Global picks to concentrate your investments

Focus your investments on attractive valuations and strong competitive advantages with Invesco's Virginia Au

Ruth Saldanha 23 April, 2019 | 2:00PM

 

 

Ruth Saldanha: Earlier this week, Virginia Au, Portfolio Manager at Invesco, gave us her perspectives on why she feels that concentration is a good strategy. Today, she is here with us to give us her top U.S. stock picks using this strategy.

Virginia, thank you so much for joining us here today.

Virginia Au: Thank you. It's great being here.

Saldanha: Your first pick is Sabre Corp (SABR), a company that has 4 Stars by Morningstar analysts, meaning we think it's undervalued. Why do you like this company?

Au: Well, I guess, great minds think alike. For our fund we like Sabre because it has two of the key attributes we look for in all of our investments, which is strong competitive advantages and also attractive valuation. For Sabre, they are the real-time database for hotel and flights availability for both online and offline travel agency. They have a very strong competitive advantage because the barriers to entry is very high and you also need a network effect. So, to do that you need scale. Sabre is the second largest provider in the world, so they definitely have scale.

Another thing we like is the long-term trend, a secular trend, of global travel. So, the travel industry tends to grow at 1.5 times GDP over time and for Sabre, their revenue is also very resilient even during the downturn because their fee is based on the number of bookings and not ticket prices. That's important to understand because for airlines, they like to fill up their planes. So, to do that, in a downturn, they will often lower their ticket prices, but volumes stay the same.

Lastly, we like the company because it's trading at 16 times free cash flow this year and I think that's pretty attractive given the revenue profile. This is a great example of doing extensive research and understanding the driver behind the company and also, focusing on that long-term secular trend, especially in this fickle market.

Saldanha: The second company that you like is Interface (TILE). Now, that stock has been rather volatile going from around US$23 down to about US$13 before stabilizing. Why do you like this stock?

Au: Yes, it has definitely been a volatile stock. And I think this is a great reminder of how wide a pendulum can swing on investor sentiment. For us, we got a great opportunity to buy the number one global manufacturer in carpet floor tiling. Carpet tile is actually just carpet in square format. They are very popular in offices and commercial use because they are cheaper and easier to install and replace. So, if you were to look down at your office floor, most likely you will see carpet tile and probably Interface as I see in this studio.

Investor sentiment today is very low on anything relating to the macro economy. But what we see is that the demand for office renovation is still strong because the employment rate is still high. And if there is a downturn, there's a lot of self help opportunities at Interface. For example, they are expanding their offering into hard service flooring. So, they are also participating in that trend. Right now, the company is trading at a compelling 10 times this year's earnings. And I think this is actually a great example of how we are able to assemble a portfolio of 25 to 35 world-class names at attractive prices.

Saldanha: Finally, your last pick is Encore Capital (ECPG). Tell us what you like about that story.

Au: Encore Capital is a U.S. and European credit card debt collector. These are debts that the bank has already written off and they are selling for pennies on the dollar. The competitive landscape has consolidated tremendously since the financial crisis, especially in the U.S. because of regulatory hurdles. And Encore is the number one player in all of its key markets. We see a lot of great tailwinds for the company in terms of higher credit card balances and higher delinquency. So, we expect the company to grow at about 10% to 15% in the next few years. And it is currently trading at 6 times this year's earnings.

So, as you can see in three examples alone, why I'm excited about our fund, because of these companies having tremendous opportunities to grow and also trading at a lower valuation than the market. And I think these are two key attributes for good long-term returns.

Saldanha: Thank you so much for joining us today, Virginia.

Au: Thank you.

Saldanha: For Morningstar, I'm Ruth Saldanha.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Encore Capital Group Inc34.14 USD1.07
Interface Inc13.09 USD0.85
Sabre Corp23.15 USD0.61

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca