Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
In today’s episode of the 7investing podcast Luke chats with Sam Ball and Jonathon McKeown, hosts of ‘The Investor Way’, a weekly investing podcast focused on UK stocks and shares.
June 30, 2022 – By Samantha Bailey
With the recent pullback in the S&P 500 and particularly US growth stocks, do you fear that your portfolio may be too US-centric?
In today’s episode of the 7investing podcast Luke chats with Sam Ball and Jonathon McKeown, hosts of ‘The Investor Way’, a weekly investing podcast focused on UK stocks and shares.
Sam and Jon share some advice about factors to be aware of when investing overseas, and the guys take us through the investment thesis for their five favorite international investment ideas right now. This one is a must-listen if you’re considering adding a bit of an international flavor to your investment portfolio!
Luke Hallard 00:00
Hey everybody, and welcome to today’s edition of the 7investing Podcast. I’m Luke Hallard, lead advisor at 7investing where it’s our mission to empower you to invest in your future. We do that by providing monthly stock recommendations for our premium members and educational content that’s freely available to everyone. I’m joined on the pot this week by Sam Ball. And Jonathan McKeown, better known to their listeners as The Investor Way, a weekly investing podcast focused on UK stocks and shares, gents, welcome to 7investing.
Jonathan McKeown 00:31
Thank you. Great to be here.
Luke Hallard 00:32
Sam, you know, you and I connected on your own podcast about a month ago. And we ended up recording a two part nearly four hour discussion on my own investing strategy. Also digging into a bunch of companies that I’m most excited about right now. It’s a marathon listen, but I’m still kind of the new guy at 7investing. So if listeners would like to dig more into what makes me tick, I’d definitely recommend checking out those episodes, or any of the other episodes where Jon and Sam do some really first class analysis on both UK and international companies. Hey, guys, I notice that you’re actually up to episode 88 on The Investor Way at the moment, you know, that’s pretty lucky in Cantonese, 88 is double money. Did you know that? You need to be investing hard right now, while you’ve got your 88 in the bag.
Sam Ball 01:19
It’s a good sign.
Luke Hallard 01:21
Well, hey, you guys are primarily a UK stocks podcast. But I know you also look at US companies. But for today’s 7investing episode, we’re going to focus on that non US aspect and chat about a bunch of interesting companies that might be worth a look to a US investor who’s looking to create a bit of international exposure in their portfolio. How does that sound to you both?
Sam Ball 01:42
Jonathan McKeown 01:43
Sounds like good fun.
Luke Hallard 01:44
Good stuff. Well, why don’t we start off with a bit of an intro to you both though, you want to share a bit of background on your current investing style, kind of who you are.
Sam Ball 01:52
Firstly, I work full time. So I’ve got a pension, my pension is just set to invest in index funds. And I’ve worked that out so that if everything I do on my own is just an absolute zero, I’ll still be okay with the pension. And then in terms of my individual portfolio, I’m about 50% U.S. listed. And that tends to be more growth focus just because of the type of companies that I look at. And then the other 50% is UK listed and to your American investors, a lot of that would probably be classed as value, although I do like companies that grow generally. So I would still consider them growth, but they tend to be more value in terms of what you typically consider value and the valuations that they trade at definitely compared to US listed companies. And then on top of that, I’ve also got a small Bitcoin allocation.
Luke Hallard 02:38
It’s got ot be nice having a bunch of value stocks in your portfolio right now. I guess they’ve held up a little bit better over the last six months.
Sam Ball 02:45
They have yeah, the U.S. side has been absolutely hammered. Whereas the UK stocks were at quite low valuations to start with, not much has happened on those.
Luke Hallard 02:54
Sometimes though boring can be the best way forward.
Sam Ball 02:57
Yeah which is why I like to have that split as well, just because you can obviously when one’s bombing away, you can just focus on the other bit.
Luke Hallard 03:04
How about yourself, Jon?
Jonathan McKeown 03:05
I mean, I think my investing style has definitely changed over the years. When I first started investing, I got a small amount of money, didn’t have any particular use for it at the time, but essentially wants to put it to work. So I went to who we knew. So a stockbroker that the family had used for for a period of time. And they essentially took the money and bought 5, 10 blue chips on the FTSE 100 didn’t really have very much input into it at the time, it was sort of well, they’re an expert, they know what to do with the money. After that money was invested and then I had the share certificate, I then became very interested in following the companies, seeing how they were doing, reading the reports, and took a much more active interest. And then I think it was around that point that I then got this extra interest, well, how would I go about picking them? So I read as with a lot of people, Ben Graham’s The Intelligent Investor which obviously is much more sort of, I suppose value orientated. And then after that, chose a couple of stocks, sort of myself, independently. That was a few years ago now. And I think I have changed as an investor. It’s definitely gotten more boring, I would say. I read some more of investing literature. So some of the classics like Jack Bogle, common sense investing, and Burton Malkiel. And I adopted a more of an index approach. So I do have individual stocks in my portfolio. I do buy individual stocks still, but the bulk of my investing now is into the FTSE All World Index. So it’s a little bit less exciting from that perspective, but I think I still enjoy stock picking as a pastime. I just think it’s so difficult to beat the index and working a busy job. I don’t probably have the time to dedicate to researching a lot of stocks for the whole portfolio. So that’s what I’ve been doing for probably the last few years.
Luke Hallard 05:10
Very good. It’s interesting you say you don’t feel you have the time to do the research, because the sort of quantity and the quality of the investment research you both put out and your podcast is fantastic. And it’s more than most professional investors would do I think.
