lagarde has come out overnight and said monetary policy can't be the only game in town. She has raised fiscal policy, tax cuts, infrastructure spending. But they are long term measures, aren't they? They can't just create demand overnight.
Bell: Yeah.
Hall: So…
Bell: Yeah, I think, Europe it is – it's hard to grow. Like, Europe has really struggled to get their growth going. But I think you need to almost break it down into looking at the U.K., but then looking at the rest of Europe. So, in terms of the rest of Europe, Germany, France, and everyone else, they've been – I mean, it's been weak for a while. And Germany in particular has been weak because of the weakness coming out of China. Now, the issue with that is that the weakness coming out of China from my view is set to continue. So, the trip I've just been on, the one most common thing I've been hearing is that the weakness in China is quite a bit worse than what people have been saying. That reflects reverberates back into Germany more than anywhere else. So, that's not quite…
Hall: Weakness, where in particular?
Bell: Well, for example, like in the auto sector. So, a lot of the earnings that the German OEMs in the auto space generate are out of the Chinese market. And because the Chinese market is being so weak, and the economy has been so weak, that reverberates back into Daimler, back into Volkswagen and some of the other companies there. So, the Brexit foot has been on the throat of the U.K. for a couple of years now. So, it's not new. It's been a limiting factor. But we're not getting to this point now where we're going to have this election…
Hall: Yeah, December 12.
Bell: December 12, which again, that could be quite a good catalyst for seeing a bit of growth coming back into the U.K. economy next year.
Hall: And finally, your third pick?
Bell: The third pick I'd say globally – it's actually probably U.S. pick, which is, CBRE, which is one of the big real estate management companies. So, they're based in Dallas. I've just met with them there. Very inexpensive, trades on about 13 times earnings. So, between those guys and JLL they really have leadership positions in the managing global real estate portfolios for multinationals. So, the likes of Unilever, they don't want to be managing their property portfolios, they want to be outsourcing it to a specialist company that can manage a portfolio globally. So, the point being is that CBRE is increasingly becoming an annuity business and becoming less reliant on transactional and that's where I think the market is missing the point. They are not pricing it for it being an annuity business. So, we see really good opportunity on that name.