View from the CIO: Decimation of traditional businesses overhypedPublished on 09 April 2019
Today’s market is split in two. On one hand, you have the new world order - structural growth stories, driven largely by technology. These, the likes of Facebook, Amazon, Netflix and Google (Fangs), are the companies we feel will be the dominant key players and, if not already, the most profitable organisations in the world to come.
On the other hand, you have value stocks, wrongly written off by many as ‘old world’ businesses, past their sell-by dates with no role to play in the new world economy.
In an ideal world, you would participate in the best of both. The Fangs and their ilk are extremely attractive businesses. It would be foolish not to at least participate in some of these long-term structural growth stories, be it technology or healthcare. They are, however, highly priced for the long-term growth they promise and, to some extent, for their dominance.
For the more traditional businesses, some will go to the wall; that is inevitable. Quite right to stay away from those struggling today when many are being presented as attractive deep value opportunities. It would be shortsighted, though, to assume that the skilled, well-paid management teams of other old world companies are unable to reposition themselves and redeploy their capital to operate in a new world environment.
Some examples are materialising. Many real estate companies have been sold-off as if they will never again find paying tenants. In fact, many have evolved their business models to create mixed-use urban redevelopments or by converting units into warehouses as the online economy’s logistical demands soar. Take the redevelopment of America’s first shopping mall, for instance. This beautiful 188-year old Rhode Island building, once three floors of boutiques, is now 48 micro-apartments and a mix of businesses. It would be wrong to write-off the growth potential of businesses like this.
The humble car hire company is another case in point. Many investors cite ride-hailing apps like Uber and peer-to-peer car sharing as sounding the industry’s death knell. True, there will be some consolidation in the market, but the fittest will survive. In September 2018, Hertz launched Hertz+, a platform giving customers access to thousands of unique, personalised experiences including whale watching in Alaska, or guided tours of Windsor Castle. Companies like this will find that group of customers prepared to use their services for a price that generates a profit. Those that do are the value businesses you want to have some exposure to.
All this is not to say that traditional businesses will enjoy a sudden return to dominance, with once ailing shopping malls out-trading Amazon. But neither will they all go bust. In our client portfolios we aim to achieve a happy mix between structural growth stories and lower cost value businesses with the ability to turn their fortunes around. There is no requirement for them to go from zero to stratospheric profits. Even a little bit of improvement, worth 10 or 15%, could be really quite attractive.
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