Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Why this manager has a record low P/E despite valuation concerns
As Australia gears up to open its borders, the local equity market is positioning itself for higher inflation and higher bond yields. DNR Capital’s portfolio manager, Sam Twidale, says the “winning stocks are coming from the value and cyclical sectors such as Resources and Energy, especially in the small-cap sector.”
Inflation has also changed from being “transitory” to a longer-term thematic. “Greater inflationary pressure has been evident during just about all our recent discussions with various companies’ management teams,” says Twidale. “This is due to supply-chain challenges, higher commodity prices, increased energy costs associated with the transition to renewables, higher property costs and ongoing labour constraints.”
As the pandemic starts to shift into the background and its impact recedes, Twidale says the DNR Capital Australian Emerging Companies Fund has been reducing its exposure to “the more expensive areas of the market.”
In contrast, Twidale favours “cheaper sectors of the market, including resources, energy and attractively priced defensives. We finished 2021 with the forward price/earnings (PE) multiple of the stocks in the portfolio at one of the lowest levels since the inception of the strategy four years ago. The forward PE multiple is 17 times currently, compared with close to 30 times a year ago.”
One thing he says to be wary of is growth stocks that are priced for perfection and have done well in a low inflation and interest rate environment. Repeating this good performance, could be difficult. “Compare this to many of the more value- and cyclical-related sectors, where earnings expectations appear more on the conservative side and offer a margin of safety in their valuation.”
A good example of a top performer, he says, is ASX-listed Canadian iron ore producer Champion Iron (ASX:CIA). The stock’s fundamentals are “quite attractive,” he says, trading on a P/E of less than six times earnings and with a net cash position on the balance sheet. Other key resources positions include Iluka Resources (ASX:ILU), IGO (ASX:IGO), Lynas Rare Earths (ASX:LYC) and Deterra Royalties (ASX:DRR).
Twidale focuses his stock selection on “quality business models with defensive characteristics, a category that includes intellectual property services group IPH (ASX:IPH) and financial services software company Iress (ASX:IRE). High-quality industry leaders with strong pricing power in the portfolio include student placement provider IDP Education (ASX:IEL) and appliance manufacturer Breville Group (ASX:BRG).”
All in all, the fund returned 34.87% in 2021, beating the S&P/ASX 200 Small Ordinaries Accumulation Index’s return of 16.90%. Twidale says: “As we look ahead to the 2022 calendar year, our outlook for the market and the positioning in our DNR Capital Australian Emerging Companies Fund remains unchanged. We continue to look for strong bottom-up investment opportunities, in quality companies trading on attractive valuations. We expect that market leadership going forward could come from a narrower selection of companies, which will require a more concentrated and benchmark-agnostic approach to managing the fund.”
