11 stocks to play the world's biggest structural themes
Hans Lee | Livewire
If bond investors are the worriers, share market investors are definitely the hopeful kind. Equity market investors love nothing more than a great narrative backed by a cash-rich balance sheet, sustainable earnings, and where appropriate, a strong dividend payout.
If the company is leveraged to a megatrend with a lot of investor support - like artificial intelligence (AI), the energy transition or the need for quality healthcare - that's a bonus too.
With that in mind, Livewire heard the views of two leading investors at the recent nabtrade Investor Room event. The investors are:
- Nick Griffin, Chief Investment Officer at Munro Partners
- Anthony Doyle, Head of Investment Strategy at Firetrail Investments
Each of them will describe one or more key themes they are focusing on right now and the stocks they are backing in each case.
Nick Griffin: AI is the trade for the next 5 to 10 years
Munro Partners' Nick Griffin
You'd be hard-pressed to find a bigger technology bull than Griffin. But with each of Munro's funds up at least 30% this year, you can't blame him either. All of this outperformance, Griffin says, is down to one thing: AI.
"We're effectively having an iPhone moment," Griffin says, adding that the technology will touch every industry on the planet."
Griffin and his team break up the AI opportunity set into two distinct parts - The companies "panning for gold" - i.e. the application companies and firms running the large language models, and the "shovels in the boom" - i.e. the cloud service providers and semiconductor companies. It is this second bucket that the Munro team have the most confidence in
Source: Munro Partners, nabtrade
The most famous of these semiconductor firms is also both a longtime Munro holding and the largest individual holding across its funds - NVIDIA (NASDAQ: NVDA).
"We firmly believe NVIDIA will become the biggest company in the world out of AI," Griffin says.
"It has a huge lead here and it is the hardware and software model of AI in the same way that Apple was the hardware and software model of the mobile cycle."
In the cloud providers space, Griffin says you need to be patient about the return on investment. For one, Microsoft's (NASDAQ: MSFT) co-pilot service has only just started. It's not perfect but it is already charging $35 extra to summarise your emails and team meetings. Microsoft subsidiary GitHub charges twice as much for its enterprise-facing service.
Another Magnificent Seven name, Meta Platforms (NASDAQ: META) and specifically Facebook has been able to return revenue growth to +25% (after troughing at +5%) thanks to GPUs, which are used to create better recommendation engines and a more addictive platform.
Several other stocks, which Munro holds, and where AI is starting to have real-world applications are:
- Axon Enterprise (NASDAQ: AXON) - A small-cap manufacturer of body cameras for police officers. AI here is being used to record what's happened, then write a report, and then submit it.
- Constellation Energy (NYSE: CEG) - Given AI is going to need so much power and energy to run its services, this service of building data centres and cooling them down for operation needs to be provided by someone. Constellation is one of those companies and has been the best investment for Munro's funds over the last 12 months.
- Meanwhile, Vertiv (NASDAQ: VRT) and Schneider Electric (EPA: SU) are examples of firms that are helping to provide the infrastructure for constructing these data centres.
Anthony Doyle: Five themes, five stocks
Firetrail's Anthony Doyle
Finally, not to be outdone, Doyle brought along five structural themes of his own and a stock for each. Each stock is classified as a "current or future leader" - but what do Doyle and his team want to see in a potential holding?
"We want companies that are quickly adapting to the many challenges that they face, but also the opportunities that they can exploit on behalf of their shareholders," Doyle says.
In Doyle's mind, constructing a portfolio is like a jigsaw puzzle - with pieces that reflect different market capitalisations, different styles of companies, different sectors, and different industries. An example of this style of portfolio construction is in the image below:
Source: Firetrail, nabtrade
For his first piece, he took on a well-known healthcare name: Novo Nordisk (CPH: NOVO-B).
"This company has a market capitalisation that is larger than the economy where it is listed [Denmark]. They are doubling capacity and doubling capacity again," Doyle says before adding that the next major catalyst for this company will be making its drug available in tablet form.
"Doctors will be more willing to prescribe it and patients will be more willing to take the drug as well."
Next up, as already alluded to, AI is an "arms race" with companies spending billions on CAPEX to develop these tools. Firetrail's preferred global play in this theme is none other than Apple (NASDAQ: AAPL).
"Only 5% of devices in existence can actually use their new tool, Apple Intelligence. There's a big upgrade cycle to potentially come through as businesses and consumers upgrade their devices. We haven't seen a big upgrade cycle for at least five years."
On the climate transition, Doyle is keen to point out they don't play in speculative technologies but would rather access the theme through a proven utility firm that has already been mentioned in this piece - Schneider Electric.
In the "efficiency" thematic, which covers businesses that help other businesses become more adaptable and more profitable in today's world, Doyle nominates American company Ecolab (NASDAQ: ECL) - a company that provides sanitisation materials and water purification tools that are necessary for many industries to operate.
Finally, Doyle mentioned one last stock - one that has the market capitalisation of Woolworths but has returned far in excess of the Australian supermarket over 2024 so far. The company is specialty insurance firm Ryan Specialty (NYSE: RYAN) and it covers everything from vulnerable properties to professional athletes' legs (if you don't believe me, read this.) These special cases often turn to the "excess insurance" market and Ryan Specialty is a player in that space.
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All prices and analysis at 12 October 2024 This document was originally prepared and published by Livewire Markets Pty Ltd ACN 156 343 501 on 12 October 2024 and Livewire is solely responsible for its issue.
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