‘The nifty 50 was a phenomenon in the US in the 60s when earnings were scarce… Today, it is the tech giants – almost a nifty five’ Will Meadon, JPMorgan Claverhouse investment trust.
Housebuilders, life assurers and online retailers are among Will Meadon’s ‘new nifty 50’ of resilient companies able to ‘get through the storm’ of the Covid-19 lockdown and deliver capital growth and income to shareholders.
Household names like Coca-Cola, McDonald’s and Polaroid soared during the 60s and 70s, becoming symbolic of the spirit of the times. Today, it is the Faang stocks – Facebook, Apple, Amazon, Netflix and Google parent Alphabet – that are leading the US market higher.
‘The nifty 50 was a phenomenon in the US in the 60s when earnings were scarce and investors were prepared to pay really high multiples for growth stocks, almost ignoring valuation. Today, it is the tech giants – almost a nifty five,’ says Meadon, who runs JPMorgan Claverhouse investment trust alongside Callum Abbot.
‘The same phenomenon could come to the UK where investors are prepared to really pay up for the companies that are going to get through the storm. Investors don’t get a free hit often – a quality company with good management trading at a cheap price. If you find a company that’s going to get through, you shouldn’t be afraid to pay for it.’
In February, as Covid-19 gripped the western world and spooked stock markets, the managers removed the trust’s 9% gearing and tilted the portfolio towards quality companies with the brightest outlooks. The pair have been buying more of them lately, taking gearing back to 5%.
‘We’re getting a bit more visibility,’ says Meadon. ‘If we find more companies in which we’re confident dividends will come, there could be wonderful profits for us, but it’s right to remain prudent. There’s huge disparity in the stock market and that’s certain to continue.’
Competitive advantage
Companies they have bought include life assurer Phoenix, housebuilder Berkeley Group and aerospace giant BAE Systems.
‘Within broad financials we much prefer life assurers to banks – Legal & General and Phoenix to HSBC and Barclays,’ says Meadon. While Britain’s largest banks have cancelled their dividends, Legal & General pressed ahead last month [April] with a final payment.
‘Housebuilders own a lot of land; I’m fairly sure they’re going to survive. They are good value, trading on single-digit multiples based on their earnings forecasts for next year, and should pay dividends in the next six to 12 months.’ Berkeley now sits in the Claverhouse portfolio alongside four other housebuilders – Persimmon, Barratt, Bellway and Taylor Wimpey.
Next was an existing position, but one that has been added to. Based on chief executive Lord Wolfson’s worst-case scenario of a 40% drop in sales, the company would still generate cash. Meadon credits Next with having the best management in the retail business, paving the way for it to emerge from the crisis stronger.
While Arcadia chairman Sir Philip Green has reportedly asked landlords of his retail empire, which includes Topshop, Dorothy Perkins and Miss Selfridge, for rent cuts of up to 50% during lockdown, Wolfson is paying in full.
‘When we come out of this, he’ll have a huge competitive advantage – he’ll be able to be anywhere he wants on the high street,’ says Meadon.
In the year 2030 Although interest rates are likely to remain low for a prolonged period, Meadon expects to see increasing company aversion to debt in future. ‘We don’t know where we’ll be in the next year, never mind five years, but we do know that we are not going to go back to the old world,’ he says. ‘For example, one of the reasons housebuilders went into this crisis with such strong balance sheets is because most of their executives went through the fiery furnace of 2008 and learned about the perils of having too much debt. I expect many other boards in other industries to take similar lessons from this crisis and avoid having such high levels of debt in future’.