Jonathan McKeown 05:23
Well that’s very kind.
Sam Ball 05:24
Yeah, well, I think a lot of our research, though, it’s like we might only talk for stock for five or 10 minutes on the podcast. And then for the prep, we might do 20 minutes each on a stock. So it’s a very, very surface level view. So like, for example, like with a lot of stocks, Jon’s guide with like, we’ve looked at them two or three times on the podcast before we thought, well, actually, we need to actually dig into that.
Luke Hallard 05:44
it’s quite good to go back and kind of remind yourself, and also the company evolves. So I guess you each time you go look at it, you learn a little bit more. Quite interesting way of building your conviction, perhaps before you put a toe in the water.
Jonathan McKeown 05:56
Yeah, no, absolutely. And I think on the podcast that we’ve done, as well, there are companies that naturally you like and you have more of an affinity towards. But then there are companies that are reporting it producing the podcast every week. So there are companies that you essentially have to do, you’re forced to do research on, that you probably wouldn’t have otherwise looked at. And that was where Airtel Africa (OTCMKTS: AAFRF), which I think Sam has got on a list of stocks to discuss later came from because I don’t think either of us would have ever looked at that if it hadn’t been for the podcast.
Luke Hallard 06:28
So Jon, you say used to have a family stockbroker, do you think he’s now a listener to The Investor Way?
Jonathan McKeown 06:34
I doubt it, but you never know. He was I suppose how you imagine a traditional stockbroker quite old, wore suits, all the rest of it. And yeah, had very good chats. And you definitely felt inclined, whatever you know, your mood was lifted, you bought into the idea you bought into another sale. And I think it’d be fair to share they did a good job, but it’s very difficult to beat the market. And also, if you’re a stockbroker, obviously, you’re always inclined you work on commission. So it’s always a good time to buy, it’s always agood time to sell. Did you have a lot of interactions, Luke personally with stockbrokers when you first started investing or?
Luke Hallard 07:17
No, not really, actually, I don’t really think the incentives in that industry work. I think it’s kind of broken incentives. And you sort of hinted at that with, you know, they’re motivated to act. And my view is 99.9% of the time, the right thing to do is absolutely nothing when you’re a long term investor.
Jonathan McKeown 07:35
Yeah, agree. Agreed.
Luke Hallard 07:37
So you guys, you do the podcast as a bit of a team and 7investing, we have seven lead advisors, and we all collaborate, challenge each other. Why do you think it’s beneficial to have that sort of close conversation with a friend or a colleague for constructive debate and challenge? How does that work for you both?
Sam Ball 07:55
I think it’s definitely been beneficial for me, especially with, as you’ve heard with the previous questions, Jon style and portfolio is very different to mine. If I look at my own portfolio now, which is quite different to before we actually started the podcast, but a lot of what I consider the highest quality investments in my portfolio. So for example, like Disney, it would be one where, despite the fact we’ve come at it from very different styles, we do see eye to eye, and we can both recognize the quality of a business, I find as well. Just generally just chatting stuff through, I can get quite blinkered when I when I get into something, and I have a tendency to want to invest right away. Whereas Jon does pretty much say no to everything that I like initially. So it does force me to be a bit more cautious.
Jonathan McKeown 08:37
I think probably for me, maybe I come at it more from sort of valuation. And a lot of what Sam does like, or some of them, certainly are very, very highly valued, I get a bit nervous. So I think I reflect that to Sam, and then he has to sort of justify why he is willing to pay so much more than I suppose what you might have traditionally thought of as, like conventional multiples. And then for me, if I’m almost overly defensive, he’ll say, well, what what are you doing this for? What’s your time horizon like? Why are you being so defensive? Why don’t you sort of push for sort of a bit more growth in your portfolio? So I think that sort of complements one another and sort of, maybe it sort of mediates, Sam a little bit and, and maybe makes me a little bit more, a little bit braver, and perhaps we get better outcomes as a result of that.
Luke Hallard 09:30
Yeah, very good. Well, you know, the wisdom of crowds, even if it’s just a crowd of two. Are there certain sectors or macro themes that you think you’re both pretty well aligned on?
Jonathan McKeown 09:41
I like the idea of a lot of the technology and I suppose a lot of what Sam invests in, some of it is just I’m not brave enough to pick those individual stocks. And Sam’s critiqued my portfolio a little bit or said, Well, you hold the whole world index and it sounds great, very diversified, but actually, you’ve got 60% maybe more in North America of that sort of all World Index, and then you’re looking within North America and the index, it works by market cap. So actually, disproportionately you have those sort of FAANG stocks. And I sort of say back to him Well, I’m almost not brave enough to pay up individually for certain things. But I do like that overall exposure. So I’m brave through the index, but not on an individual basis. But I think going back to tech is something that we probably do like, although, like I say, I don’t necessarily hold things individually, I feel like I have a good understanding of consumer goods, consumer discretionary sort of stocks. So that does form part of my portfolio. Are there any particular ones that you like, Sam, would you say that I’m not so keen on?
Sam Ball 10:52
Yeah, a lot of the time, I think if we’re talking about macro themes, a lot of the time I find that you do sort of get the theme and see where it’s going. I think the issue is more picking the winners. So an example that like when I was looking at the questions beforehand that sprung to mind. Was I outsourcing. So companies like Upwork (NASDAQ: UPWK) and Fiverr (NYSE: FVRR). When we talk about it on the show, okay, Jon, absolutely, you absolutely see it as a big industry, but then go in and pay, I know it’s come down a lot, but even going and paying 10x sales for Fiverr. As big as you think the industry is, it’s not so much that you don’t agree with the macro theme, it’s just that you wouldn’t buy the businesses, you try and pick a winner. I think the only macro theme I’d say where we are more aligned is possibly Bitcoin, where we both view it as a hedge against inflation. And a way to opt out of the devaluation of sterling or dollars or whatever else. And we do both view it as like a different type of asset class or more akin to a commodity. So like we we do both view that as a way to try and balance a portfolio. So that’s probably the closest one to a macro theme where we’ve actually both gone in on it.
