It’s been a polarising year to be a global equity investor. As the Magnificent Seven have continued to dominate global indexes, it has become more expensive for investors to keep up, driving a new wave of inflows into passive trackers as a way of extracting value from an increasingly concentrated market. Active managers are starting to feel like an endangered species, AJ Bell warned earlier this year.
However Nisha Thakrar, an investment specialist on the $281m Nedgroup Contrarian Value Equity fund, believes that investors' views of the market will shift next year, making it a “really exciting time to be an active manager and investor”.
She said: “If the environment is changing, how do you find value in a market that looks quite expensive? It’s all about the durability of earnings.”
Below, Thakrar identifies three durable, compounding global stocks that are poised to take advantage of this shift in viewpoint.
Alphabet
While it is almost impossible to escape the Magnificent Seven, some have more durable earnings than others.
Thakrar explained: “We are looking for stocks that deliver actual value for the investor, not just value for its own sake.”
By that metric, she said that one of the most exciting stocks in the Magnificent Seven was Alphabet.
Performance of Alphabet over five years
Source: Google Finance
While she admitted that recent regulatory pressure has led to a short-term share price decline, Alphabet's five-year record remains solid, with its share price up by 158%.
Moreover, she argued that pessimism towards Alphabet due to recent regulatory scrutiny was being overestimated. Anti-trust laws, she explained, were hardly a new concept, with around 43% of the S&P 500 already subject to them.
Even if these anti-trust regulations were implemented, it would not dent Thakrar’s confidence in the holding. All its constituent businesses, such as Chrome and YouTube, are individually strong enough to feature within the top 10 global businesses, making it an extremely durable and safe investment.
“Can Alphabet continue to deliver for investors? We think so,” Thakrar concluded.
JDE Peets
Turning to a more underappreciated sector, Thakrar pointed towards consumer staples as one of the most exciting sectors for investors. Here, Nedgroup holds coffee business JDE Peets.
JDE has experienced a challenging five-year period, with poor management and capital allocation decisions leading to share prices sliding by 47% over the past half a decade.
Performance of JDE Peets over five years
Source: Google Finance
However, Thakrar remained convinced of the value of the holding, arguing that it has been “unfairly penalised” for market challenges.
JDE is already aware of its poor performance and is moving to correct it with an ongoing restructuring of its senior management, Thakrar explained. This has already delivered results, with the business' one, three- and five-year earnings estimates now far more optimistic.
Additionally, JDE is poised to benefit from a broader transformation in consumption habits. It is now increasingly common to drink coffee from home, with a greater market for speciality coffee amongst the average consumers. Moreover, Thakrar argues that demand is still growing, with the consumption of coffee now rivalling the consumption of energy drinks worldwide.
Since this change has occurred almost entirely in the post-pandemic period and looks set to continue, Thakrar believes stocks such as JDE Peets have enormous long-term growth potential.
Shiseido
Looking to the east, Thakrar identified a leading Japanese cosmetic and skincare brand, Shiseido, as another great example of an exciting, durable company.
The stock has struggled in the past five years, shedding 65% of its share price in this period and falling to its lowest level since 2016 earlier this week, due to a poorly received growth plan.
Performance of Shiseido over five years
Source: Google Finance
Despite this, Thakrar remains convinced of the value of the stock. “It is a good example of why we stay away from the noise behind companies. It is ultimately fundamentals that will reward investors,” she said.
A Japanese-listed stock, Shiseido also has a leading position in China, giving exposure to the Chinese market while bypassing some of the risks.
Moreover, it has continued to grow its market share internationally, with Shiseido products frequently sold in the UK and US, giving it a global presence.
Similar to Alphabet, Shiseido has embarked on a programme of ambitious acquisitions over the past few years, acquiring other leading pharmaceutical brands such as Drunk Elephant in 2019, which has contributed to a strong balance sheet and leading market share.
Moreover, she argues that it is far from a “broken business”. The stock is fundamentally sound but lacks operational efficiency, which can be rectified through management improvement. While the market responded negatively to its recent growth plan, Thakrar believes it is poised for a resurgence and will reward patient investors in the long term.