While strong performance from the US market has led many investors to avoid buying in at what they consider the ‘toppy’ valuations, there are still some attractively-priced companies to be found, according to Artemis’ Stephen Moore.
The US bull market has continued to surprise many by its longevity and has fuelled investors’ concerns that high valuations are rife.
Indeed, as the below chart shows, the S&P 500 index has risen by 216.35 per cent since the onset of the global financial crisis in August 2007.
Performance of S&P 500 index over 3yrs
Source: FE Analytics
While the index has slowed more recently, it hasn’t shown any signs of falling back with some expecting the index to continue at these levels for some time.
Despite high valuations in the US market, Moore believes there are still a number of attractive investment opportunities.
The manager of the £876.3m Artemis US Extended Alpha fund said: “After such a long run, investors are starting to question whether the US market can make much further progress.
“That said, corporate profits are supportive – many US companies reported second quarter earnings that beat expectations.”
The FE Alpha Manager said earnings for the S&P 500 should grow by high single-digits this year, rather than the earlier forecasts of 5-6 per cent.
“There are still plenty of investment opportunities,” he added. “The US is a highly dynamic market with a large number of innovative companies.
“It is also a very broad market with a range of sectors, trading on different valuations and with varying outlooks.”
As such, Moore – who also manages the £478.1m Artemis US Absolute Return fund – said there are several areas worth paying attention to.
One such area is the technology sector where many stock-specific opportunities remain, according to the manager, although he has cut overall exposure in the fund.
“Rapid technological change warrants investment in both the infrastructure and the components needed to develop these technologies,” he explained.
Moore said this theme is represented in the fund through holdings in undervalued companies supplying memory to innovative areas of the sector such as ‘big data’, artificial intelligence and autonomous vehicles.
“One such company is Micron Technology, which manufactures the DRAM and NAND flash memory used in smartphones, tablets and in the vast server farms that support cloud computing,” he said.
“The memory industry has a history of very poor capital allocation, always adding too much capacity, resulting in oversupply and eventually destroying pricing.
“In the past, this has resulted in frequent loss-making periods. But because of the significant consolidation that has taken place across the industry and the emergence of new high-growth markets for their products, we believe that pricing is likely to remain much stronger than is reflected in Micron’s current low price-to-earnings multiple.”
Performance of stock over 1yr
Source: Google Finance
The manager said away from companies that stand to benefit from innovation in the technology sector he also holds more traditional tech companies “able to cope with the risk of new entrants”.
“For example, Amazon's Cloud business presents a serious competitive risk to companies already established in the industry,” he said.
“But we think a company like Microsoft will be able to withstand this competition as it has robust operations and an established customer base with long-held trust in the company.”
Other holdings reflect indirect beneficiaries of strong trends in the sector, the fund manager said.
“The unstoppable rise of online shopping, for example, is creating all sorts of opportunities elsewhere,” said Moore.
“Amazon’s rapid expansion and the logistical requirements imposed by shorter and shorter delivery times creates demand for warehouses whose location gives them access to ‘the final mile’.
“For example, we hold logistics and property company Prologis, whose main customer is Amazon. So, these technological advances are not always disruptive – sometimes they can create opportunities in other sectors.”
Despite the sector’s stock-specific opportunities, the FE Alpha Manager said the recent deterioration in the balance between risk and reward had driven its decision to cut overall exposure to the sector, most notably in the video games sub-sector.
“We have also increased the fund’s short exposure in the sector as rising prices have resulted in high multiples in some areas, that we believe are not justified,” he added.
However, the information technology sector represents a 28.4 per cent net exposure in the fund, the largest sector weighting in the portfolio, and is well represented among the fund’s top 10 holdings.
Moore said there are other areas of caution, including financials – and banks in particular – adding: “The expected steepening of the yield curve has failed to materialise but valuations have increased substantially.
“The deterioration in trend levels of growth, the increase in indebtedness and the higher bad debts that it brings, will continue to limit the banking sector’s potential.
“Instead, we prefer diversified financials such as ratings company S&P Global and financial data provider MSCI, whose business models we find more attractive.”
Another area where the manager has a negative stance is in consumer staples stocks and is also cautious on the telecoms sector.
He said: “Given the lacklustre growth of cashflows, valuations remain high even under the assumption that current, very low discount rates continue.
“Competition from cable companies remains a major threat to the telecoms sector. We have, however, reduced our negative position in telecoms following a period of poor performance.
“Within that, we are still positive on mobile operator T Mobile. It has established a strong business in the US and is likely to benefit from consolidation in the industry.”
Moore has overseen the Artemis US Extended Alpha fund since inception in 2014. The fund aims to achieve long-term growth by using a long strategy supplemented with short positions.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years, the Artemis US Extended Alpha fund has returned 86.78 per cent compared with a 64.67 per cent rise in the S&P 500 benchmark and a gain of 57.73 per cent for the average IA North America sector peer.
The fund has an ongoing charge figure (OCF) of 0.86 per cent.