Jonathan McKeown 11:55
Yeah, with Bitcoin, I sort of saw that as I don’t know whether you would call it a commodity or what what class of asset you’d consider Bitcoin. But I started allocating a little bit in in sort of dollar cost averaging way. So it just all of that now forms part of the portfolio, probably about 15%.
Luke Hallard 12:13
Well, so that’s actually quite a significant allocation.
Jonathan McKeown 12:16
Yeah with way things have gone. With things being switched back on after COVID geopolitical situation, not the Bitcoin, but the oil and the commodities index have gone up an awful lot.
Luke Hallard 12:26
And what would you guys say is your biggest difference of opinion?
Sam Ball 12:31
Absolutely, oil and gas. So whenever we cover Shell, and in fairness, this is one way so far, Jon has been absolutely spot on with it. And I’ve been absolutely wrong. But we actually it’s a bit of a running joke on our show that we covered. In the middle of lockdown, we covered Shell for the first time, it was putting out these terrible, terrible figures. I was just saying, Well, I think we’ve hit peak oil like no one’s driving anywhere. And Jon’s just sat with it as his largest position. I think you didn’t quite catch the bottom, but you did top up. And then equally, we’ve covered it again. Now it’s doing a lot lot better. And it’s a similar conversation where I’m just saying, well, it’s a cyclical business. I just think like, when are things going to be better for an oil company than right now. So I would be taking that allocation down, but then I never would have had it in the first place. But that’s one where we’ve got a very different view for that.
Jonathan McKeown 13:19
And I suppose I had my own biases when it came to it. It was one of those stocks that nearly 10 years ago, I got or sort of got it was born, I didn’t have any sort of input really into getting it. It was actually a gas company that I had, which was then taken over by Shell, but you got cash, you’ve got some shell shares. And then yeah, I had topped with it over the years. I suppose it’s you can make money, even if the industry that you’re investing is in structural decline. I’m not bullish really, really long term on oil, but I think it does have some way to run. And I think it was probably overdone, obviously cyclical. So when you know when the world economy is switched off when you had a glut of oil, it’s not going to be worth anything. But now that we’ve sort of switched back on and there are other other factors too. But when the world economy is going it is guzzling oil. And in those emerging markets, you feel that they are going to need to go through that same, I suppose same transition that most of the West has, or is going through? I think longer term, I’d be looking to get out of it, because I appreciate it is sort of in structural decline. But I think there’s there is money to be made in it in the meantime.
Luke Hallard 14:34
Jon, putting your profits above the welfare of the world.
Jonathan McKeown 14:40
Ethics aside, but yeah, maybe maybe I should be switching over into Tesla shares.
Sam Ball 14:46
I think another one that we disagree on as well is the World Index we both do indexing to some degree. Jon does a lot more than me, but with my indexes I don’t use the World Index because I don’t like that 60% allocation to the US. especially if if you do think the next 50 years for the US aren’t gonna be as good as the last 50 Would you want to go in with a 60% allocation? And so with my index, and I’ve just picked five different index funds covering five different geographies. So I’ve got UK, developed Europe, North America, emerging markets, and Asia Pacific. And I just go 20% In each of them, just because I don’t want that much exposure to the US in my index.
Jonathan McKeown 15:23
On that, I suppose. I think that if you look at the quality of the companies that are listed in the U.S., and certainly a lot of those big ones, they are the highest quality, so it doesn’t worry me too much. And you do have decent exposure to other countries. Well, I mean, UK is doesn’t form a large part of it. I think it’s about 4 to 5%. Developed Europe is excluding the UK is probably about 14%. But you know, give or take. So I think I think you’ve got a fair balance. But in the rest of my portfolio, I don’t have a large exposure to the US anyway, if that 60% In The World Index is that personally doesn’t worry me.
Luke Hallard 16:03
Well, we’re going to talk about investing internationally on today’s podcast. And I guess 7investing primarily has a US audience. What should a US investor be aware of if they’re investing overseas, perhaps particularly into the UK?
Jonathan McKeown 16:16
If you look at the UK market, it’s very different to the U.S. in terms of the sectors. We have very little tech in the UK. So that’s something that’s it’s more an absence of it. Valuations tend to be quite a bit lower in the UK, which I think certainly for me, if you’re a US investor looking to invest in the UK is something that would be quite attractive. Quite a lot of maybe older industries. So like Sam mentioned earlier, oil and gas make up a larger proportion of the main index in the UK the FTSE 100. You have other sort of Old World Industries, like you’ve got a larger number of banks that form part of the FTSE 100, then you’ve got brewers, tobacco companies that maybe less forward looking? I don’t know that that could be a bit harsh, you’ve got quite a lot of consumer staples in there, too. What would you say, Sam?
