Amazon, Tesla and Kroger: Value in global growth stocks?

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In this BizNews Rational Radio webinar, BizNews founder Alec Hogg talks to Sean Peche, director and portfolio manager at UK-based Ranmore Fund Management. A strong proponent of value investing, Peche runs a critical eye over some of his top stocks, including Amazon’s thriving grocery-delivery business, and the profit-ripping run of Kroger, the US supermarket chain. Peche also has a word of warning for Tesla shareholders, with a reminder about what its future competitors are spending on research and development. – Derek Alberts

Alec Hogg: Our last participant today is Sean Peche. Born in Zimbabwe and now based in the UK, Sean Peche is a CFA Charterholder and gained his BSc in Finance from the University of Cape Town. He is now a director and portfolio manager at Ranmore Fund Management and has been with the firm since 2008. He currently manages the Ranmore Global Equity Fund underpinned by a value-driven strategy.

Thanks Alec, it’s good to be on the show, thanks for the invitation.

Sean Peche

Yeah. Many South Africans would know you from years gone by. I mean, not just that. You and I have had lots of conversations in public and in private, but elsewhere as well. How long have you been in the UK and following global markets? 

Alec I came over here in 2001 at an interesting time indeed. In fact, we started a little hedge fund. I was at Sicilian at the time and had a hedge fund myself and my good friend and colleague at the time, Richard Pitt, and we were busy marketing the fund during 9/11! So, there was certainly wild markets and it’s been an interesting time. And it was really about coming over here to have a look and see. And that was back in 2001. So we’ve been here going on 20 years. Our families back in South Africa travel back regularly, or did! And also lots of clients in South Africa to see as well.

And Ranmore?

Well, I spent five wonderful years at Orbis and it got to the point where I felt I wanted to paddle my own canoe. And so I left. And again, I teamed up with Richard, who was at Blue Alpha at the time. And they seeded the investments. And we started that in 2008, beginning of 2008, which again, was a challenging year. Halfway through 2008, we actually had a little hedge fund that we were managing then. And then the market started falling so fast. I’ve just come out of a long earnings phase and we thought that maybe we should start a long-only fund, which we did in the back end of 2008. We caught the last of the downdraught and have been going since then. And then Blue Alpha sold some years ago. And so it’s now myself and my small team, and we soldier on.

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Certainly, challenging times for value investors. You mentioned Piet Viljoen. Piet cycled out to my office a couple of years ago when he was travelling over here and we got together. We joked at the time, that we thought “this feels like a value investors’ supporters group that we’re forming”. And that was before the under-performance this year. So I think another beer with Piet is long overdue.

So, is there value or more interest now in value stocks, given this incredible run that we’ve seen? On the other side of the coin, in other words, the growth stocks?

Are you able to A, keep your head above water in your performances and B, starting to see other people who are also looking for contrarian approaches?

Yeah. And I think that’s a great question, because often what happens is when you mention that you’re a value investor, it conjures up images of owning steel companies and paper mills and boring old industrial revolution type stocks. And I don’t think that is the case.

And certainly, if you look at the value index, the MSCI World Value Index, and you and you see how it is comprised of some 22% of financials and obviously, a large part of those would be US financials and US banks primarily. So, you know, these are energy stocks, another huge component.

So, you can understand why the value space has under performed because energy’s been dealt a big shock. In 2008, we had the financial crisis, in 2011, the European process, etc. But one doesn’t have to own those companies.

I mean, all we try and do, is we’re just trying to look at a business that a sensible business person would look at, like a private equity investor. The first question a great business person would ask, and without putting words in his mouth, I think investors like Mr Brian Joffe and those kinds of industrialists, would ask is how long is it going to take me to get my money back? And what has got to go right for me to do that?

And how much am I going to lose if I get it wrong? And so that’s what we try and do. And I mean, I’ll give you a great example of that, right at the moment. Look at Amazon and you may ask, well, what drove Amazon’s results last quarter? Because everybody owns Amazon. I think for some, I think it’s the top 10 of some 40% of hedge funds out there?

I’d encourage you to look at a website called Whale Wisdom. They go through all the 13 Xs, have a look. If you look there, you look at what percentage of funds have Apple in their top 10 and Amazon. It’s 30 to 40%. And you say, well, what drove Amazon’s results? Was it web? Was it the Amazon Web Services? No, this was quite challenging. What really drove the results was grocery.

They kept talking about how the online grocery division was doing so well. And so you say, well, that’s great. But when I look at the food and staples retailing space in the MSCI World Index, it makes up one and a half percent, actually less than one and a half percent. And half of that would be Wal-Mart and Costco.

So then you ask, well, if that is what’s going on, how are the grocery retailers doing? And they’re doing really well. I mean, you’ve got a company like Kroger, which is in our top 10. It’s one of the largest supermarket chains in the US and it’s trading at 12 times earnings, and revenues are growing and profits and more importantly, profits are going up.

And why are profits going up? Because in the past, in recent years, there’s been this huge multi-decade shift to eating out of home, eating at restaurants and quick service places. All of a sudden, that’s turned on its head. And people are now preparing more meals internally. They have more money to spend because you wouldn’t have to pay the margins, etc. But now they’ve been battling against the discounters. But the discounters have smaller stores. It’s harder to socially distance in smaller stores that don’t have the same online offering.

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You know, you don’t want to queue around three car parks to go and get your food, fruit and vegetables at one store when you’re getting cleaning materials at another. So there is some fundamental and promotional spend that has been less, etcetera.

So you’ve got these businesses which are doing really well on 12 times earnings. And the reason that they haven’t run hard, I would guess is, A, they so small in the index and so much money is flowing into these guys. And B, people think this is a short-term phenomenon. And I don’t think it is, because when the market opens up, as we’ve seen in places like Germany, people are not rushing back to restaurants. And even if they are, there are few restaurants to rush back to.

So, in a tough economy you don’t go out and eat in supermarkets. I remember growing up, you know, we used to go to restaurants once or twice a year for a birthday. And then it became quite a regular thing. So maybe we got to go back to that. But then I look at it and I say, okay, so I’ve got the same growth factors that are driving Amazon, but on 12 times earnings out of 100.

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And what happens if it is a short-term phenomenon? And everyone does get back to restaurants? Well, how much am I going to lose? I’m not going to lose that much. And so that’s why I think value investing makes so much sense. And that’s why I’m a committed value investor. But it’s been tough. It’s been tough when you stand back and you look at Zoom and you think hang on, Zoom’s on a hundred billion (US dollars), and of course, I have a young teenage son and he’s fascinated by Tesla.

One thing we don’t own is a Tesla, we have a Mitsubishi but if you look at Tesla, it’s great story and it’s a great car, all the rest of it. Okay. But let’s put it in South African rand terms. Tesla’s worth three hundred and seventy billion dollars and they earn a hundred million last quarter and their revenue was down 5%. So imagine if I tried to market a product around southern Africa.

Everyone’s saying that’s a great savings investment. You give me three hundred and seventy thousand rand and I’ll give you a hundred rand a quarter. I mean, who on earth isn’t going to take, you know, take up that offer. But of course, everybody thinks Tesla is the new phenomenon.

It’s going to do well. Yeah, but BMW spent five times what Tesla does on research and development. And are you really going to take a bet that the German engineers at BMW and Porsche and the ones at Volvo, are all going to just allow Tesla to eat their lunch? I don’t think so. And so if you get Tesla wrong, you know, you’re going to lose a lot of money.

Watch the full episode of Rational Radio with BizNews founder Alec Hogg and Sean Peche (below, who comes on at the 53:00 minute mark).

 

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