Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 303

Boring can be beautiful when investing

Buying the hottest stock in the hottest industry can be a dangerous game in investing. Valuations and expectations are typically very high, and many an investor has been burnt by purchasing a fashionable stock too late in the cycle. For example, tech darling Tesla is now 30% off its high following a stellar run through to 2017.

Often the best opportunities come from boring industries, which don’t generate much ‘buzz’ but quietly build something special. Sir James Dyson became rich in vacuum cleaners, becoming a household name in a low-growth industry where competition and innovation was previously low.

Overlooked not overcooked

If you can find the right company in an overlooked industry, returns can be exponential. Earnings exceed expectations and the valuation multiple applied to those earnings increases as investors appreciate the better than expected outlook. It’s a double kicker to investment returns.

The table below shows some recent examples of winners operating in boring, low-growth industries that have performed exceptionally well over the last 12 months.

Recent winners

CompanyCode12 month returnIndustry
SpicersSRS110%Paper products distribution
InfomediaIFM90%Auto dealership software
Vista GroupVGL70%Cinema software
Breville GroupBRG60%Kitchen appliances

Spicers distributes paper-based products and has been negatively impacted by the move to paperless communication. Along with capital structure issues the stock did little for seven years. However, the industry has consolidated, Spicers had net tangible assets well above the share price, undertook a successful turnaround and then received a takeover offer.

Infomedia is a global provider of software to the parts and service sector of the automotive industry. The automotive sector is mature, making costs an increasing focus. Yet Infomedia has grown by improving its customer efficiency and adding significant value.

Vista is the leading provider of software to cinema operators globally, which is currently being challenged by streaming providers like Netflix. However, cinema attendances globally are moderately growing, and Vista has delivered five consecutive years of revenue growth above 20%. An exciting new marketing opportunity is also beginning to scale.

Breville has developed an innovative and appealing range of kitchen appliances like toasters and kettles. Hardly exciting. Yet it is expanding globally, broadening the product range and recently reported earnings per share growth of 20%.

What are some new ideas on this theme?

What are some other 'boring' industries which offer investment opportunities? The table below shows some new ideas that we like among stocks in industries which may be considered unfashionable.

New ideas

CompanyCodePriceIndustry
EQT HoldingsEQT$26.80Trustee services
GTNGTN$1.30Radio advertising
Ive GroupIGL$2.23Printing

EQT provides trustee services for individuals and corporates. It’s considered a relatively stable industry. Existing customers are unlikely to leave but it’s also hard to win new customers. New management has reinvigorated the business and earnings growth is accelerating. The recent Financial Services Royal Commission is likely to be significantly beneficial as greater importance is placed on external, independent trustees like EQT.

GTN has a near monopoly providing real-time traffic information to radio stations and sells attached advertising. It was sold down heavily after a downgrade in December 2018, but we understand those issues have now been resolved. It is about to benefit from accelerating earnings growth in Canada and Brazil and trades on an FY20 PE of 9x and yields 9%. Only a little needs to go right for investment returns to be large.

Ive Group is a printing and marketing company. The industry is challenged, but recently consolidated, and is increasingly rational. IGL just completed a capex programme and is about to reap the returns. Trading on a free cashflow yield of c. 20%, shareholders should benefit from higher dividends and value-accretive acquisitions.

Sometimes, frogs do turn into princes.

 

Richard Ivers is Portfolio Manager of the Prime Value Emerging Opportunities Fund, a concentrated fund which invests in companies outside the S&P/ASX100. This article is general information and does not consider the circumstances of any investor.


 

Leave a Comment:

     

RELATED ARTICLES

Why caution is needed in Aussie small companies

Five global trends point to buys and sells for 2022

Six COVID opportunist stocks prospering in adversity

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.