Sam Ball 17:11
I think the first thing I think that if you look at US companies, I think they’ve got a huge and very entrepreneurial domestic market. So if you get a company that’s able to dominate in the U.S., I think they’ve got a pretty good chance if they take their product or service internationally. Whereas in the UK, it’s a much smaller market. And although you do get a lot of excellent businesses, you tend to see, I think, a higher proportion of those, if they do go international, it’s less likely to work. So for example, like Tesco and Domino’s (NYSE: DPZ), I know they’ve got Domino’s listed in the US, but there’s a UK listed one as well, they’re both fantastic businesses domestically, both have tried expanding overseas. And both of them massively didn’t work. So I think the total addressable markets tend to be lower. And I think if you’re factoring international growth in you should probably be a lot more cautious if you’re investing in a UK business. So another example is one that we both own is Right Move. And that’s a fantastic business. It’s essentially a monopoly in the UK, if they said they were going to France, I would be concerned about that. Whereas, you know, I think if it was the US equivalent, and they said, Oh, well, we’re going to Australia or something, you’d probably, you’d think that they have a much better chance of doing it. And I’d agree as well, with the multiples as well, I think you tend to if you look at a lot of UK listed companies, and then compare them to their US peers. So for example, like the consumer goods companies, or even like the tobacco companies, they the tobacco companies we’ve got in in the UK, they trade at P/Es of 10 or less, whereas in the US, they might be like 15, 16 for what are essentially the same, pretty much the same companies. But I think if you’re buying them, the valuations are more attractive, but I’d just be cautious. If you’re a US investor, I wouldn’t buy it and think well, British American Tobacco is at a P/E of 10. And Philip Morris is at 18. So I’m going to wait for it to rerate because you probably won’t get that rerating or certainly not anytime soon that I’d expect.
Jonathan McKeown 19:02
I think something else sort of on that point. Recently, we’ve had a windfall tax on oil and gas companies in the UK, with things like that you do get a bit more regulatory and government involvement in the private sector, which I think probably contributes to multiples of some UK listed companies being a bit lower than the US where there’s sort of lighter touch regulation. So the businesses, I suppose can maybe reach their full potential sooner which in the UK can be limited by those factors. So I think that’s probably something else to be aware of and to consider. Whereas I don’t know much about US politics, but I can’t imagine that Exxon is going to be having a big windfall tax slapped on it.
Sam Ball 19:46
We’ve got it with the house builders too. And again, which is silly because we’ve got an under supply of housing and they’ve slapped an extra tax on the house builders. I don’t know any US house builders because I don’t follow them. But you wouldn’t expect them to be hit with an extra tax.
Luke Hallard 19:58
Oh, well, that’s some good background. there, and I think we’ve got a decent understanding of kind of where both of your thinking is. So let’s dip into a couple of actual international stock investment ideas. And these are some companies you’ve picked out of your own portfolios. And maybe if you can just give 7investing listeners a bit of a flavor of what these companies are and why you like them. So I think Sam, you’re going to kick us off with Airtel Africa?
Sam Ball 20:22
it’s one we both like actually, but it’s it’s my largest holdings. It’s a mobile phone provider, they operate in 14 African countries, listed on the FTSE. They’re the second largest telecoms operation in Africa. They’ve got 128 million mobile subscribers, 46 million data subscribers, and 26 million Airtel money users. In terms of the figures, last year, revenue was up 21% earnings per share was up 86%, operating free cash flow was at 40 and a half percent. And average revenue per user was at 15.4%. And last year is not a one off either. They only listed a few years ago, but it’s been like this year after year, we’ve had 17 quarters of double digit revenue and EBITDA margin growth, it’s got a lot of demographic tailwinds just on the mobile data side. And then as well as that it’s got this part of the business called Airtel money. And what that is, is it’s it’s almost a hybrid between PayPal and a traditional bank, because a lot of Africans are underbanked. And that currently makes up 11.7% of the business, but it’s growing at 35% a year. And it’s already up to 64 billion of annual transaction value a year. So when you look at this operationally, it’s a very, very good business in terms of the demographics and the tailwind, it’s got a lot going for it. I also like the diversification of it in that where else would you have exposure to Africa in your portfolio, even if you have a World Index or an index, because there’s so few listed stocks, it’s very, very difficult. Even in an emerging markets index, there’s very little exposure to Africa. And then as well as putting up these fantastic figures. If you look at the valuation, it yields 2.6% as a dividend, and it trades at a P/E of under 11. So yeah, so that’s my two minute pitch on it.
Luke Hallard 22:03
Sounds like you both agree on this one. But anything you’d add to that, Jon?
Jonathan McKeown 22:05
I mean, it does obviously come with its risks, from the countries that it operates in. And I think it was in the news. Was it yesterday, Sam, that I think they’re in the Congo, and they’ve slapped $180 million tax of some form on all of the telecoms companies. And essentially, they’re just going to have to pay up for it. I don’t know how lawful it is. But it’s one of those things. And I suppose it’s the cost of operating in some emerging markets like that. It has great growth potential, and it has been delivering on that. But it does come with its risks, which are probably reflected in that earnings multiple.
Luke Hallard 22:46
Would you guys say that this is probably your strongest conviction stock that you both kind of share your consensus on?
Jonathan McKeown 22:52
That and Disney (NYSE: DIS) but that’s probably your US listeners are very familiar with that.
Sam Ball 22:56
There’s a few others we both like but yeah, I think we both like Airtel Africa a lot.
Luke Hallard 23:01
We’re gonna get into one that you’re not such a fan of I’m not sure, Sam. But Jon, you’re gonna give us an overview of your next stock.
