Lanyon Asset Management is looking past the noise to undervalued global stocks

While equity markets such as those in the US may be overvalued, there are opportunities to be had for the patient investor, Lanyon Asset Management says.

Nick Markiewicz and David Prescott from Lanyon Asset Management. Picture: Tom Huntley

BMWs, french fries, and a commitment to patient value investing has stood Lanyon Asset Management in good stead, with the fund manager’s global fund vastly outperforming its benchmark even as international markets hit turbulence.

Lanyon equity investor Nick Markiewicz, who joined the Adelaide-based fund last year from Platinum Asset Management, said that despite the US market overall being expensive, and the shift to a tightening stance from central banks around the world throwing some markets into disarray, there was plenty of value to be found.

While the Lanyon fund takes a global perspective, Mr Markiewicz said, using the US market as an example of how value could be extracted, while it was overvalued when taken as a whole, when you looked more closely, the story was more complex.

“We don’t like to talk macro too much because we’re fundamentally bottom-up, company-specific investors, but when rates are at zero and yields start moving up pretty quickly and you notice a lot of froth coming out of a lot of stocks pretty quickly, we do sometimes put out a view on more of a top-down market perspective’’ he said.

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“On a headline basis, the (US) market is expensive … on a CAPE (cyclically adjusted price-to-earnings) basis it’s probably the second-most expensive it’s been in history, if you look at market cap to GDP it’s also up there at probably the most expensive it’s ever been.

“But if you peel it back a little bit and start to look at which pockets are more expensive than others, even today it’s only a small subset of the market by the number of stocks that are expensive.

“If you break it apart, sort of the top third of the market is the most expensive it’s ever been, but the bottom two thirds is the same valuation it’s been for 20, 25 years which is amazing considering real rates have fallen over that time period.

“You can make an argument that the bottom two thirds of the market is as cheap as it’s ever been over the last 25 years.’’

Mr Markiewicz said the reason for this disconnect was difficult to pin down exactly, but he expected that it was in part related to the fact that passive flows of funds tended to concentrate at the bigger end of town.

Also the fact that many smaller funds had fallen by the wayside as investors sought larger funds with lower fees, “and those larger funds by definition have to concentrate in the bigger end of town, I think you’ve just seen the weight of money flow to the top end of the market and that’s where you’ve seen the valuations the most stretched’’.

Mr Markiewicz said the bottom half of the US market was cheap, as were Europe and Japan.

Nick Markiewicz and David Prescott from Lanyon Asset Management. Picture: Tom Huntley

Lanyon holds a position in BMW, with Mr Markiewicz saying the fundamentals of the business were compelling.

“It’s got a €55bn euro market cap, it’s got €30bn euro in net cash, a €25bn implied net equity value and last year it generated €12bn in EBIT,’’ Mr Markiewicz said.

“So a business like BMW is trading on two times trailing EBIT and right now, I think for the first time in their history, they’re returning a lot of that cash to shareholders.’’

Mr Markiewicz said this year, between the BMW buyback and the dividend, something in the order of 20 per cent of the market cap will come back to shareholders.

Lanyon also holds Mexican airports operator Sureste, which owns monopoly assets such as the Cancun airport, and US French fry maker Lamb Weston.

The airports operator is debt free, generating better margins that any software maker except Microsoft, Mr Markiewicz said, while Lamb Weston was one of only three large scale French fry makers in the US, with good profitability and great scope to flex on prices.

Lamb Weston is the largest French fry processor in the world, Mr Markiewicz said, and accounted for more than four in 10 french fries sold in the US.

Mr Markiewicz said French fry demand was “recession proof’’, and Lamb Weston had run essentially the same business since the 1950s.

“They were one of the first businesses that were an inflation casualty,’’ he said.

“They are a consumer staple, high-margin, grew consistently each year and then suddenly had two downgrades in a row, the stock fell 40 per cent.

“So this is where a bit of experience tells you that a consumer staple that’s been around for 70 years should not fall by 40 per cent in six months.

“So we started pulling the thread, speaking to management, industry experts … they have 40 per cent of the market, the industry is at 100 per cent capacity, French fry demand has grown every year.

“Then getting into the nitty gritty, when you understand that french fries are the second most profitable item on the restaurant menu after the Coke gun … you’ve got pricing power.

“This is a great oligopolistic industry. If you’re a genuine long-term investor this will make you money in three years.’’

Lanyon’s Global Value fund returned 16.7 per cent in the 12 months to the end of April, against its benchmark MSCI AC World Index which returned just 2.8 per cent.

Mr Markiewicz said the philosophy was to run a concentrated portfolio, with a modest number of positions, with the fund generally holding a reasonable amount of cash so it had the opportunity to take advantage of new ideas.

“Across the whole spectrum of value and quality there are a lot of amazing businesses out there at very reasonable valuations, returning capital to shareholders,’’ Mr Markiewicz said.

Lanyon’s funds under management as at the end of February was more than $720m.