Themes to start 2016:
Some of the themes we liked for end of 2015 start of 2016 have played out in Q4, but we stick with them for the start of the year.
On the long side we stick with our TELCO theme. None of this is ground breaking, but sometimes the best trades are the obvious ones. Largely European exposed, with above market average dividend yield, M&A, and operating leverage just as they begin to monetise the growing theme of data usage. This is theme that will continue to grow as more of our daily lives is controlled by our hand-held devices. Valuations are not cheap, but nothing like what you are paying for other yielding sectors.
Favourite names include:
Telecom Italia: The M&A angles are well known but on less than 6.5x EBITDA it is cheap vs the sector and doesn’t reflect that. We think Brazil is more likely to play out than the market anticipates, and while the ultimate intentions of Bollore and Niel is unknown, most conspiracy theories end in TI being part of cross border consolidation. Italy is also a favourite market of ours. LONG.
We also stick with other current long positions:
KPN: Fundamentally like this stock given its 100% Europe, has improving operational momentum and is continually mentioned as a bid target, most recently by Altice.
TITr vs TIT: The conversion will happen in 2016 as conversion would deliver 4-10% value accretion and 5%-12% 2016E FCF accretion.
IAG: where we feel 2016 is going to be a good year as the low oil price comes through into the bottom line and as global air traffic increases.
PEUGEOT: Cost saving and price discipline will continue to play out in 2016. China car sales have been great helped by the tax cut as we continue to see them feeding through. European sales to stay strong. Still cheap on an EV basis and as they continue to build up a cash pile.
ADIDAS: is a business with a huge margin expansion opportunity, and a plan to realise that opportunity.
HEINEKEN: Africa to double group profit
FOX:With corporate bond yields at 5% Fox’s share can easily double
COACH: Today uncertainty is the source of high returns. Coach can deliver at least 22.5% operating margins, or at least $700mln of profit, over the next few years even while investing aggressively.
GSK: Valuation is compelling and expectation for the stock are low. Great dividend of over 5% vs with good scope to increase; UK 10yr pays 1.5%! All this while you wait for the M&A angle.
BMPS: Fresh capital, profits up and consolidation coming
HSBC: Restructuring and a big beneficiary of US rate rises. If US rates rise to 3% plus then Blue Sky 1100p
On the short side we like luxury. It may not be the perfect entry point for a new trade, but it has played out nicely for us in Q4. Q4 numbers are likely to be horrible
Favoured names for us include:
SWATCH given structural concerns and inventory build, but that is not a trade we would initiate here.
LVMH given currency overlaps and positioning.
HERMES given artificial demand/supply imbalance and a crazy multiple.
RACE is also included as a LUX short as it is trading on a luxury multiple despite being an auto.
We also stick with our short in SANDVIK as global IP continues to slow.
Any feedback welcome!