Jonathan McKeown 23:08
Yes. So Unilever, it’s a company that maybe U.S. listeners haven’t heard of. It was in the news a couple of years ago, when Warren Buffett and Kraft Heinz tried to acquire it, but that was fleeting, it didn’t. It didn’t happen. But you may be familiar with some of its brands. It’s a consumer goods company with a lot of, well, ertainly in the UK brands that dominate. There’s Ben and Jerry’s, it has Magnum ice cream, Hellman’s Mayonnaise, Dove soap products, Degree, Vaseline, the Dollar Shave Club in the UK, certainly all household names, which people across the developed world are willing to pay a premium for. But they’re also brands that people in the emerging markets like China and India, as the wealth of those countries grows, they have growing middle classes, and they’re looking to buy those brands as well. So while it’s quite a defensive company that’s really being sort of tested now, when inflation is going up, and how much they can put up prices to offset that. But it’s also a company that, I would say has future growth in it, particularly as it expands into those sort of less tapped markets I suppose. It’s one that I’ve had a stronger conviction in the past. I think management hasn’t been doing such a good job recently of really unlocking the value in some of those brands. But interestingly, and this is only in the past few weeks. Nelson Peltz, the US investor has bought I think with his company bought about a billion pounds or maybe a bit more of shares in Unilever, and he’s got a seat on the board. So you would expect is going to be agitating for change. So I think it’s likely to be a more exciting year or a couple of years for shareholders. The growth has not been what you’d hope for sort of high single digits from a business like this. And it’s at the moment. So we’ve been sort of doing about what I think was the last one was about four and a half percent. But it does have those quality brands. And I think particularly if you’ve compared Unilever with your sort of Procter and Gamble, and Kraft Heinz, its U.S. equivalents, essentially, it doesn’t trade for anywhere near as much. So it’s only on about 16 to 17 times earnings. And it’s got a yield of about 4%. But I think if you can unlock the value in some of those brands, it’s potentially a value play, but it’s got a decent way to grow as well. So I think it would be one for U.S. listeners to maybe take a look at.
Luke Hallard 25:42
Very good, and I guess you’ve both picked there on two stocks that have pretty robust income aspects to them, so 2.6% from Airtel and 4% from Unilever. I guess, Sam, you’re, you’re the third stock, you’re gonna share. I’m guessing this one doesn’t pay a dividend
Sam Ball 25:58
Games Workshop (OTCMKTS: GMWKF), you would actually be wrong. It pays three and a half percent actually. It’s yeah. Right. So I’ll jump into Games Workshop. So yeah, they make the Warhammer figures, I don’t know how big they are over in the US. But if you’re not familiar with the miniature figures, you might be familiar with some of the they’ve got like the Total War Warhammer games, and they’ve done a few other computer games over the years. But they’ve got a very, very fanatical customer base, it’s all their own IP, they’re not really beholden to anyone. And in terms of the performance of the business, it’s just been fantastic. So 2017 to 2021, if you look at those five years, revenue grew by 123%, operating profit grew by 295%. And they’ve not come out with the annual report yet for this year, because well, the year ends only just finished. But as at 31, may 2021, they had a total of 523 stores. Of those 96 were UK, 142 in North America, which is tiny compared to the UK, because obviously the UK is just a much smaller market. 130 in Europe, 37 Australia and just 22 in the whole of Asia. And I think if you look at how a lot of like luxury brands have gone over to Asia, I could see Warhammer being something that’s actually very popular over there. And then I think they’re only really sad. They’re pretty saturated. In the UK, they’ve probably exhausted the market for like geeky hobbyists that are the ones who go and paint miniatures. But in overseas, I don’t think they have. And I think there’s a lot they can do. And like I mentioned before, they’ve got the total war games, but they’re now starting to look much more seriously at licensing the IP. So you’ve got to fight like television shows and films and stuff like that. I think they’ve got a very, very, very strong universe. And I think there’s a lot that they could do with that IP. And I think as well, like, if you were to look at something like Formula One where they’ve gone, I think if you look at how much Formula One’s popularity has increased since Netflix did the drive to survive series, you almost get these Disney esque benefits where one part of the business is making the other stronger. And it just all feeds into itself. And I think you could get that on a smaller scale or Games Workshop. But then if you look at it, it’s a very, very small market cap. I have not dyed it down, actually. But I think it’s two or 3 billion. It’s something like that. So it’s absolutely tiny. And then in terms of valuation, despite all that growth, the PE is just 18. And you’ll still get a yield of three and a half percent.
Luke Hallard 28:22
Wow. I mean, it sounds like a really robust business. I’m shocked actually, I was one of those geeky long haired Dungeons and Dragons players as a kid, and I’m going to out myself on the podcast. And actually, I’ve got a couple of buddies coming together in about a month time. And we might have a bit of resurgence of the game just for one weekend only in London, I had no idea that the Games Workshop I used to go into as a kid is still going and it’s such a robust business.
Sam Ball 28:47
It’s absolutely fantastic. Honestly, I think if you look at the International, if you read through the annual report, I do feel like they are just getting started, especially with Asia because 22 stars in the whole of Asia is absolutely tiny.
Luke Hallard 28:59
I love your reference to the sort of Disney esque network effects there. That can be an incredibly powerful accelerator for a brand that’s got its toe in a couple of different areas.
Sam Ball 29:08
We’ve talked about on the show before and I said like if I was destiny, I would just buy it because it’s so small that you can absorb it. I think Disney could actually do a very, very good job with that IP. So if if I didn’t know I could make I could make a proposal at the AGM this year but I’d like to see this. I think it would be a good idea to buy Games Workshop.
Luke Hallard 29:31
Can be interesting, where Bezos has purchased the IP for the Lord of the Rings. Now they’re plowing almost a billion dollars into producing that TV show and hopefully see it later this year. Maybe there’s a bit of resurgence of that style of programming, perhaps that does make Games Workshop a bit more attractive target to Disney.
