The virtual world has driven the market over the past 10-15 years, so much so that investors have seemingly forgotten how dependent major players like Apple and Google are on companies that make components.
Alec Cutler, manager of the Orbis Global Balanced fund, said that “opportunities abound” in the physical world and he expects investors will soon witness what he calls the “revenge of the makers”.
He said the tech giants have not needed to invest much – in terms of property, plant and equipment – unlike a semiconductor manufacturing facility that can cost between $15-20bn and take up to six years to build.
“During which time investors are not receiving any return.”
But “as good as Amazon, Google, Apple and Microsoft are, they can’t do what they do without companies that make things”, he added, pointing to semiconductors, chemicals, plastics, fibre optics, electricity, oil, gas, copper, aluminium and cobalt.
When it comes to ‘real world’ opportunities for investors, Cutler named six firms:
- – Samsung Electronics
- – Taiwan Semiconductors
- – BP
- – Royal Dutch Shell
- – Drax (UK utility company)
- – Mitsubishi
He described Samsung as a ‘maker’ that is about to have its revenge on investors who have ignored it.
“We have invested in Samsung since the mid-1990s. We have seen it grow and compound and produce high return on investor capital but with high capex. It spent a lot of money building plants to become the largest memory semiconductor manufacturer in the world.
“It has earned a 20% return on equity over the long term, but today trades for less than 15 times earnings. We know the business will go through cycles, but with our long investment horizon, we are prepared to look through those cycles to focus on Samsung’s long-term growth potential.
“Amazon wouldn’t exist without the memory chips Samsung produces – it might sell at 75x earnings but is completely enabled by Samsung, which sells at less than 15 times earnings because it spends too much on building things.”
These businesses form the foundation for the virtual tech giants, but their significance is being overlooked.
“Whether it’s semiconductors, copper, or transformers, after 20 years of capital markets massively favouring software and only things that require no capital spending, we should start to see greater recognition of the companies that make the things that those virtual businesses rely on for their very existence,” Cutler said.
