They say timing is everything, but when we launched the VT Downing European Unconstrained Income fund this month, little did we know the events which were to follow.
While we don’t class ourselves value investors per se, the recent run on value and recovery stocks which followed the announcement of Pfizer’s and Moderna’s successful vaccine trials, could set an entirely new backdrop for investing both in Europe and more globally. Without getting too much into our investment process, we look for two types of companies in our portfolio; contrarian opportunities and under the radar companies. We essentially look for what we consider to be undervalued companies which you won’t typically find in the large-cap dividend paying sectors.
One such contrarian opportunity we added to the fund at launch is Ryanair. A stock everyone loves to hate, but we think it remains the best airline in Europe.
A well-known name to everyone, the reasons you may have been able to buy this budget airline cheaply are obvious, no-one wants to (or can during lockdown) fly on an airplane. This is what we call a classic contrarian opportunity. It is a company which everyone is familiar with, but on occasions you get an opportunity to buy it when the market falls out of love with it.
A long-term winner
The investment case for Ryanair is a well-known one, however there are often times when investors get scared over a company’s short-term prospects. As long-term investors, taking a five-year view, we still believe Ryanair is going to take market share away from competitors such as British Airways, Lufthansa and Air France. We think it is a long-term winner and right now we can buy it cheaply simply because there is fear in the market.
While volatility can cause performance and stock prices to move around a lot, right now is generally a great environment for contrarian opportunities. As long-term investors, we have a behavioral edge in that we have the confidence and patience to hold positions for an investment thesis to play out.
Ryanair is a classic example of this. In the last few weeks it has seen a huge move in its share price on the back of the vaccine announcements, rising from under €12 a share to almost €16. When I think about what contrarian investing looks like in practice, there are two legs of performance to consider. The first is what has happened in the last few weeks, which we can call a knee-jerk, sentiment driven relief rally. This is exactly what has happened to many travel and leisure stocks since a potential solution to Covid-19 was announced.
How much value is left?
After this first leg of performance, the question we then have to ask is how much value is left? We first became interested in Ryanair in March and despite its recent jump we are likely to stay invested for a while yet. This is because the second part of contrarian investing is buying companies that have the ability in tough economic conditions to get better, rather than worse.
Investors can often become confused between short-term trading moves and what can happen over the long term. In the aftermath of Covid, many of those legacy airlines I mentioned earlier (British Airways et al) are under huge pressure, and as a result are being bailed out by their respective governments. In short, their competitive dynamics have become weaker during the pandemic, not stronger.
In our opinion, Ryanair however has the best balance sheet, best cost structure, best fare structure, and sits in the leisure sector rather than the business sector. So, in a relative sense, we think it is now in a better position today than it was 12 months ago. This is the second aspect you have to factor into contrarian investing, getting a second leg of performance as the longer-term dynamics play out over the next five years.
The acid test of a high-quality business is one that can come through a crisis not only unscathed, but in a stronger position than it went into it. We believe Ryanair is a classic example of this, and love or hate it, it is around to stay.
Another way to play the travel theme
Another play on the contrarian travel theme in the portfolio is the Spanish-listed travel technology and airline reservations company Amadeus. Essentially Amadeus is the booking engine behind airline ticket sales, and like Ryanair its share price has seen a huge jump, rising almost 50% from €40 in March to close to €60 today.
Amadeus shares many of the same characteristics as Ryanair. It has a leading market share and is the dominant player in what it does, and because of this we can see the business surviving and taking relative market share through the crisis and beyond. It is a company that came on to our radar at the same time as Ryanair and one we are sticking with in the new portfolio.
Mike Clements is co-manager of the VT Downing European Unconstrained Income fund