Sam Ball 29:49
Yeah, I think so. I think it’s, the users are very, very fanatical. And I think if you look at the universe, it’s the sort of stuff like it would have quite a broad appeal.
Luke Hallard 29:59
Well, that’s definitely jumped up my radar of stocks to look at. So Jon, why don’t you bring us back to something a bit more traditional?
Jonathan McKeown 30:08
So I’ve got Diageo (NYSE: DEO). It’s a drinks company that probably most US listeners haven’t heard of. But it’s a brewer and distiller you probably come across some of its some of its drinks so produces Guinness for its brewing division. And then in terms of distilling it’s got Smirnoff vodka, Johnnie Walker whisky, Captain Morgan spiced rum, Gordon’s Gin, Bailey’s, Don Julio Tequila, and many more. And it’s actually the world’s largest seller of scotch whisky. Again, it’s a, it’s a company that has lots of defensive qualities to it with a portfolio of some of the strongest brands that are sold worldwide, which are delivering growth. Its largest source of revenue just comes from the US. So it’s a company that’s already operating there. But it’s also growing rapidly in the emerging markets, which are certainly not saturated, like the UK market might be. It’s got really impressive margins. And despite people being more health conscious, and drinking smaller amounts of alcohol, they’ve managed to adapt to this by selling more premium versions of their existing brands. And again, upping the margins even more. So I think that’s really impressive. But it is like, for example, in developed markets, like the US is still growing and only has 4% of the global spirits market. So it’s got a long way still to go. It also is adapted to people drinking less, by having its alcohol free portfolio, basically, of those well known brands, but 0% versions of it, it’s an extremely well run company, it makes smart acquisitions, there was Aviation American gin, which Ryan Reynolds founded, it bought a share of that, and it’s integrating that into its portfolio. And I think also just going back to some of the defensive qualities like with the scotch whiskey, that’s something that has very high barriers to entry, it takes a very long time to produce. And it’s essentially the market leader in that. So it’s got the growth, but it’s also got the defensive side to it. By UK standards. It’s a fairly big company. It’s got a market cap of around 80 billion pounds, which is about $98 billion. And it has a yield of I think around 3%. I’m not sure exactly what the share price has been recently, I haven’t. It’s one of those companies that you can buy and you don’t need to look at for a while. But again, I think by comparison, if you compare it with an equivalent US company, so maybe Brown Forman, for example, Diageo would only trade at say 25 times earnings, or there abouts compared with nearly 44 it’s US equivalent. So I think it’s one of those businesses that if you’re a US investor, you might take a look at because it’s globally diversified, very high quality, but quite a lot cheaper than the equivalent company in the States.
Luke Hallard 32:59
And you dropped Smirnoff’s name in there. So you saying I shouldn’t be boycotting Smirnoff vodka?
Jonathan McKeown 33:07
Okay, okay. Okay. So I suppose this is this is where the politics, maybe it becomes a bit more controversial if we’d if we recorded this. Yeah, more than six months ago, we might have been all right. Yeah. Hopefully the whiskey can make up for that. But yeah, it’s, I think they’d like to think of themselves as apolitical when it comes to some of these issues, which is different from Ben and Jerry’s, I have sorted out but yeah, a company that I have in my portfolio. And I think it’s a bit like Unilever that you can buy it, forget about it and come back in 10 or 20 years, and you wouldn’t have to worry too much. And you’d hope that there was a nice return waiting for you.
Luke Hallard 33:48
And you know, the opportunity to sort of consume the products of the companies that you own.
Jonathan McKeown 33:54
Yeah, absolutely. I haven’t been to an AGM, but I would hope that you might get some freebies there.
Luke Hallard 34:00
Very good. Don’t drive home. Yeah, don’t
Jonathan McKeown 34:01
Yeah don’t drive home
Luke Hallard 34:05
I was actually I was shocked. My wife picked up a bottle of 0% Gin, good stuff. I was actually shocked at the price tag, though.
Jonathan McKeown 34:13
Absolutely. And I’ve had some of the 0% both the Gordon’s and the tanker is it’s very good. And it tastes like the real deal. I find that you’re drinking twice as much to get the flavor and it’s not half the price. So it’s yeah, you pay a lot for it. Absolutely.
Luke Hallard 34:29
I’m sure it’s great for the margins. Well, Sam jaunt around pick us up with our fifth and final stock for today. And I think this might be a bit of a controversial one between the two of you.
