Warren Buffett was onto something, in our view, when he said he liked companies that could be run by a ham sandwich. When investing in the US, which is full of cutting-edge, innovative companies, one should also pay attention to resilience and stability and try to avoid key-person risks.
Having at least some companies in a portfolio that a ham sandwich could run makes investing more like a smooth train ride than a rollercoaster.
Innovation and cutting-edge ideas can be very profitable, but they can also be very risky if they come with no track record. Alternatively, resilient conglomerate companies can offer established mature services and revenue streams, while still incubating cutting-edge ideas, giving investors the best of both worlds. If there is a ‘cash cow’ part of the business sitting alongside a more innovative division, this can tide over the bad years and lower the overall cost of financing.
These companies often serve critical customer needs and provide repeat services: in contrast, during the pandemic we saw some big bets on changing patterns of consumer behaviour, some of which turned out to be transient.
Early-stage growth companies, with great ideas but little profitability make for a volatile ride. At the other end of the spectrum, there are former ‘growth’ companies which have run out of runway to invest in. The sweet spot is in the middle, focusing on real growth which ultimately provides outperformance without the volatility. This leads to some so-called ‘boring’ names.
JB Hunt is a name most investors from Europe have probably not heard of. It is an Arkansas-based logistics firm that doesn’t make the news and its directors don’t speak at many conferences. Yet it is a leader in US intermodal transportation. It controls the process from end-to-end, from cargo being unloaded on the west coast from Asia, through truck and train journey all the way to Washington or New York.
Another name that doesn’t make the headlines is Service Corporation International. This is America’s largest provider of funeral services. It may not be doing anything especially innovative but it is well managed and operates in a very fragmented market where people spend more and more on ceremonies to remember their loved ones. Through the ups and downs of the US stock market over the past few years it has proved a resilient stock.
Avery Dennison makes labels; 80% of its business revolves around producing clothing/packaging tags. So far so conventional, but it is also developing ‘smart labels’ that can track merchandise through a store. The combination of mature service lines and new ideas makes it a safer, steadier bet than pure concept stocks, while still providing the potential for strong growth.
Oracle does not regularly appear in the portfolios of growth managers. It is seen as too slow and established and to some degree as ex-growth (reflected in a relative low valuation). However, we believe it has potential. It is sometimes the case that companies investors think are old and mature can partially reinvent themselves.
Oracle has attractive growth prospects that might come as a surprise, in the same way as Microsoft surprised investors 10 years ago. Then, Microsoft’s core services of Windows and Office were seen as having limited growth potential and the company’s successful move into cloud computing came as a shock.
As the era of rising interest rates creates an ever-increasing premium on efficiency, many customers are turning to Oracle for Enterprise Resource Planning (ERP) solutions, demonstrated by its projections of 9-10% organic revenue growth from 2023 to 2026.
Growth investing in the US is most famous for the big bets on technology and the high beta companies with little to no earnings. But there are also virtues in striking a balance between growth, proven track records and stable earnings. A lot of steady, resilient companies can still have surprises in store with a less bumpy ride.
Justin Streeter is portfolio manager of the Comgest US Equity Strategy. The views expressed above should not be taken as investment advice.