Sam Ball 34:39
Yeah, so we do have different views on this one. So this one’s Hargreaves Lansdown. So it’s the UK’s leading investment platform for stocks and shares, which is where you’d go to buy the stocks and shares. They’ve got a 43% market cap in the direct to consumer platform market and they are absolutely dominant in the UK. They’re I think they’re over like twice the size of the next next rival, I think they’ve got about 1.7 million customers, I think the next biggest, I want to say it’s interactive investor, something like 400,000, 500,000, or something like that, but they are head and shoulders above the rest. They’ve got assets under administration of 141 billion as of 31, December 21. And that’s more than doubled from five years ago. 1.69 million clients, and that compares to 878,000 5 years ago, and the client retention is 92.1%. It’s a very, very competitive market. And they do charge quite high fees that dominance and that growth hasn’t necessarily translated through to revenue growth. So despite the doubling of the assets under administration and the doubling of the client numbers, revenues only up by 63% in the last five years and operating profit by 39%. However, they are absolutely dominant, they are continuing to grow, although it’s probably going to be a bit less now. Because that assets under administration, it gets a big boost when stock prices are going up. Because it can go up without you having to actually do anything or acquire new customers. I think they’re the best platform, I think they’re very easy to use, they’ve by far got the best support if you’re going to use free trade or trade them to want to if you actually have a problem and want to get them on the phone, good luck is all I would say. I think for anyone that’s investing a significant amount of money, they are the obvious choice, if you’ve got someone that’s got a couple of grand and doesn’t want to pay the 10 pound fee, they can go to free trade. If you’ve got someone that say I don’t know, a partner in a law firm, they’ve got half a million quid they want to invest. They’re going to go to Hargreaves, because that’s where everyone they speak to is already. So they do have a big network effect. A lot of people trust them. And as well, in the UK, we’ve not got as much of an investing culture in the US. We’ve got what’s called ISAs and they’re basically you can put 20 grand a year so about $26,000 into an account. You can invest it in whatever you like, and the gains and the income from that is completely tax free. There’s different types of ISAs, the stocks and shares ISAS market is a lot smaller than the cash ISAs market and they’ve now just started doing the cash ISAs. I think they’re going to do very well in the cash ISAs based on how they’ve done on stocks and shares. I think what’s more is they’ll probably be able to bring a lot of people into stocks and shares via the cash ISAs in terms of the valuation, it’s trading at a P/E of 13. And the yield is 4.8% now.
Luke Hallard 37:16
Interesting, and I’ve seen the platform I’ve got a family member who’s got a Hargreaves Lansdown account. I agree. It’s like super easy to use. It’s probably not for me for different reasons. But there’s a lot to be said for just kind of keeping it simple and making it very easy for your customers to engage with your product.
Sam Ball 37:33
Yeah, Jon doesn’t share my view. So I’m sure he’s gonna tell us why.
Jonathan McKeown 37:37
Yeah, I think what I worry about with Hargreaves Lansdown is not that I dislike the product, I don’t use it. But I think that the platform is very expensive. And correct me if I’m wrong Sam but I think it’s 0.45% They charge on portfolios is up to 250,000 pounds, which would be over $300,000, which compared with a lot of platforms is very expensive. There’s Robin Hood in the States, but we’ve got new essentially commission free platforms coming through in the UK, which I think at the moment, they’re not not making profits, but maybe eventually they will, I fear that they would come in eat up Hargreaves share. There are also bigger players, which maybe have more respectable or more established names like Vanguard that came to the UK a couple of years ago in a direct to consumer sort of form. So obviously, you’ve always been able to buy the Vanguard products on whichever stock broking platform you’ve been on. But now they’re doing direct consumer. So you can go onto the Vanguard website, you can buy the Vanguard funds, no fee there. And I think they charge 0.1% so significantly less than Hargreaves. And there are lots of other platforms. I appreciate they’re not as big. But I think while it’s the market leader at the moment, essentially, it’s a sort of a race to the bottom. I’m not convinced that Hargreaves is going to be able to hold on to that position and make the profits that it is at the moment that would be my concern for I don’t see how it sort of differentiates itself at all,
Luke Hallard 39:11
I suppose what you’re hinting at is almost becoming a bit of a commodity market.
Sam Ball 39:16
I would rebut that slightly in that the 0.5%. So that that is right. But that only applies to funds. And it’s actually slightly more expensive if you invest via a SIP or something. But if you’re in an individual, like say stocks and shares, and you just buy individual companies, you’ll pay the trading fee and that’s basically it. I don’t think you get hit by the 0.5% on individual stocks. In terms of the vanguard and stuff coming in. They’d been here for at least a couple of years now. There’s been everyone else has been coming in before that you’ve got the free trades or trading two on two. I do think the trading fee so to make a trade it’s about 10 pounds a trade. I think that will come under pressure. But I still think a lot of these competitors have been there for years and Hargreaves are still dominant. I just think as long as their assets under administration continues to go up. So it’s currently 141 billion, there’s going to be ways to monetize that they might have to look at different ways of doing it. But if you look at how the business has evolved over the years and how it’s grown, I think that management’s shown that they will find ways to monetize it.
Luke Hallard 40:15
That was the controversial one we wanted to end out with. That was interesting. I think you’ve given 7investing listeners a couple of quite interesting international investment ideas. Certainly, it sounds like you guys are most bullish about Airtel Africa, and probably most controversial one there, Hargreaves Lansdown, but I noticed all of those companies quite a strong income component. So particularly if you’re looking for income or dividends in your portfolio, probably all five of these are worth a bit of a look.
Jonathan McKeown 40:42
Yeah, they’re absolutely I mean, I think certainly Unilever and Diageo. Some, they’re less growth orientated. They are but I appreciate Games Workshop, how high the yield on that was, I thought it would be 1% or less.
Luke Hallard 41:03
Well, if you guys are up for it, we should we do a bit of a quick fire round, because I’ve got a bunch of other companies, I like to pitch for you, and then see what you think. Now, I’m going to apologize to the guys from the stock club podcast because I’ve blatantly ripped off their episodes they did with Beth Kindig, which is worth a listen, it’s a fantastic episode. But I thought was a really fun format. And I thought I’d give it a go with you guys and see if we, if we can all get to the winner of our little stock playoff. So what I’m going to do is I’m going to pitch two company names to you. You’re going to tell me your favorite. And let’s say the best investment in your view over a five year timeframe. Keep it super simple. Use your investing instincts, no justification don’t want any analysis, just kind of which ones you like best. And let’s see if you can both agree. But if you disagree, I don’t know. We’ll figure it out as we go. So I’ve got 10 stock names for you and they’re all pretty well known companies I’m fairly confident 7investing listeners will be familiar with. Oh and by the way, they’re all from your own podcast. I had a dig through those episodes. Yeah, I’ll kick us off with an interesting little mash up. Start with Aston Martin versus Beyond Meat.
Sam Ball 42:15
Jonathan McKeown 42:17
Yeah, Beyond Meat Beyond Meat.
Luke Hallard 42:19
I used to own Beyond Meat myself. Okay. Here’s a bit more of a traditional one perhaps. Netflix versus Fiverr
Sam Ball 42:27
Jonathan McKeown 42:28
Luke Hallard 42:30
Okay. Okay, what so Jon had Netflix, Sam had Fiverr. That’s it. Okay. Let’s see if you agree about Lululemon versus Etsy (NASDAQ: ETSY).
Jonathan McKeown 42:41
Sam Ball 42:41
Luke Hallard 42:43
Strong, strong consistency there. And then this is probably perhaps one more for Jon. Shell versus GlaxoSmithKline.
Jonathan McKeown 42:52
Sam Ball 42:52
Luke Hallard 42:54
Okay Shell, clear winner. And then our last match up before we go into quarterfinals. Domino’s, and I suppose let’s say the US listing of Domino’s versus Bumble.
Jonathan McKeown 43:05
Sam Ball 43:05
Luke Hallard 43:06
I think that’s sort of the Netflix and chill. So let’s take our let’s take our stocks through the next round. So I think our next round we’ve got Beyond Meat versus Etsy.
Jonathan McKeown 43:21
Sam Ball 43:22
Luke Hallard 43:22
Wow. Okay, sorry Beyond Meat. Shell versus Domino’s.
Jonathan McKeown 43:30
Oh, I’ll go shell
Sam Ball 43:32
Shell based on valuation if it’s US Domino’s.
Luke Hallard 43:36
Okay. All right. So let’s pit you against each other. You have to come to a conclusion between Netflix versus Fiverr. Who’s going to win over those two?
Jonathan McKeown 43:49
I think because Netflix has earnings. Not the only reason but I find Yeah. Firstly, I find it very difficult to pay up for Fiverr and I like the industry that it’s in.
Sam Ball 44:02
We’ll give him Netflix.
Luke Hallard 44:04
Going on Netflix. Okay. Yeah. So I think that makes off in our final we’ve got Netflix, Etsy, and Shell I think that’s our last three. So which of these is the winner out of those three do you guys think?
Jonathan McKeown 44:16
I would go for Etsy, which is unusual for me, but I think actually, I liked it as a business when we’ve covered it on the podcast and its valuation now seems to be much more reasonable than it was maybe six months ago.
Sam Ball 44:30
I was sure that Jon was gonna say Shell and we were gonna have to argue it out. But yeah I would also go for Etsy.
Jonathan McKeown 44:37
Shell is cheap though. I still got some conviction there, but.
Luke Hallard 44:42
Excellent. So 10 interesting, somewhat controversial stocks, but between the two of you. I think we’ve arrived at Etsy being the winner.
Jonathan McKeown 44:49
Yep. I’d agree.
Luke Hallard 44:50
Very good. A little sidebar question then. So I think we started the podcast and you guys said you were very bullish on Bitcoin, 15% Bitcoin allocation. So go on. Let’s get our final heads up. Bitcoin versus Etsy. You can only own one and let’s say you’re all in for the next five years.
Sam Ball 44:50
Jonathan McKeown 45:09
I would caveat that yeah, in my portfolio, it’s the 15%, it’s 15% commodities, of which Bitcoin is a small, small amount.
Luke Hallard 45:19
Are we Etsy for the win?
Sam Ball 45:21
If I’ve got other stocks, I’d possibly go with Bitcoin just because it’s a different type of asset. But if you’re saying this is my whole portfolio, I would probably go with Etsy.
Luke Hallard 45:30
Okay, we’ve got a clear winner, then we’re very good. I certainly don’t recommend anybody goes all in on anything, whether it’s a cryptocurrency, index, or a single company, that the winner of this little game was Etsy, congratulations to that company. Well, I think we’re coming towards the end of our episode. But before we do wrap up, anything you chaps would like to tell listeners about The Investor Way or where listeners can find yourselves?
Sam Ball 45:54
Yeah, we do have a podcast that we do once a week. Occasionally, we’ve got a guest interview, like when Luke came on a few weeks ago, but usually, it’s just the two of us. We’ll talk about six stocks a week. So we’ll pick one US stock and the rest will be UK listed. So if you are interested in UK stocks, or you just want a bit of diversification outside of the US market, it’s just, ‘The Investor Way,’ if you search that, I would hope we come up by now. But if we don’t, we’re on Twitter @TIWtweets, and that has a link to all our platforms anyway.
Luke Hallard 46:23
I do recommend the podcast to 7investing listeners, if you’re looking for a bit of flavor of what’s happening outside of the US market. I think you guys have a really good little vibe is a good chat. And it’s a it’s a fun listen once a week.
Sam Ball 46:35
Jonathan McKeown 46:35
Well, thank you very much, Luke.
Luke Hallard 46:36
Very good, well guys, that was a fun discussion. Thanks for making the time to share your perspective with 7investing listeners. You have been listening to the 7investing podcast where it’s our goal to empower you to invest in your future. You want to know more swing by 7investing.com/subscribe to get a fantastic deal on your first month of membership and access to our deep repository of over 100 stock recommendations, deep dive videos and regular company updates. Well that’s it for this week. Thanks to my guests, Sam and Jon, and look forward to speaking to you all soon. Thanks.
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